Investor Alert: Tax Rule Change Puts Strategy’s $46 Billion Bitcoin Treasury at Risk

• Strategy’s Bitcoin reserves pose liquidity risks amid market volatility and tax burdens.
• Fair-value accounting may increase earnings volatility, impacting Strategy’s stock price.
• CAMT taxation could impose heavy cash obligations, affecting Strategy’s future liquidity.

Bitcoin treasury firm Strategy, formerly MicroStrategy, has warned investors about potential profitability risks from Bitcoin price volatility and changing tax rules. The company, holding 478,740 BTC valued at over $46 billion, made these concerns clear in its latest 10-K filing with the Securities and Exchange Commission (SEC). 

The filing specified potential liquidity concerns, new fair-value accounting rules, and the possibility of significant tax bills under the Corporate Alternative Minimum Tax (CAMT).

Bitcoin Price Swings Threaten Profitability

Strategy reported a net loss for 2024, primarily due to a $1.79 billion digital asset impairment. The company indicated that returning to profitability could prove difficult, especially if Bitcoin prices plunge. A significant decrease in Bitcoin’s market value could hit the firm’s liquidity, potentially forcing it to sell Bitcoin at unfavorable prices.

Additionally, Strategy’s enterprise analytics software business didn’t make positive cash flow in 2024. The firm might need to count on equity or debt financing to meet financial obligations, which largely hinges on the value of its Bitcoin holdings. Should Bitcoin prices fall drastically, getting financing could become tough, raising further liquidity risks.

Related: Is Michael Saylor’s Latest Tweet a Secret Message About Another Bitcoin Binge?

Fair-Value Accounting Set to Reshape Financial Reporting

Previously, companies had to mark down Bitcoin values during market downturns but could not adjust them upward unless sold. However, from January 1, 2025, Strategy will start using the Financial Accounting Standards Board (FASB) fair-value accounting rules.

Under this approach, unrealized Bitcoin gains and losses will be recognized in net income each reporting period. This rule change will create a $12.75 billion cumulative adjustment to the company’s retained earnings.

While the new accounting method provides a clearer financial picture, it also introduces increased earnings volatility. Any major Bitcoin price movement will directly impact Strategy’s reported financial results, which could influence investor sentiment and stock performance.

Tax Hikes and Regulatory Landscape Add to Uncertainty

Strategy also faces significant tax challenges due to the Inflation Reduction Act (IRA) of 2022, which introduced a 15% CAMT. The tax applies to firms with an average annual adjusted financial statement income exceeding $1 billion over three years. If Strategy doesn’t get an exemption, it might be subject to CAMT starting 2026.

The company expressed concerns about potential tax liabilities related to unrealized Bitcoin gains. If CAMT is applied, it could impose a substantial financial burden, requiring significant cash payments that may impact earnings and liquidity. Additionally, tax obligations in multiple jurisdictions and potential changes in tax laws add to the firm’s financial uncertainty.

Massive Bitcoin Holdings Under Scrutiny

Strategy remains the largest corporate holder of Bitcoin, having acquired approximately 258,320 BTC in 2024 at an average price of $85,447 per Bitcoin. Despite accumulating significant reserves, the firm did not make additional purchases last week. Its holdings represent over 2.2% of Bitcoin’s total 21 million supply.

Related: Bitcoin Bet Pays Off: Strategy₿ (MSTR) Outperforms Top Stocks

The firm’s outstanding debt stands at $7.27 billion, with annual interest expenses of $35.1 million, expected to rise under its Bitcoin accumulation strategy. Despite concerns over profitability and taxation, Strategy’s stock price has surged over 350% in the past year, trading at a premium relative to its Bitcoin holdings.