MicroStrategy’s Redemption of Convertible Notes

The business software firm MicroStrategy decided to redeem $1.05 billion worth of 2027 convertible notes and utilize the firm’s shares to settle all conversion requests, as stated in a Friday press release.

This move may aim to reduce the company’s debt and encourage noteholders to convert to company equity. Each note will convert at a rate of 7.0234 shares of MicroStrategy’s class A common stock (MSTR) for every $1,000 of the principal amount. This conversion rate equates to $142.38 per share of MSTR for a convertible note, which is nearly half of MSTR’s current share price of $374.36.

MicroStrategy is recognized as the largest corporate holder of bitcoin, owning 461,000 BTC valued at around $48 billion. Recently, it acquired an 11,000 bitcoin lot for $1.1 billion.

Due to provisions under the 2022 Inflation Reduction Act, MicroStrategy could face a liability of up to $18 billion in realized bitcoin gains, even though the firm has never sold any tokens, according to reporting from The Wall Street Journal. Changes in taxation rules from the Internal Revenue Service, influenced by the Trump administration’s pro-crypto agenda, could exempt MicroStrategy from this realized gains tax. The IRS had previously exempted Berkshire Hathaway, a U.S.-based holding company, from paying unrealized gains taxes on its securities.

Tax analyst Robert Willen told the WSJ that “there’s no real difference in the accounting” between crypto assets and stocks for the unrealized gains tax exemptions, leading him to expect that the IRS will rule in MicroStrategy’s favor.