Proposed Corporate Alternative Minimum Tax Regulations Raise Challenging Issues for Companies Subject to Certain Accounting Rule Changes, Including Insurers and Companies Holding Crypto Assets

By Stuart E. Leblang, Joshua R. Williams, Michael J. Kliegman and Amy S. Elliott

On September 12, Treasury and the Internal Revenue Service (IRS) issued sweeping proposed regulations^[1]detailing how companies determine whether and to what extent they are subject to the 15 percent corporate alternative minimum tax (CAMT) on book income that went into effect in 2023.  CAMT was the most significant payfo ² in the Inflation Reduction Act of 2022 (IRA).³ Prior to the issuance of the proposed regulations, companies relied on the statute ⁴ and a series of IRS notices⁵ to make educated guesses about their potential CAMT liability.

As they evaluate this latest guidance (which exceeds 600 pages), more companies are finding themselves potentially within scope of the tax than previously thought.⁶  There are a variety of reasons for this, ⁷ but a somewhat surprising one ⁸ involves changes to how book income is determined and reported.  The Financial Accounting Standards Board (FASB) is responsible for issuing rules that govern how items are reported on GAAP ⁹ financial statements (such as Forms 10-K), which provide much of the basis for determining a corporation’s ultimate CAMT liability.

In Notice 2023-64, IRS and Treasury took the view ¹⁰  that if FASB changes the accounting rules in a way that triggers a one-time book-up ¹¹ to a company’s retained earnings (a balance sheet item—not an income statement item), then the book-up must also be included in income such that it is within scope of CAMT (albeit generally spread ratably over a four-year period ¹² and subject to certain other adjustments ¹³ ).  As it turns out, FASB changes the rules fairly frequently.  It issued a total of 15 changes (accounting standards updates or ASUs) in 2022 and 2023, although only six of them had the potential to impact retained earnings.  With certain exceptions, ^1] the proposed regulations largely adhere to the views expressed by the IRS and Treasury in Notice 2023-64 with respect to accounting rule changes.

Last year, for example, FASB decided that many companies ¹⁵ that invest in crypto must mark those assets to market (i.e., recording any increases or decreases in the fair value for each period) starting in 2025. ¹⁶  Even spread over four years, the initial book-up required to implement the change could be significant for firms that hold large crypto stakes purchased in recent years during a low period (crypto has experienced boom and bust cycles in recent years).  As detailed further below, all it takes to be in scope of CAMT is average annual profits exceeding $1 billion, and once a taxpayer is in scope, then it generally continues to be an applicable corporation indefinitely even if it later falls below the $1 billion average annual income threshold (although there are exceptions ¹⁷ ).

After the book-up, future increases in the value of the crypto assets between reporting periods would give rise to financial statement income that could potentially be subject to CAMT,¹⁸ even though the gains are unrealized (i.e., the crypto assets are still held for investment and have not been sold).  This report also addresses the appropriateness of taxing these mark-to-market crypto gains on an ongoing basis.

To be clear, companies with significant crypto positions carried at historic cost are not the only ones at risk.  Any large company facing an accounting rule change that could materially increase amounts included in book income for purposes of CAMT could potentially be impacted by the position in the proposed regulations, indefinitely ¹⁹ locking the company into the CAMT regime.

For example, certain insurance companies were recently subject to a significant financial accounting change (for long-duration contracts²⁰) that also triggered large adjustments upon adoption, potentially increasing the risk that they may have a CAMT liability (albeit for different mechanical reasons than those at play for companies that hold crypto assets).²¹ The life insurance industry asked for (and received) targeted relief in the form of an extended spread period.  Instead of breaking the book-up ratably over only four years, they wanted it broken up over 15 years. ²²  While the proposed regulations preserve the default four-year spread period, they also allow for extensions of up to 15 years in limited cases. ²³ 

CAMT Refresher

CAMT was designed to tax businesses that are extremely profitable in economic reality but that—through various strategies enabling them to reduce their taxable income—pay little or no federal income tax (the poster child has often been Amazon.com, Inc.  (NASDAQ:  AMZN)).

A taxpayer will generally owe the 15-percent minimum tax if:

1. It is within scope (it is a so-called applicable corporation, meaning it—taken together with certain related entities—generally had over $1 billion in annual adjusted financial statement income (AFSI) averaged over the prior three years); and
2. The amount that it pays in regular tax ²⁴ is less than 15 percent of its AFSI.

Obviously, the definition of AFSI is critical to the CAMT analysis (and AFSI for #1—scope purposes—is calculated differently than AFSI for #2—liability purposes). ²⁵  To determine AFSI, the statute directs companies to essentially start with net after-tax financial statement (i.e., book) income or loss and then add back in certain taxes paid and subtract certain depreciation deductions.  There are a host of additional adjustments that may or may not apply depending on the facts, ²⁶ and there is an entirely separate regime to reduce AFSI for financial statement net operating losses.  Notably, however, the final statutory adjustment is a catch-all that, among other things, gives Treasury authority to “issue regulations or other guidance to provide for such adjustments . . . to prevent the omission or duplication of any item.” ²⁷ 

New Accounting Standard Adoption

Absent guidance providing otherwise, a taxpayer likely would not have thought that the required adoption of a new accounting standard triggering a change to retained earnings—and not to financial statement net income—should give rise to AFSI omission/duplication adjustments under the catch-all provision above.  However, Notice 2023-64 and the proposed regulations require (among other things) that the book-up triggered by a change in financial accounting principle be included in AFSI because, in the view of Treasury/IRS, it is an adjustment needed to prevent the omission of a relevant item “to account for the economic effect of that amount in the financial statements.”²⁸  We note that this seems somewhat questionable, as the initial adjustment to crypto assets’ book values necessitated by the newly issued FASB crypto rule change constitutes a balance sheet adjustment, and not an income statement item. ²⁹  Apart from the book-up and absent a potential carve-out, future value increases in crypto assets appear also to be included in AFSI ³⁰ and potentially subject to the 15 percent tax.

Just for perspective, under longstanding tax principles, unrealized gains in crypto assets are generally not subject to tax, ³¹ so imposing a corporate tax on unrealized gains from crypto assets in the context of CAMT would be a departure. ³²  Did Treasury really intend to do this, or is it simply an unintended consequence of the interaction between the CAMT and FASB rules with respect to which Treasury might be persuaded to provide a carve-out before the regulations are published as final? The risk with respect to this issue is very real given that the proposed regulations did not provide relief.  That being said, we believe that legislative history may provide some useful arguments for why relief could potentially be appropriate.

Senate Changes to CAMT May Provide Guidance

Lawmakers arguably did not intend for CAMT to tax unrealized crypto gains if for no other reason than, when CAMT was adopted, crypto was not generally marked to market for book purposes.  But the issue of taxing unrealized book gains is not limited to crypto.

It may be possible to predict the likelihood of a regulatory carve-out for crypto by looking to the legislative history surrounding Section 56A(c)(2)(C), which essentially provides an AFSI adjustment in certain cases where the CAMT entity owns a nonconsolidated equity interest in another corporation.  There were changes made to that provision by lawmakers (or by staff on one of the tax-writing committees) presumably concerned about the tax’s impact on public companies with certain nonconsolidated investments in marketable equity securities of other public companies (specifically, investments that are not accounted for under the equity method but are accounted for under the fair value method).

Before 2018, if a public company held investments in marketable equity securities of another entity where its ownership of such other entity fell below the 20 percent accounting consolidation threshold, then such securities were often classified as available-for-sale such that they would not have to be marked up until the investments were actually sold.  Generally starting in 2018, FASB decided to change that, requiring such equity investments to be accounted for under the fair value method, with changes to the securities’ readily determinable fair values hitting book net income even though the securities had not been sold.^[33] Thus, absent clarification, there was a risk that unrealized gains from minority stakes in a non-consolidated corporation could be included in AFSI and thus subject to tax under CAMT (very much like the crypto gains discussed in this report).

Between the time that the CAMT text was originally released by the Senate Finance Committee in Build Back Better and when Sen. Joe Manchin III (D-WV) included the CAMT proposal in his July 27 IRA draft (i.e, before subsequent changes were made as part of vote-a-rama, including the infamous Thune amendment ³⁴ that altered the aggregation rules to exempt private equity firm portfolio company profits from CAMT ^35]), there were some modifications made.

Specifically, Section 56A(c)(2)(C) was amended effectively to ensure that certain investments recorded under the mark-to-market method of accounting (also referred to as the fair value method ³⁶ ) are not treated any worse under CAMT. ³⁷  We previously wrote about how the slight changes to the wording of the provision (including removing the reference to earnings) arguably benefitted companies such as Berkshire Hathaway Inc. (NYSE:  BRK.A), which (at the time) reported some $76 billion of net unrealized gains associated with its investments in companies including American Express Company, Apple Inc. and Bank of America Corporation.  (That report—“Surprising Impacts of Inflation Reduction Act’s Stock Buyback Excise Tax and Corporate Book Minimum Tax (Including Overblown Concerns About Berkshire)” from September 14, 2022—is appended.)

As we explained, the changes to Section 56A(c)(2)(C) were designed to ensure that companies with investments in equity securities that are reported under the fair value accounting method and therefore create paper (unrealized) gains on financial statements will be able to back such gains out of their AFSI when calculating their CAMT.  However, the language of that statutory adjustment does not clearly apply to exclude mark-to-market gains from crypto assets, since such income is not “with respect to” a corporation that is not included on a consolidated return with the taxpayer.  The preamble to the proposed regulations explains that “financial statement income often includes gain or loss with respect to stock even if there has been no realization event for Federal income tax purposes.” ³⁸  The proposed rules make clear (including in an example) that mark-to-market book gains associated with certain stock investments that are not marked-to-market for regular tax purposes should be disregarded in computing AFSI (such gains are also disregarded for purposes of determining CAMT stock basis and CAMT retained earnings). ³⁹ 

Fair Value Comparisons

Unrealized gains associated with long-term investments in equity securities are clearly not subject to CAMT, but that is not the only mark-to-market income item that was specifically excluded from the AFSI calculation.  Although we are not accounting professionals and a detailed description of these rules is beyond the scope of this summary, we note that FASB requires fair value accounting (mark-to-market) for a variety of assets—not just for certain investments in crypto and certain investments in equity securities (not accounted for under the equity method).  In applicable cases, we understand that mark-to-market adjustments are also required for certain derivative instruments, ⁴⁰ debt securities, ⁴¹ and foreign currency transactions, ⁴² among others, ⁴³ although FASB guidance varies on whether these adjustments end up in net book income (and would therefore have an impact on CAMT, absent an exception) or a separate line on the income statement referred to as other comprehensive income (OCI).

OCI is comprised of certain revenues, expenses, gains and losses that are specifically excluded from the net income line on an income statement and that instead are reported on a company’s balance sheet as part of stockholders’ equity.  OCI gains and losses are generally considered temporary in nature as they have not yet been realized (and are often thought of as amounts not core to the business of the reporting entity).  Days before CAMT was enacted, Sen. Ben Cardin (D-MD) posed a question on the floor of the Senate (in a so-called colloquy) to Senate Finance Committee Chair Ron Wyden (D-OR) regarding whether OCI should be included in CAMT.  Wyden responded that it should not.⁴⁴  Notice 2023-64 and the proposed regulations confirm that view. ⁴⁵ 

The following table provides a very high-level overview of various items that we understand are marked-to-market for book purposes and whether they end up either in net income or in OCI (and the potential CAMT impacts):

The rationale for why certain of these items apparently end up in net income (e.g., crypto) while others end up in OCI is not entirely clear.  In this regard, FASB provided the following explanation for why it decided that crypto remeasurement gains and losses should end up in net income and not OCI:

“[A] few stakeholders supported including changes in the fair value of crypto assets in other comprehensive income until those gains and losses are realized through the sale or disposal of the crypto asset.  Those stakeholders were concerned primarily about the volatility in earnings that the changes in fair value may cause . . . The Board decided not to present changes in the fair value of crypto assets in other comprehensive income.  Many investors said that they would prefer to see that volatility reflected in net income because it would provide transparent, decision-useful information about the performance of crypto assets and an entity’s ability to manage them.  Furthermore, neutrally reflecting changes (that is, both decreases and increases in fair value) in net income would improve financial reporting and address concerns that the current accounting model does not reflect the underlying economics of crypto assets.”  ⁴⁸  

As one can see from the table above, mark-to-market crypto gains are not the only items subject to fair value accounting that will potentially be taxed under the CAMT regime.  Crypto is not unique in this regard, and a much broader class of assets should arguably be considered for relief in connection with Treasury’s efforts to finalize the regulations.  Given the general rule in the CAMT regime that net income is the starting point for the AFSI calculation while everything in OCI is excluded entirely, is it appropriate for Treasury to defer to FASB over what might be included or excluded for CAMT purposes?

Ultimately, we question why long-term investments in equity securities (eligible for the adjustment in Section 56A(c)(2)(C)) or debt securities (eligible for the OCI carve-out) should be treated more favorably under CAMT than long-term investments in crypto assets, for example.  Lawmakers saw fit to tweak Section 56A(c)(2)(C) to essentially provide that unrealized gains associated with nonconsolidated subsidiaries that are booked at fair value for accounting purposes would not be subject to tax under CAMT.  Lawmakers also saw fit to exclude OCI (which generally comprises unrealized gains and losses that are temporary in nature, which arguably are very similar to the volatile gains and losses associated with crypto) from the CAMT base.  How can these carve-outs make sense when similar items remain in AFSI?

Despite the potential policy arguments in favor of relief for unrealized crypto gains, we fully recognize that the entire purpose of the CAMT regime was to draw a line in the sand, however arbitrary.  Arguably, the only thing coherent about CAMT is the big idea behind it—that if a company reports over $1 billion in book profits, then it must pay at least 15 percent of that in taxes.  That notion is supported by the lawmakers (including Sen. Elizabeth Warren (D-MA)) who pushed for this tax and have been urging Treasury to quickly finalize the regulations. ⁴⁹  If crypto can secure an exception, then what prevents other stakeholders holding mark-to-market accounting assets that also do not benefit from the existing carve-outs in Section 56A(c)(2)(C) or OCI from securing an exception?

The most telling indication that relief is not on the table may be the very limited adjustment Treasury decided to provide in the proposed regulations for certain hedging transactions and hedged items—that is, only where there are certain mismatches. ⁵⁰   Crypto holders may need to be conservative in their expectations that this is something Treasury/IRS will address in the final regulations, particularly since any relief seemingly would need to sweep more broadly than just crypto and involve other classes of mark-to-market assets.

Moore and Taxing Unrealized Gains

Just as Congress can be a guide, so too can the courts.  As it happens, the U.S. Supreme Court issued a couple of rulings this term that may offer some perspective on the appropriateness of taxing unrealized crypto gains under the CAMT regime.  The first is its June 20 decision in the Moore case. ⁵¹   Even though the question presented in Moore was whether the Sixteenth Amendment authorizes Congress to tax unrealized sums without apportionment among the states, the Court specifically chose not to decide whether realization is a necessary predicate to the imposition of an income tax.  In a footnote to the opinion authored by Justice Kavanaugh, the majority wrote that “our analysis today does not address the distinct issues that would be raised by (i) an attempt by Congress to tax both the entity and the shareholders or partners on the entity’s undistributed income; (ii) taxes on holdings, wealth, or net worth; or (iii) taxes on appreciation.”

However, even though the majority did not rule on the realization requirement explicitly, the opinions make clear that there were at least four votes for the proposition that the Sixteenth Amendment imposes a realization requirement on income taxes. ⁵²  That means that if Treasury decides to tax unrealized crypto gains in the context of CAMT (as the proposed regulations appear to do) and the rule is challenged, the Supreme Court may ultimately hold that such taxation is unconstitutional. ⁵³ 

Additionally, in the Loper Bright⁵⁴decision issued June 28, the Court struck down the Chevron doctrine, which had essentially provided that if a statute was silent or ambiguous with respect to a specific issue, then the courts should defer to the agency’s interpretation of the statute, assuming such interpretation was reasonable.  Instead, Chief Justice Roberts wrote that the courts should determine what the best reading of the law is in certain circumstances, arguably making agency rules more susceptible to challenge.

What kind of deference will the courts give to the CAMT regulations? In this case, Congress expressly delegated to Treasury the authority to promulgate rules to fill in the details of a provision (the statute was not silent).  These express delegations were flagged in a separate “Authority” section in the preamble to the proposed regulations. ⁵⁵  While some observers view the impact of Loper Bright to tax regulations (where such express delegations are common) to be limited, express grants of authority do not insulate Treasury’s regulations from judicial review.  The CAMT regulations will likely still be challenged (especially if, as we suggest above, the rules impose a tax where it may be unconstitutional to do so), and a court will have to determine whether Treasury adopted the best meaning of an ambiguous term as instructed by Loper Bright.

The Real-World Impact

As people work to digest the proposed regulations, we thought it would be interesting to consider the impact that the interaction between CAMT and the FASB crypto rule change could have on publicly traded companies.  One of the largest public corporate holders ⁵⁶ of the popular cryptocurrency Bitcoin is MicroStrategy Incorporated (NASDAQ:  MSTR) (MicroStrategy). ⁵⁷ 

A high-level, preliminary analysis of MicroStrategy’s financials indicates that, solely due to the requirement that the crypto book-up be included in AFSI, MicroStrategy—which has been in a loss position over the last few years—could become an applicable corporation in 2027 and incur some $500 million in additional taxes due to CAMT. ⁵⁸  If one further assumes that Bitcoin will appreciate some 15 percent year-over-year in the next several years (which, depending on your leanings, may be either overly conservative or overly optimistic), then it would actually become an applicable corporation one year earlier (in 2026) and its total CAMT liability for the first four years that it is an applicable corporation (i.e., through 2029) could reach nearly $2.7 billion.  This assumes the size of MicroStrategy’s Bitcoin holding stays constant—that is, that it simply holds on to its crypto investments and does not sell even one Bitcoin.  However, these high-level estimates are merely that—and they are based on public information and numerous assumptions and simplifications.  Therefore, these estimates are for illustrative purposes only and should not be relied upon.

The final regulations could explicitly exempt all crypto assets held for investment from CAMT.  Or they could include them, and the price of Bitcoin could skyrocket (Bitcoin’s value has more than quadrupled over the last five years).  Further, nuanced accounting rules govern exactly how much the one-time book-up ⁵⁹ to account for the crypto rule change should be—it is not simply the difference between the carrying amount of the crypto (previously reported under the cost-less-impairment model) and the fair value but should presumably also be tax-effected^. 60 

Finally, tax law is not immune to politics, and there is a recognition that if Republicans are in control of the executive and legislative branches, CAMT may not be long for the world.  Even if Republican control were limited to the President, many of the issues raised in this report could become moot due to lack of guidance (or overriding guidance, as it is unlikely Treasury will be able to finalize these regulations before the next administration, meaning that the new administration could simply decide to withdraw the proposed regulations).  While the CAMT regime overall is safer with Democrats in control, the taxation of crypto is not something that necessarily follows party lines, so it is unclear how exactly a potential future Harris administration might handle this specific issue.

^{[1] REG-112129-23 (https://public-inspection.federalregister.gov/2024-20089.pdf).}

^{[2] JCX-18-22 (Aug. 9, 2022), https://www.jct.gov/publications/2022/jcx-18-22/.}

^{[3] See Title I, Subtitle A, Part 1, Section 10101 of P.L. 117-169.}

^{[4] The operative CAMT provisions are found largely in amended IRC §§55 and 59 and new §56A.}

^{[5] See Notice 2024-66 (Sept. 12, 2024); Notice 2024-47 (June 13, 2024); Notice 2024-33 (April 15, 2024); Notice 2024-10 (Dec. 15, 2023); Notice 2023-64 (Sept. 12, 2023); Notice 2023-42 (June 7, 2023); Notice 2023-20 (Feb. 17, 2023); Notice 2023-7 (Dec. 27, 2022).}

^{[6] But meeting the financial statement income threshold to be subject to CAMT does not mean a company will incur a CAMT liability (see next note).}

^{[7] One reason for this is that adjusted financial statement income (AFSI) for purposes of determining whether or not a company is in scope for CAMT (i.e., to see if the company had over $1 billion in annual profits averaged over a three-year testing period) is different (and often higher) than AFSI for purposes of calculating the company’s potential CAMT liability.  One reasons for that is that scope AFSI is determined before taking into account the deduction for financial statement net operating losses (pursuant to IRC §59(k)(1)(B)).}

^{[8] “[U]nless Treasury or Congress provides an exception, the rule from accounting world will lead to a seemingly unintended corporate AMT windfall for the government in federal income tax world,” wrote Andrew Strelka, Corporate AMT’s Shadow Grows as FASB Goes Mark-to-Market, 182 Tax Notes Federal 2231 (Mar. 18, 2024).}

^{[9] Prepared in accordance with United States generally accepted accounting principles (GAAP).  Note that FASB issues Accounting Standards Updates (ASUs) to communicate changes to US GAAP.}

^{[10] This view was detailed in Notice 2023-64, Section 11.02(2), https://www.irs.gov/pub/irs-drop/n-23-64.pdf, and is incorporated in the proposed regulations at Prop. Treas. Reg. §1.56A-17(c)(1) (pg. 399).}

^{[11] Technically, a cumulative adjustment (or cumulative-effect adjustment).}

^{[12] This is referred to as the Adjustment Spread Period Rule (Prop. Treas. Reg. §1.56A-17(c)(3)) (pg. 400).}

^{[13] Although this was not in Notice 2023-64, the proposed regulations would adjust the accounting principle change amount to disregard any portion of the cumulative retained earnings adjustment that is attributable to taxable years beginning on or before December 31, 2019, among other adjustments (Prop. Treas. Reg. §1.56A-17(c)(2)).}

^{[14] Id.}

^{[15] Not all firms with crypto holdings will have to make this change.  For example, some firms have historically used fair value to account for Bitcoin-related assets.}

^{[16] In Dec. 2023, FASB issued ASU 2023-08 changing the treatment of certain crypto assets for GAAP purposes to require fair value accounting (essentially marked-to-market, both up and down).  Previously, crypto assets were generally treated as indefinite-lived intangibles that were initially measured at cost and then tested for impairment (so that they were effectively only marked down).  FASB decided that “reflecting only the decreases, but not the increases, in the value of crypto assets in the financial statements” didn’t provide investors, among others, with “decision-useful information.” ASU 2023-08 essentially begins in 2025, although early adoption is permitted.  Once adopted, future changes in the fair value of the crypto assets are recognized in net income, and, upon adoption, the book-up of the crypto assets to fair value triggers a cumulative-effect adjustment recorded through retained earnings.}

^{[17] Termination of applicable corporation status is available under §59(k)(1)(C) such that, subject to limitation, if the corporation either (a) has a certain type of ownership change, or (b) has not met the average annual AFSI test for five consecutive taxable years (see Prop. Treas. Reg. §1.59-2(h)(1)(ii)), then its status as an applicable corporation ends.  However, the corporation will once again be treated as an applicable corporation if it subsequently meets an AFSI test for any taxable year beginning after the first taxable year for which its applicable corporation status was terminated.}

^{[18] Note that tax amounts paid pursuant to the CAMT regime are carried forward and used to offset future regular tax liability.}

^{[19] But see Note 17.}

^{[20] See both FASB’s ASU 2018-12 (with later guidance ASU 2019-09 and ASU 2020-11 delaying its implementation, with the change commonly referred to as LDTI, Long-Duration Targeted Improvements or Targeted Improvements to the Accounting for Long-Duration Contracts) and the International Accounting Standards Board (IASB)’s IFRS 17.}

^{[21] “The changes required by IFRS 17 result in tens of billions of dollars of cumulative effect adjustments to IFRS net assets across the industry as of the beginning of 2023. . . . For most companies, the changes represent a decrease in beginning-of-year retained earnings, removing earnings that were reported in prior years.  These amounts adjusted to retained earnings will flow back through net income again in future years over the life of the insurance contracts, creating a duplication of income as a result of the accounting standard change.  Without a Section 481(a)-like adjustment of the type authorized by Section 56A(c)(15)(A), the cumulative effect adjustment would result in a duplication of income or expense for AFSI purposes, which in turn, could create CAMT liability where there otherwise would be none, or result in increases or decreases in CAMT liability directly attributable to this duplication,” according to American Council of Life Insurers, Comments on adoption of new accounting standards – Notice 2023-7, https://www.regulations.gov/comment/IRS-2023-0001-0031 (March 20, 2023).}

^{[22] Regina Y. Rose, Mandana Parsazad, Sarah Lashley, Re:  Comments on adoption of new accounting standards - Notice 2023-7, AMERICAN COUNCIL OF LIFE INSURERS (March 20, 2023) (https://www.taxnotes.com/insurance-expert/corporate-alternative-minimum-tax/insurers-suggest-accounting-standards-corporate-amt-guidance/2023/03/28/7g8c6).}

^{[23] The spread period can be as long as 15 years only if the entity is able to demonstrate that a longer period is warranted (Prop. Treas. Reg. §1.56A-17(c)(3)(i)(B)) (pg. 400).  Such relief is only available in the case of so-called duplications and is therefore seemingly not applicable to crypto.  It is believed that, in general, life insurance companies likely will be able to demonstrate that a distortion would arise if the spread period was limited to 4 years but that a net duplication is reasonably anticipated to be taken into account if the spread period were extended, given that the contracts affected by the method change are long-duration contracts.}

^{[24] Plus, any additional tax the corporation might owe under the base erosion and anti-abuse tax (BEAT) in §59A.}

^{[25] See Note 7.}

^{[26] They include things like dividends received from related entities, whether related entities are consolidated for tax purposes, and adjustments for certain pension plans, among others.}

^{[27] IRC §56A(c)(15)(A).}

^{[28] See REG-112129-23 preamble pg. 102.}

^{[29] In addition, the definition of financial statement income (FSI) in both Notice 2023-64 and the proposed regulations (Prop. Treas. Reg. §1.56A-1(b)(20)(i)) states explicitly that “FSI does not include amounts reflected elsewhere in the [Taxpayer’s] AFS, including in equity accounts such as retained earnings and other comprehensive income,” so it appears that the special rule in Section 11.02(2) and Prop. Treas. Reg. §1.56A-17(c)(2)(i) is an exception to this general rule.}

^{[30] ASC 350-60-35-1 generally provides that in-scope entities must measure crypto assets at fair value and that gains and losses from the remeasurement of crypto assets must be included in net income.  Pursuant to Prop. Treas. Reg. §1.56A-1(b)(20)(i), the starting point for financial statement income is “the net income or loss of the CAMT entity set forth on the income statement . . . included in the CAMT entity’s [applicable financial statement] for the taxable year.”}

^{[31] Notice 2014-21 (March 25, 2014) provides that virtual currency is treated as property for federal income tax purposes.  When virtual currency is sold, the taxpayer must recognize any capital gain or loss on the sale (assuming it is held as a capital asset).}

^{[32] Even so, in other contexts, the Code does tax the appreciation in the value of certain securities held by certain taxpayers even when there has not been a sale or other realization event (for example, mark-to-market taxation for dealers in securities and commodities under §475).  The issue of whether cryptocurrency constitutes a “security” or “commodity” for purposes of §475 is beyond the scope of this report.}

^{[33] See Accounting Standards Codification Topic 321, Investments – Equity Securities (ASC 321), implemented by Accounting Standards Update (ASU) 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which became effective for financial statements beginning after December 15, 2017; specifically ASC 321-10-35-1.}

^{[34] Introduced by Senate Minority Whip John Thune (R-SD), with Sen. Kyrsten Sinema (D-AZ), amendment No. 5472 was entitled, in part, Removal of Harmful Small Business Taxes (https://www.budget.senate.gov/imo/media/doc/5472.pdf).}

^{[35] Jeff Stein, With Sinema’s help, private equity firms win relief from proposed tax hikes, The Washington Post, Aug. 7, 2022 (https://www.washingtonpost.com/us-policy/2022/08/07/inflation-reduction-act-sinema-private-equity/).}

^{[36] Pursuant to the requirements of ASC 820.}

^{[37] The reason for the modifications to the language in IRC §56A(c)(2)(C) is merely speculative.  According to Deloitte, “[i]t is thought this adjustment is intended to exclude amounts otherwise taken into account with respect to stock under the mark-to-market method of accounting.” Inflation Reduction Act clears House of Representatives, Deloitte, Aug. 13, 2022 (https://www.taxathand.com/article/26753/United-States/2022/Inflation-Reduction-Act-clears-House-of-Representatives).  According to KPMG, “[t]he updated language in the Senate bill that is reflected in the new law regarding the treatment of a taxpayer’s interest in a non-consolidated corporation for purposes of determining the taxpayer’s AFSI seems intended to favorably resolve ambiguity that had existed as to the treatment of taxpayers that apply a mark-to-market method as to strategic investments under the House BBBA and SFC BBBA Draft….there was ambiguity regarding the application of this rule in situations when a long-term strategic investment, such as an investment with less than 20% ownership in corporate stock, may be accounted for using the fair value accounting method.  If a holder reports the lower-tier investment under the fair value method for financial reporting purposes, the holder, in general terms, uses a mark-to-market method to report the change in value of the lower-tier corporation.  This generally would not match, or even necessarily correspond with, the lower-tier corporation’s earnings during such period.  Because the fair value method is not tied to the earnings of the lower-tier corporation, it seems that the statutory language used in both the House [Build Back Better Act] and the [Senate Finance Committee] BBBA draft rule (stating that AFSI ‘shall take into account’ the earnings of any non-consolidated corporation only to the extent of dividends received) would not, by its terms, apply to disregard the fair value method when determining a taxpayer’s AFSI.  The new law appears to address this ambiguity by not referring directly to the earnings of the non-consolidated corporations.  Instead, the revised rule applies more broadly to the determination of AFSI ‘with respect to” such corporation.  This ostensibly would apply to any mark-to-market adjustments made by the taxpayer on its applicable financial statement with respect to a non-consolidated corporation.  With respect to amounts taken into account for non-consolidated corporations, the Senate bill further added the phrase ‘and other amounts which are includible in gross income or deductible as a loss under this chapter,’ which seems to indicate that mark-to-market adjustments made for tax purposes (for example by a dealer in securities under section 475) are taken into account in determining AFSI, in addition to any dividends.  This apparent harmonization of the treatment of taxpayers that apply the equity method versus the fair value method as to strategic investments seems appropriate.” Analysis and observations:  Tax law changes in the “Inflation Reduction Act,” KPMG, Aug. 16, 2022 (https://kpmg.com/kpmg-us/content/dam/kpmg/taxnewsflash/pdf/2022/08/tnf-kpmg-report-tax-law-changes-inflation-reduction-act-aug16-2022.pdf).}

^{[38] See REG-112129-23 preamble pg. 109.}

^{[39] Prop. Treas. Reg. §1.56A-18(c)(2)(i) (pg. 417-418) and Example 2 “FSI resulting from stock investments marked to market” at Prop. Treas. Reg. §1.56A-18(c)(8)(ii).}

^{[40] See Accounting Standards Codification (ASC) 815-10-35-2 and 815-20-35-01; For example, NRG Energy, Inc. (NYSE:  NRG) has disclosed that it may enter into various energy purchase and sales contracts, fuel purchase contracts, interest rate swap agreements and foreign exchange contract agreements (among other energy-related financial instruments) and that changes in the fair value of these derivative financial instruments are recognized in earnings.  NRG further disclosed in its Form 10-K filed Feb. 28, 2024 that “CAMT may lead to volatility in the Company’s cash tax payment obligations, particularly in periods of significant commodity or currency variability resulting from potential changes in the fair value of derivative instruments.” (https://www.sec.gov/ix?doc=/Archives/edgar/data/1013871/000101387124000005/nrg-20231231.htm)}

^{[41] Those classified as available-for-sale, see ASC 320-10-35-1.}

^{[42] See ASC 830-20-35-1, which generally provides that a change in exchange rates between the functional currency and the currency in which a transaction is denominated increases or decreases the expected amount of functional currency cash flows upon settlement of the transaction and those gains or losses generally shall be included in determining net income for the period in which the exchange rate changes.  Note this is different than foreign currency translation adjustments, which, per ASC 830-30-45-12, are not included in determining net income but shall be reported in other comprehensive income.}

^{[43] For example, pursuant to ASC 715-20-50-6, publicly traded entities are also required to disclose gains or losses associated with the change in value of plan assets of a defined benefit (pension) plan.}

^{[44] 168 Cong. Rec. S4166 (2022), https://www.congress.gov/117/crec/2022/08/06/168/133/CREC-2022-08-06-pt1-PgS4165-3.pdf.}

^{[45] Prop. Treas. Reg. §1.56A-1(b)(20)(i); see also the preamble pg. 20.}

^{[46] There is an exception in cases where there is a mismatch between the hedging transaction, which is measured at fair value for book but not for tax, and the related item, which is not marked to market for either book or tax.  In that case, the AFSI adjustment described at Prop. Treas. Reg. §1.56A-24(c)(2) may apply.  Such relief was contemplated by the Joint Committee on Taxation as further described in REG-112129-23 preamble pg. 169.}

^{[47] See also REG-112129-23 preamble pg. 171, which addresses cash flow hedges.}

^{[48] ASU 2023-08, background comments 45-46 on numbered pages 35-36 (https://www.fasb.org/Page/Document?pdf=ASU%202023-08.pdf&title=ACCOUNTING%20STANDARDS%20UPDATE%202023-08%E2%80%94Intangibles%E2%80%94Goodwill%20and%20Other%E2%80%94Crypto%20Assets%20(Subtopic%20350-60):%20Accounting%20for%20and%20Disclosure%20of%20Crypto%20Assets).}

^{[49] Warren, King, Bennet, and Beyer to Treasury:  Quickly Finalize Strong Rules for Corporate Minimum Tax on Billionaire Corporations, July 3, 2024 (https://www.warren.senate.gov/newsroom/press-releases/warren-king-bennet-and-beyer-to-treasury-quickly-finalize-strong-rules-for-corporate-minimum-tax-on-billionaire-corporations).}

^{[50] See Note 46.}

^{[51] In Moore v. United States, 602 U.S. ___ (2024), the Court held (7-2) that the §965 one-time mandatory repatriation tax does not exceed Congress’s constitutional authority, affirming the decision by the Ninth Circuit.  The majority concluded that attributing income realized by a corporation to its shareholders and then taxing them on their share of such income (even though the income was never distributed to such shareholders) is constitutional.  Justice Kavanaugh was joined in the majority by Chief Justice Roberts and Justices Sotomayor, Kagan, Jackson, Barrett and Alito (although Barrett and Alito only concurred in the judgment).  Justice Jackson filed a concurring opinion.  Justice Barrett filed an opinion concurring in the judgment joined by Justice Alito.  Justice Thomas filed a dissenting opinion joined by Justice Gorsuch.}

^{[52] In the opinion concurring in the judgment authored by Justice Barrett and joined by Justice Alito, Justice Barrett wrote that “realization may take many forms, but our precedent uniformly holds that it is required before the Government may tax financial gain without apportionment.” In the dissent authored by Justice Thomas and joined by Justice Gorsuch, Justice Thomas wrote that “[b]ecause the Sixteenth Amendment requires a way to distinguish between income and source, it includes a realization requirement.”}

^{[53] Indeed, some observers have indicated that they expect an important follow-on case to Moore will address what realization means in the context of digital assets (see, for example, comments by Sean McElroy of Fenwick & West LLP on the July 9, 2024 webinar “The Moore Decision – Analysis and Implications,” sponsored by IFA USA Multi-Regional Webinar).}

^{[54] Loper Bright Enterprises v. Raimondo, 144 S. Ct. 2244 (2024).}

^{[55] REG-112129-23 preamble pg. 3-4.}

^{[56] Marathon Digital Holdings, Inc. (NASDAQ:  MARA) and Coinbase Global, Inc. (NASDAQ:  COIN) are also large holders of Bitcoin.  MARA held 18,488 units of Bitcoins as of June 30, 2024, according to its Form 10-Q filed Aug. 1, 2024.  COIN held 8,999 units of Bitcoin as June 30, 2024, according to its Form 10-Q filed Aug. 1, 2024.}

^{[57] MSTR held 252,220 units of Bitcoin as of Sept. 19, 2024, according to a Form 8-K filed Sept. 20, 2024.}

^{[58] This analysis is based on various assumptions, including that MicroStrategy does not early adopt the change and that, upon adoption, the fair value of Bitcoin (for book-up purposes) is $60,000 per unit.  If the price is higher at the time of the required book-up (Jan. 1, 2025), then the potential CAMT hit would be larger.}

^{[59] Technically, the cumulative-effect adjustment to the opening balance of retained earnings.}

^{[60] According to the background information for ASU 2023-08, “[t]he amendments in this Update require a cumulative-effect adjustment, including the direct effects of that adjustment such as tax consequences, to the opening balance of retained earnings (or other appropriate components of equity or net assets) as of the beginning of the annual period in which an entity adopts the amendments.” To prevent the stranding of the associated deferred tax liability, the change to retained earnings should be tax-effected at the relevant rate (which can vary based on the company), pursuant to ASC 250.}