Bitcoin rebound gives Strategy $4.1 billion tax benefit

Strategy estimated a $4.1 billion income-tax benefit after the fair value of its Bitcoin holdings exceeded their cost basis on Sept. 30, according to a filing dated Oct. 5. The management-prepared figures have not been audited or reviewed by KPMG.

The company reversed a deferred tax asset related to its Bitcoin holdings and released the related valuation allowance. The accounting changes reduced its estimated tax expense. The benefit applies to Strategy’s tax accounts and does not represent a cash payment or the return earned by each shareholder.

Strategy held 848,000 Bitcoin at an average purchase price of $75,440.70, including fees and expenses, as of Oct. 4 at 4 p.m. Eastern time. That figure has a later cutoff than the Sept. 30 valuation used for the tax-accounting estimate.

The cost of Strategy’s Bitcoin holdings differs from the cost of Bitcoin held by exchange-traded funds and the price paid by ETF shareholders. BlackRock’s iShares Bitcoin Trust, known by its ticker IBIT, held about 806,038 Bitcoin on Oct. 5, according to the fund’s holdings file. The fund reported nearly $69 billion in net assets and a Bitcoin benchmark level of $85,694.41 that day.

An estimate based on the fund’s daily flows and prices put the average acquisition cost of the Bitcoin remaining in IBIT at about $81,188 per Bitcoin on Oct. 2. That figure applies to the fund’s underlying Bitcoin. An IBIT shareholder’s break-even price depends on when and at what price the investor bought the shares.

IBIT’s quarterly filing for the period ended June 30 recorded 734,261 Bitcoin, an investment cost of about $61 billion and a fair value of about $43.4 billion. During the six months ended June 30, the trust acquired 157,501 Bitcoin and disposed of 192,970 Bitcoin in connection with share redemptions. Some disposals were in-kind transfers to authorized participants.

Individual investors generally sell IBIT shares in the secondary market. Only authorized participants can redeem shares directly with the trust. Redemptions can be settled in cash or Bitcoin. In a cash redemption, the trust sells Bitcoin to raise funds. In an in-kind redemption, it transfers Bitcoin to the recipient. The recipient’s later decision to hold or sell the Bitcoin determines whether that transfer leads to a market sale.