Annual report pursuant to Section 13 and 15(d)

INCOME TAXES

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INCOME TAXES
12 Months Ended
Dec. 31, 2021
Income Tax Disclosure [Abstract]  
INCOME TAXES

NOTE 6 - INCOME TAXES

 

The Company accounts for income taxes under ASC Topic 740: Income Taxes, which requires the recognition of deferred tax assets and liabilities for both the expected impact of differences between the financial statements and the tax basis of assets and liabilities, and for the expected future tax benefit to be derived from tax losses and tax credit carry-forwards. ASC Topic 740 additionally requires the establishment of a valuation allowance to reflect the likelihood of realization of deferred tax assets.

 

Income tax expense attributable to income from continuing operations was $23,020,721 and $2,400 for the years ended December 31, 2021 and 2020, respectively, and differed from the amounts computed by applying the U.S. federal income tax rate of 21% to pretax income from continuing operations as a result of the following:

 

    2021     2020  
                         
Federal income tax expense (benefit) at the statutory rate     (21.0 )%   $ (2,762,295 )     (21.0 )%   $ (2,229,606 )
State income taxes, net of federal tax expense     57.7 %     7,593,773       (7.0 )%     (745,190 )
Executive Compensation Deduction Limitation     229.7 %     30,213,175       4.2 %     444,031  
Excess Tax Benefit Related to Share-Based Compensation     (14.5 )%     (1,909,197 )     0.0 %     -   
Nondeductible Other Expenses     1.7 %     225,278       0.0 %     -   
Change in Valuation Allowance     (110.1 )%     (14,477,083 )     23.9 %     2,533,165  
Change in Expected Utilization of Tax Attributes     32.5 %     4,281,445       0.0 %     -   
Other, net     (1.1 )%     (144,375 )     0.0 %     -   
Income tax expense (benefit) from continuing operations     174.9 %   $ 23,020,721       0.1 %   $ 2,400  

 

The components of the provision for income taxes are as follows:

 

    2021     2020  
Current income tax expense (benefit)                
Federal     -          
State   $ 1,600     $ 2,400  
Total Current Income Tax Expense     1,600       2,400  
                 
Deferred expense                
Federal     29,904,031       -  
State     7,592,173       -  
Total Deferred Tax Expense     37,496,204       9,079,841  
                 
Change in Valuation Allowance     (14,477,083 )     (9,079,841 )
                 
Net Deferred Tax Expense after Valuation Allowance     23,019,121       (0 )
                 
Income Tax Provision   $ 23,020,721     $ 2,400  

 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities at December 31, 2021 and 2020 are presented below.

 

    12/31/2021     12/31/2020  
Deferred tax assets:                
Tax Credit carryforwards   $ 163,211     $ 31,961  
Net Operating Loss carryforwards     25,422,829       11,467,248  
Capital Loss carryforwards     -       758,731  
Intangible assets     1,055,099       2,995,317  
Stock Compensation     447,487       246,975  
Accruals, reserves and other     269,096       143,079  
Digital Currencies     7,255,674       -  
Other     -       144,358  
Total gross deferred tax assets     34,613,396       15,787,669  
                 
Less Valuation Allowance     -     (14,477,083 )
                 
Net deferred tax assets     34,613,396       1,310,586  
                 
Deferred tax liabilities:                
      -       -  
Unrealized Gains     (18,294,723 )     -  
Prepaid service contracts     (4,395,095 )        
Property and equipment     (34,942,699 )     (1,310,586 )
Total gross deferred liabilities     (57,632,517 )     (1,310,586 )
Net deferred tax liability   $ (23,019,121 )   $ -  

 

The valuation allowance for deferred tax assets as of December 31, 2021 and 2020 was $0 and $14,477,083, respectively. The net change in the total valuation allowance was a decrease of $14,477,083 in 2021.

 

At year ended December 31, 2021, the Company concluded, based upon all available evidence, it was more likely than not that it would have sufficient future taxable income to realize the Company’s federal and state deferred tax assets. As a result, the Company released $14.5 million of valuation allowance associated with deferred tax assets and recognized a corresponding benefit from income taxes in the consolidated statement of operations for the year ended December 31, 2021. The Company’s conclusion regarding the realizability of such deferred tax assets was based on the scheduled reversal of existing deferred tax liabilities.

 

At December 31, 2021, the Company has net operating loss carryforwards for federal income tax purposes of $109,130,270, which are available to offset future taxable income. The Company has net operating loss carryforwards for state income tax purposes of $54,106,348 which are available to offset future state taxable income.

SCHEDULE OF NET OPERATING LOSS CARRYFORWARDS  

    Gross Amount     Expiring
           
Federal Net Operating Loss Carryforwards     3,314,298     2034-2035
Federal Net Operating Loss Carryforwards - Indefinite Life     105,815,972     Indefinite
State Net Operating Loss carryforwards     54,106,348     2035-2041

 

Section 382 and Section 383 of the Internal Revenue Code limit the utilization of U.S. tax attribute carryforwards following a change of control. Based on the Company’s analysis under Section 382, approximately $76.2 million of tax attributes is limited by Section 382/383 as of December 31, 2021. The Section 382/383 limitation in conjunction with the twenty-year carryforward limitation caused $37.8 million of attributes to be deemed worthless, which resulted in a write-off of the deferred asset.

 

In addition, the Company has the following attributes and credit carryforwards as follows:

SCHEDULE OF ATTRIBUTES AND CREDIT CARRYFORWARDS

Federal R&D Tax Credit Carryforwards     131,250     2040-2041
State alternative minimum tax credit carryforwards     40,457      

 

A reconciliation of the beginning and ending amount of total unrecognized tax benefits for the tax years ended December 31, 2021, and 2020 is as follows:

 

    2021     2020  
             
Balance, beginning of year   $ -     $        -  
Increase related to prior year tax positions     25,000       -  
Decrease related to prior year tax positions     -       -  
Increase related to current year tax positions     18,750       -  
Settlements     -       -  
Lapse of statute of limitation     -       -  
Change in tax rate     -       -  
                 
Balance, end of year   $ 43,750     $ -  

 

Unrecognized tax benefits that reduce a net operating loss, similar tax loss or tax credits carryforward are presented as a reduction to deferred income taxes.

 

The company has established a reserve against its federal R&D tax credits generated in 2021.

 

As of December 31, 2021, the total amount of unrecognized tax benefits was $43,750, all of which was offset against deferred tax assets. If the unrecognized tax benefits were recognized as of December 31, 2021, there would be a $43,750 favorable impact that would affect the effective rate on income from continuing operations. The Company also accrues for interest and penalties on its uncertain tax positions and includes such charges in its income tax provision in the Consolidated Statement of Operations. Interest and penalty expense amounted to nil and nil, respectively, in 2021. Total accrued interest and penalties were nil and nil, respectively, in 2021. The Company does not currently expect any of its remaining unrecognized tax benefits to be recognized in the next twelve months.

 

The Company files federal and state income tax returns. The 2018-2020 tax years generally remain subject to examination by the IRS and various state taxing authorities, although the Company is not currently under examination in any jurisdiction.

 

 

MARATHON DIGITAL HOLDINGS, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements

 

In 2018, the company dissolved those subsidiaries that were required to file tax returns that had no tax due for 2018. Marathon Digital Holdings, Inc. moved its headquarters to Las Vegas, Nevada on June 1, 2018 so it is required to file a final tax return with the state of California for 2018. The company believes there will be no tax due in the state of California other than the $800 Minimum Franchise fee that all companies are required to pay.

 

Management does not believe there are any material tax liabilities owed with respect to its operations in Canada, since Management believes there is a loss from the Canadian operations. Such operations have been outsourced. (See NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS, for details)

 

The Coronavirus Aid, Relief, and Economic Security (CARES) Act, was enacted March 27, 2020. Among the business provisions, the CARES Act provided for various payroll tax incentives, changes to net operating loss carryback and carryforward rules, business interest expense limitation increases, and bonus depreciation on qualified improvement property. Additionally, the Consolidated Appropriations Act of 2021 was signed on December 27, 2020 which provided additional COVID relief provisions for businesses. The Company has evaluated the impact of both the Acts and has determined that any impact is not material to its financial statements.