Starting a Crypto LLC or Corporation: Tax Benefits and Drawbacks (2026 Guide)

An LLC (Limited Liability Company) is a legal business structure that provides liability protection for its owners. In the US, LLCs can own and trade cryptocurrency, and they carry distinct tax implications worth understanding.

How are LLCs taxed?

LLCs are taxed as pass-through entities. That means that the LLC doesn't pay taxes, but the owners are required to report the LLC's profits or losses on their individual tax returns.

The rules for LLC taxation differ slightly for single-member LLCs and multi-member LLCs.

Single-member LLCs

Sole members of an LLC are required to report profits or losses as income on their individual tax returns, Form 1040. The IRS does not recognize a single-member LLC as an entity separate and apart from the individual. Even if the owner does not withdraw cash from the LLC's bank account, they are still liable for income taxes based on the LLC's income.

Multi-member LLCs

When multiple individuals share ownership of an LLC, each one is taxed based on their share of profits and losses. It's recommended that owners clearly lay out how profits and losses are shared in an operating agreement.

For example, imagine that Robert owns 40% of a crypto LLC. He'll likely be entitled to receive 40% of the LLC's profits, though this may vary based on the structure of the LLC's operating agreement. Even if he chooses to leave his profits within the LLC's bank account, he'll still need to pay taxes on his share of the LLC's income.

Though multi-member LLCs do not pay taxes at the entity level, they are required to file Form 1065 to ensure that each individual owner has accurately filed their taxes. In addition, the LLC is required to provide owners with a Schedule K-1 that details their share in the business's profits or losses.

Starting with the 2025 tax year, crypto brokers are required to issue Form 1099-DA reporting gross proceeds. Beginning with 2026 transactions, basis reporting begins, making accurate per-wallet cost basis records essential for any crypto business filing Schedule C or Form 1065.

Should I start a crypto LLC?

Considering getting started with a crypto LLC? Here are a few pros and cons you should consider before making a final decision.

Pros

Write off relevant expenses: Typically, individuals cannot deduct expenses, such as the cost of electricity for Bitcoin mining. However, if an individual is operating as a trade or business, they can write off relevant expenses through Schedule C. In addition, individuals operating as a trade or business have the ability to claim casualty losses related to events such as scams or wallet hacks. This is not available for most taxpayers. Still, it's important to note that these benefits are available whether or not you set up an LLC.

Protect owners from liability: Typically, owners in an LLC are not personally liable for business debts and obligations. This may be helpful if the nature of your business involves debt or significant risk. Still, it's important to remember that an LLC entity's protections can potentially be "pierced" and liability protection removed if the individual and entity do not keep separate books and records.

Protect owners' privacy: If someone was to set up an LLC through an agent, it's possible to not have their name tied to their LLC in a state's public database. This can provide valuable privacy that is highly sought-after by crypto participants.

Cons

Setting up an LLC can be expensive and time-consuming: To operate an LLC, you'll need to pay set-up costs and, in certain states, annual fees up to $800. Depending on the complexity of your operation, you'll likely want to hire a tax attorney or an accountant with familiarity with cryptocurrency and business structures during the formation process. In addition, it's highly recommended that you set up a separate bank account for your LLC to maintain liability protection.

Operating an LLC can be complicated: LLC structures can be complicated from a tax and operating standpoint. If you choose to get started with one of these structures, be prepared to pay ongoing fees to tax professionals who can help you navigate the complexities of business tax law.

Setting up a single-member LLC does not change how you're taxed: Because single-member LLCs are flow-through entities, there's no difference in how your operations are taxed. Whether you file as an individual or file as a single-member LLC, you would still be filing a Schedule C and paying the same tax rate on your income.

LLCs vs. C-corporations vs. S-corporations

One alternative to forming a crypto LLC is forming a typical C-corporation for your crypto business. Another option is to form an S-corporation.

While LLCs are taxed as pass-through entities, C-corps are taxed at the entity level. In a C-corp, the corporation pays tax on its profits, and the individual owners only pay tax on dividends they receive from the corporation. This creates a "double taxation" effect that often makes C-corps less attractive for small crypto businesses.

S-corporations are pass-through entities like LLCs, but with one key difference: owners can split their income between salary and distributions. Salary is subject to self-employment tax (15.3% up to the Social Security wage base, which is $176,100 in 2025), but distributions are not. This split can produce meaningful tax savings for crypto businesses generating $60,000 to $80,000+ in annual net income.

Example: S-corp salary split

Sarah runs a crypto trading business that generates $180,000 of net income for the year.

If Sarah operates as a sole proprietor, she owes self-employment tax on the full $180,000, roughly $25,000.

If Sarah operates as an S-corp and pays herself a reasonable salary of $80,000, she owes self-employment tax only on that $80,000, roughly $12,000. The remaining $100,000 in distributions is not subject to self-employment tax.

Sarah saves about $13,000 in self-employment tax for the year.

Remember, the IRS requires S-corp owners to pay themselves a "reasonable" market-rate salary based on the work they perform. Paying yourself an artificially low salary to avoid self-employment tax is a known audit trigger.

If you're not sure which structure is right for your situation, you should consult with a tax professional.

What is the QBI deduction for crypto business owners?

The Qualified Business Income (QBI) deduction allows eligible owners of pass-through businesses to deduct up to 20% of their qualified business income on their personal tax return. That means an LLC, S-corp, or partnership owner with $100,000 in qualified business income can potentially deduct $20,000 right off the top.

The 20% QBI deduction was originally set to expire after 2025. The One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025, made the deduction permanent.

For the 2025 tax year, owners with total taxable income under $197,300 ($394,600 for joint filers) can claim the deduction using the simpler Form 8995. Above those thresholds, additional limitations apply and you'll use Form 8995-A.

It's important to note that not all crypto income qualifies as QBI. Capital gains are generally excluded, since the deduction applies to income from an active trade or business, not passive investment gains. Whether your crypto activity rises to the level of a "trade or business" for QBI purposes is a fact-specific question that depends on factors like trading frequency, business intent, and time spent on the activity. If you're planning to claim the QBI deduction on crypto income, work with a tax professional to confirm your activity qualifies.

Are there other ways to reduce my crypto tax liability?

Whether or not you decide to form a crypto entity, remember that there are additional methods to reduce your crypto tax liability. For example, more than 700,000 investors use crypto tax software like CoinLedger and strategies like tax-loss harvesting and cryptocurrency donation deductions to reduce their tax bills.

If you're interested in learning more about how cryptocurrencies are taxed, check out our complete guide to cryptocurrency taxes.