Tax implications when someone invests Bitcoin for LLC equity - capital contribution questions

Thanks for the clarification! Quick follow-up - does it matter how long we hold the Bitcoin before converting it? Like is there a difference between selling it the same day versus waiting 6 months? And also, who's responsible for tracking the original value - us or the investor?

Yes, the holding period does matter. If your LLC holds the Bitcoin for more than a year before selling, any gain would be considered a long-term capital gain, which typically has more favorable tax rates than short-term gains (held less than a year). But remember, the holding period for the LLC starts when the LLC receives the Bitcoin, not when the investor originally acquired it. As for tracking, your LLC is responsible for documenting the fair market value on the date of contribution. I recommend getting a timestamped record from a major exchange showing the Bitcoin's value when it was transferred to your company wallet. You should also have proper documentation in your LLC records showing the equity issuance in exchange for the Bitcoin contribution.

Did they help with figuring out the fair market value documentation too? My biggest concern is establishing that initial value correctly so we don't have issues during an audit.

I'm slightly skeptical about these services. Did they actually save you money compared to just hiring a CPA who understands crypto? And how did they handle the paperwork for the equity issuance itself?

They absolutely helped with the fair market value documentation. They provided timestamped verification of the Bitcoin value from multiple exchanges at the exact moment of transfer, which gives much stronger audit protection than just taking a screenshot yourself. As for comparing to a regular CPA, what made the difference was their specialized knowledge. Most CPAs I talked to weren't confident about crypto-specific issues. They handled all the technical documentation for both tax purposes and helped format the information for our operating agreement amendment. The equity issuance itself still required our business attorney, but taxr.ai provided all the valuation documentation that made the legal work straightforward.

Wait, how does this actually work? I thought it was impossible to get through to the IRS these days. Does it just put you in a queue or something?

Sounds like BS honestly. I've tried everything to get through to the IRS and always end up waiting forever or getting disconnected. No way some service can magically get you through when millions of people can't get through.

It's not a queue system - they actually use technology that continuously redials and navigates the IRS phone tree until they secure an open line. Once they get through, they call you and connect you directly to the IRS agent. I was super skeptical too! I had been trying to call for over a week and kept getting the "call volume too high" message and disconnects. With Claimyr, I submitted my request around 9am, and by 10:30am I got a call connecting me directly to an IRS agent who specialized in business tax issues. The agent confirmed exactly how to document the crypto contribution and the specific tax forms we needed. Saved me countless hours of frustration and gave me confidence we were handling everything correctly.

That's a great point! Do you know which states are particularly problematic with crypto? We're in California but our investor is in New York, not sure if that complicates things.

California and New York are actually two of the more complex states for crypto taxation! California doesn't conform to all federal tax treatments and has been aggressive about taxing crypto transactions. Since your LLC is in California, you'll generally follow California rules for the entity. New York has its own comprehensive regulatory framework for cryptocurrency through BitLicense. While that's more focused on crypto businesses than individual transactions, it shows they're paying close attention to this space. The investor's location typically doesn't affect your LLC's tax treatment, but their own tax situation would be subject to NY rules on their personal return.

We used a dedicated business wallet with BitPay for our crypto equity transaction last year. The advantage was it automatically generated receipts with USD value at time of transfer, which was super helpful for tax documentation. Whatever you use, make sure it gives you clear timestamp and valuation data!

This is incredibly helpful - thank you for mentioning Rev. Rul. 2014-21! I've been searching for specific IRS guidance on this situation. The operating agreement amendment point is something I hadn't considered at all. Quick question about the 48-hour conversion window - did you face any pushback from your investor about converting so quickly? I'm wondering if there's a way to structure it where we can hold for slightly longer to potentially qualify for long-term capital gains treatment without taking on too much volatility risk. Maybe some kind of gradual conversion schedule? Also, when you amended your operating agreement, did you need to get formal valuations or appraisals of the Bitcoin contribution, or was documenting the market price from exchanges sufficient for your purposes?

Great question about the conversion timing! Our investor was actually fine with the quick conversion because we were upfront about it during negotiations - we explained that as a startup, we needed predictable working capital and couldn't afford the volatility risk. We structured it as "Bitcoin contribution converted to USD within 2 business days" right in the equity agreement. Regarding gradual conversion, that's definitely possible but adds complexity. You'd need to track the basis and holding period for each separate conversion, which could be a bookkeeping nightmare. If you do go that route, make sure your accounting system can handle multiple Bitcoin "lots" with different acquisition dates. For the operating agreement amendment, we didn't need formal appraisals - documenting market price from major exchanges (we used Coinbase, Kraken, and Binance timestamps) was sufficient. Our attorney recommended getting at least two exchange prices at the time of transfer to show we used reasonable market data. The key is having contemporaneous documentation that you can defend in an audit. One thing I'd add - consider having your investor handle the actual Bitcoin-to-USD conversion and just contribute cash. It simplifies everything tax-wise and removes the volatility risk from your company entirely. The investor takes on the conversion timing decision, and you get clean cash for equity.