Author | TaxDAO
Recently, MicroStrategy has been accelerating its holdings of Bitcoin, with the number of holdings soaring from 226,000 in June 2024 to 444,000 in December. This investment style has attracted widespread attention. MicroStrategy's substantial increase in Bitcoin holdings is inseparable from the strong support of the company's CEO Michael Saylor. Saylor has become a well-known figure in the crypto market in 2020 with his firm belief in Bitcoin. However, he was involved in a huge tax dispute in 2022.
In August 2022, the District of Columbia (DC) government sued Saylor through the Office of the Attorney General (OAG), accusing him of fraudulent tax evasion of approximately $25 million. According to the District of Columbia's False Claims Act (FCA), Saylor may be fined $75 million. After more than two years of litigation, the two parties reached a settlement agreement in June 2024, with Michael Saylor paying the authorities $40 million to end the case. Although the settlement amount did not reach the $75 million predicted by the outside world, it also became the largest income tax fraud recovery case in the history of the District of Columbia, and once again aroused heated discussions from all walks of life. What is a tax settlement? Is this settlement worth $40 million? Let's review this case with FinTax.
1. Bitcoin billionaire caught in tax dispute
1.1 Michael Saylor’s entrepreneurial journey
Michael Saylor was born in February 1965 in Nebraska, USA. His father was an Air Force officer. In 1983, Saylor enrolled at the Massachusetts Institute of Technology (MIT) with a full scholarship from the Air Force Reserve Officer Training Corps (ROTC), majoring in aerospace engineering and history of science, where he met Sanju Bansal. In 1989, Saylor and Bansal co-founded MicroStrategy, which provides data analysis tools to help companies make business decisions. In 1998, under Saylor's leadership, MicroStrategy successfully went public and became an industry leader in business data analysis and mobile software. In early 2000, Saylor's net worth reached $7 billion, making him a well-known figure in the fields of technology and finance.
In addition to being a successful entrepreneur, Saylor is also a staunch supporter of Bitcoin and a bona fide Bitcoin billionaire. In 2020, he announced on social media that he had personally purchased 17,732 Bitcoins for $175 million, officially entering the crypto industry; and since 2020, with Saylor's support, MicroStrategy has spent billions of dollars to purchase more than 444,000 Bitcoins as of December 2024, becoming the world's largest Bitcoin holder. Saylor highly respects the value of Bitcoin, believing that Bitcoin is not only a digital asset, but also a safeguard against inflation and a reliable means of storing value in a world where traditional assets are becoming increasingly unstable. His ideas and positive actions on Bitcoin have influenced many investors in the crypto industry and have directly promoted the development of the crypto industry.
1.2 Unexpected tax disputes
However, while Saylor was buying Bitcoin at a high speed, a tax storm was brewing against him. In 2021, a whistleblower accused Saylor of defrauding the DC government and failing to pay full income tax from 2014 to 2020. The DC government launched an investigation through OAG and filed a lawsuit against Saylor for suspected tax fraud, demanding further recovery of Saylor's unpaid taxes from 2005 to 2020.
The DC government, through OAG, accused Saylor of evading huge amounts of personal income tax by falsifying residence information. Although Saylor has lived in Washington, DC for a long time, he declared his residence as a low-tax state (such as Florida), thereby avoiding nearly $25 million in personal income tax. In addition, OAG also pointed out that MicroStrategy, the company founded by Saylor, also played a key role in assisting him in tax evasion. Specifically, Saylor's annual salary was only $1, but MicroStrategy provided him with benefits such as private jets, dedicated drivers, and security teams. Because Saylor nominally lived in Florida, these benefits were not considered taxable remuneration, allowing him to significantly reduce the taxes payable.
Facing the DC government's accusation, Saylor insisted that he moved to Florida more than ten years ago, bought a property in Miami Beach, and moved his life center to Florida. He emphasized that he lived, voted, and performed jury duty in Florida. At the same time, MicroStrategy also argued that the company had no right to interfere in Saylor's personal tax affairs and therefore should not be held responsible for Saylor's tax issues.
This is the largest income tax fraud recovery case in the history of the District of Columbia and the first lawsuit under the District’s revised False Claims Act (FCA). Under the FCA, it is illegal to intentionally conceal, avoid or reduce a tax obligation to the District. The District can impose a fine of three times the amount of tax paid, so it was thought that Saylor might be liable for a fine of $75 million.
2. The parties to the lawsuit reached a settlement: Why didn’t Saylor fight the case to the end?
After more than two years of investigation and litigation, with both parties arguing over their own opinions, Saylor and the DC government finally reached a settlement and signed a settlement agreement in June 2024. Without finding that Saylor and MicroStrategy had committed any illegal acts, Saylor paid the authorities $40 million to settle the case. What is the tax settlement system applicable to this case? Why did the two parties choose to settle the dispute through settlement instead of continuing litigation?
2.1 US Tax Settlement System
The U.S. tax settlement system (Offers in Compromise) originates from the Taxpayer Bill of Rights. While taxpayers are under the Taxpayer Bill of Rights, they are protected by the Taxpayer Bill of Rights and enjoy ten rights, including the right to know, the right to quality service, the right to finality, the right to confidentiality, the right to question the IRS's position and appeal. Among them, the "right to a fair and just tax system" clarifies that taxpayers have the right to ask the tax department to consider facts and circumstances that may affect the taxpayer's potential liabilities, ability to pay, or ability to provide information in a timely manner.
As a non-litigation dispute resolution method, tax settlement is applicable to disputes between taxpayers and tax authorities during the tax audit process, especially when the amount of tax payable cannot be clearly determined or the taxpayer's financial situation cannot pay the tax in full. At the same time, when the taxpayer's assets and income are lower than the tax payable, the tax department may consider accepting a settlement and allow the taxpayer to resolve the tax issue with an amount lower than the tax payable. In addition, if paying the tax in full will cause financial difficulties to the taxpayer, the tax department may also accept a settlement. Due to the flexibility and efficiency of the tax settlement system, according to public data, about 80% of small tax litigation cases can be settled out of court before the trial, thus avoiding a lengthy litigation process and reducing the time and cost burden on both parties.
2.2 Analysis of the reasons for the settlement between the two parties
The two parties chose to settle the dispute, involving an amount of up to $40 million. In addition to the time, money costs, and lengthy litigation procedures mentioned by both parties in the settlement agreement, this choice also reflects the strategic considerations and practical needs of the plaintiff and the defendant.
For the DC government represented by OAG: First, avoid the uncertainty of the outcome of the lawsuit. Although the DC government may have a lot of evidence to support its claims, Saylor's legal team is strong and may also raise various defenses and challenge the government's chain of evidence. In this case, Saylor's determination as a state resident is still unclear. At the same time, the timing of OAG's lawsuit is also questionable. The time it chose to file the lawsuit happened to be a short period after the FCA was revised. The outside world may question whether it "chose a favorable time" to file the lawsuit. If the case is lost, the DC government will not only lose potential compensation, but may also weaken its law enforcement credibility in similar cases in the future. Second, quickly obtain financial compensation through settlement. The settlement amount of $40 million not only provides direct fiscal revenue for the DC government, but also provides flexibility for the allocation of administrative and legal resources. Third, establish a legal deterrent effect. Although Saylor did not admit to any wrongdoing, the $40 million settlement itself is a powerful signal to the public and businesses that the DC government takes tax compliance seriously.
For Saylor, first, the settlement protects personal and corporate reputations. Reputation is a vital intangible asset for an entrepreneur and the company he leads. If the case goes to trial, the relevant details will be made public through court records, which may cause irreparable damage to Saylor and MicroStrategy's public image. In the current era of rapid information dissemination, negative public opinion may further affect MicroStrategy's shareholder confidence and market performance. Second, the long-term consideration of compliance of listed companies. As a listed company, MicroStrategy needs to consider long-term interests when dealing with compliance matters. In the context of compliance becoming an increasingly key element of business competition, especially when facing domestic and international regulators in the United States, maintaining good compliance can help companies reduce potential legal obstacles in the future and avoid affecting their business expansion. Third, avoid the risk of being found to be illegal. Although Saylor denies any illegal behavior, continuing the lawsuit may also face the risk of an unfavorable judgment. If the court rules that Saylor's actions constitute tax evasion or submitting false tax documents, this will not only bring higher financial compensation, but may also bring additional scrutiny pressure on the defendant's future tax compliance. In addition, such judgments could become the basis for investigations by tax authorities in other states or countries, continuing to increase legal risks on Saylor's part.
Overall, the decision of the two parties to settle is the result of a rational trade-off, reflecting the pursuit of maximizing their own interests. For the DC government, the settlement provides efficient economic returns while demonstrating the seriousness of tax law enforcement; for Saylor and MicroStrategy, the settlement reduces uncertainty and potential risks, and protects the reputation and operational efficiency of individuals and companies.
3. Tips and suggestions for FinTax
In addition to understanding the practice of the U.S. tax settlement system, Saylor’s tax settlement case also provides some inspiration for crypto asset investors.
First, pay attention to government regulatory trends and be alert to changes in the intensity of tax law enforcement. In this case, the FCA adopted amendments to strengthen tax collection, and the DC government accordingly filed a tax lawsuit against Saylor. In this regard, investors in the crypto industry should note that as the crypto asset market continues to grow, tax law enforcement agencies around the world have generally strengthened their supervision of crypto assets. However, at the same time, there are dynamic changes in political trends and economic policies in various countries, and there may be significant differences in law enforcement intensity in different places at different times. Therefore, investors need to pay attention to regulatory trends in a timely manner and adjust tax payment activities in a timely manner to avoid policy risks and ensure tax compliance.
Second, pay attention to crypto tax compliance to avoid affecting business development. In this case, in order to avoid the continued impact of the tax crisis on Saylor and the company, Saylor chose to achieve tax settlement by paying $40 million. This should attract the attention of crypto asset investment companies. When investing and financing crypto assets, companies should take tax compliance into strategic considerations. When making large-scale crypto asset investments, companies should fully evaluate the tax impact and make appropriate plans in accordance with legal requirements. If a company has ambiguities on tax issues or behaviors that may lead to tax evasion, it may trigger broader legal risks and affect the company's financing capabilities and capital market performance.
Third, comprehensively consider the costs and benefits and make good use of the tax settlement system. Due to the complexity and volatility of crypto asset transactions, investors may have disputes with tax authorities when declaring taxes, especially when the valuation, transfer date and transaction details of crypto assets are unclear. If the tax authorities are unable to accurately determine the amount of tax payable, or if there is a disagreement between the two parties during the review process, investors can try to reach a settlement with the tax authorities at an amount lower than the amount of tax payable. In addition, if the investor's financial situation does not allow the full amount of tax to be paid, tax settlement can also provide a certain solution. Through this system, investors can not only avoid lengthy litigation procedures, but also obtain flexible tax treatment solutions when disputes are not fully resolved.
The Saylor case provides a precedent for crypto-asset investors, once again demonstrating that tax compliance risk is an important issue that crypto-asset investors cannot ignore. By working with tax advisors and using mechanisms such as tax settlement, investors can effectively reduce risks and improve the compliance and security of crypto-asset investments. Of course, compared with solving problems after the fact, it is more important to eliminate hidden dangers beforehand. In the face of increasingly stringent and changing tax supervision, investors need to remain highly alert to tax risks, keep up with new developments in tax laws and regulations, and, with the assistance of professionals and tax software, take the initiative to carry out tax planning and reasonably manage crypto assets to avoid legal proceedings or economic losses due to tax issues.
