Inequality in crypto does not stem from technology, but from legal architecture. Those who operate as entities (dealer/trader, proper accounting, compliance and reporting) capture benefits that individual investors can hardly reach. Stronghold’s recent video underlines precisely this asymmetry. This post is based on the explanation of U.S. tax rules, mark-to-market (IRC §475), wash sale (§1091) and economic substance (§7701(o)), and shows how entities (LLC, LP, C‑Corp, SPV) make all the difference. It also uses case studies and a legislative radar (U.S./EU/UK + sentinels).
From there, it speculates on how Stronghold might package all this into a kind of regulated super app, with already regulated stablecoins and embedded tax/accounting automation.
Section 475 of the Internal Revenue Code is regarded as one of the most powerful and at the same time most controversial mechanisms in the taxation of financial assets and, by extension, of cryptoassets. Its logic seems simple, at the end of each fiscal year, all eligible positions are treated as if they had been sold at market value. This “deemed sale” forces the immediate recognition of gains or losses, which cease to be capital gains and become classified as ordinary income, taxed as business income. On the following day, those positions reopen with a new tax basis adjusted to the closing value, creating an annual accounting reset. This mechanism eliminates the need to track long lot histories but raises additional complexities. It can generate liquidity obligations because tax is due on unrealised gains, and it eliminates the advantage of long‑term reduced rates.
Moreover, it requires precision accounting that only structured entities usually support. Historically, §475 was conceived for dealers and traders in traditional securities and commodities, and only recently has its application to digital assets been debated. As the IRS still classifies crypto as property, eligibility remains a grey area that depends on interpretation and regulatory risk. For professional traders, however, this regime remains a way to turn volatility into opportunity, allowing unlimited and carryforward ordinary losses (NOLs), something inaccessible to the average investor.
Before moving on, it is worth clarifying a key concept, Long‑Term Capital Gains (LTCG). In the U.S., when an asset is held for more than one year before being sold, profits may be taxed at lower rates than ordinary income. This distinction is central because §475 eliminates that advantage, all results are treated as ordinary income, subject to the taxpayer’s marginal tax rate. Knowing this helps to understand the costs and benefits discussed later.
§475 stands out because it radically changes the way losses and gains are treated. For individuals, there is a rigid annual cap, only three thousand dollars of capital losses can be used against ordinary income. This limit is negligible compared to crypto’s volatility. For an entity that adopts MTM, that brake disappears. Ordinary losses are recognised fully and immediately. Thus, a fund or LLC can offset negative trading results against other business income flows, materially reducing the tax bill in the same year.
Another benefit is the so‑called NOL carryforward. Imagine that an entity has a year of substantial losses exceeding the income generated. Under the normal capital gains regime, part of that loss would remain “trapped” and could only be used in a very limited way over time. With MTM, those losses become fully recognised ordinary losses and can be carried forward to subsequent years. In practice, the company creates a tax cushion, when profitable years return, those past losses immediately reduce the taxable base. This provides strategic flexibility, smoothing the cycles of volatility typical of digital assets and offering predictability in planning. It also increases the ability to attract investors, since the stock of NOL can be seen as a latent asset that will reduce future taxes and improve cash flows.
A third point is the practical end of the wash sale. Normally, the rule prohibits recognising certain losses when the asset is repurchased within 30 days, as a way of preventing tax manipulation. For the individual investor, this means having to wait or forgo the deduction, limiting flexibility. In the MTM regime, since there is mandatory annual mark‑to‑market, that limitation becomes irrelevant. The loss is recognised in any case, regardless of whether the asset is held or repurchased immediately. The entity can sell and repurchase, adjust exposure or even simply hold the position, knowing that the tax result is guaranteed. The effect is far greater freedom to manage trading strategies, implement disciplined daily loss harvesting and adjust portfolios without fear of losing the tax benefit.