S-Corp vs. Disregarded Entity: Getting Your LLC Tax Treatment Right #
The default single-member LLC is a disregarded entity for tax purposes. The IRS pretends it doesn’t exist and you report everything on your personal return. Simple, clean, no separate tax filing for the LLC.
An S-Corp election changes everything. You become an employee of your own company. You take a salary, pay payroll taxes on that salary, and distribute the rest as dividends that avoid the 15.3% self-employment tax. Sounds great until you realize you’ve just signed up for payroll processing, quarterly tax filings, and a whole compliance structure.
The math only works when you have real active income. Not appreciation. Not unrealized gains sitting in a wallet. Active income you’re pulling out and using.
Here’s the break-even point most accountants use. If your LLC is generating less than $60,000-80,000 in annual profit, the S-Corp election costs more in compliance than you save in taxes. You’re paying for payroll services, additional accounting fees, and quarterly filings to save maybe $3,000-5,000 in self-employment tax. Not worth it.
Digital asset LLCs stay disregarded until there’s actual business activity generating regular income. You’re mining cryptocurrency and selling it monthly? That’s active income, S-Corp might make sense. You’re holding Bitcoin that went up 200%? That’s appreciation, disregarded entity is fine.
The salary requirement is where people get stupid. The IRS says you must pay yourself a “reasonable salary” for the work you actually do. Not zero. Not $12,000 when you’re running a $500,000 business. Reasonable means what you’d pay someone else to do your job.
If you’re actively managing investments, typical salaries run $60,000-120,000 depending on asset size and complexity. If you’re just holding long-term positions and checking your portfolio monthly, you’re not doing $100,000 worth of work. The IRS knows this. They audit S-Corps that pay $20,000 salaries and take $200,000 in distributions.
The rest comes out as distributions. You already paid yourself a reasonable salary and paid payroll taxes on it. The remaining profit distributes without self-employment tax. That’s the entire benefit of the S-Corp election.
Most wealth management firms like Digital Wealth Partners focus on growing your assets and providing fiduciary guidance on investments. They’re not setting up your LLC tax structure or processing your payroll. That’s coordination work.
Cold wallet custody adds another layer. Your LLC owns the D’Cent hardware wallet holding the cryptocurrency. Whether the LLC is taxed as a disregarded entity or an S-Corp doesn’t change custody. It changes how you report income and what administrative burden you’re carrying.
The real question is whether you need this level of tax optimization at all. If you’re just accumulating digital assets and not taking regular distributions, a disregarded entity keeps things simple. You report gains when you sell, you take deductions for business expenses, and you’re done.
Once you’re generating six figures in annual profit and actually pulling money out to live on, the S-Corp election starts making financial sense. Before that point, you’re optimizing for a problem you don’t have yet.
Digital Ascension Group handles the full coordination: the entity structure, the tax strategy, the payroll compliance, and the wealth management all working together. You don’t want four different advisors arguing about whether your salary is reasonable.
Contact Digital Ascension Group to learn how our family office services can coordinate your complete financial picture.
