Canton Strategic Holdings, Inc. Income Taxes Disclosure

Note 7 – Income Taxes

 

The following table presents the domestic and foreign components of loss before income taxes:

 

Schedule of Domestic and Foreign Components of Loss Before Income Taxes

		2025				2024
		Year Ended December 31,
		2025				2024
Domestic			(42,103,363	)			(12,197,568	)
Foreign			-				-
Total loss before income taxes		$	(42,103,363	)		$	(12,197,568	)

 

The income tax provision (benefit) consists of the following amounts:

 

Schedule of Income Tax Provision (Benefit)

		2025				2024
		Year Ended December 31,
		2025				2024
Current tax provision (benefit)
Federal			-				-
State and local			-				-
Total current tax provision (benefit)			-				-
Deferred tax provision (benefit)
Federal			(4,622,176	)
State and local			(1,564,937	)			-
Total deferred tax provision (benefit)			(6,187,113	)			-
Net tax provision (benefit)		$	(6,187,113	)		$	-

 

 

A reconciliation of the income tax provision (benefit) to the amount computed by applying the 21% statutory US Federal Income tax rate to loss before income taxes after adoption of ASU 2023-09 is as follows:

 

Schedule of Effective Income Tax Reconciliation

		For the years ended December 31, 2025
Income tax benefit at the federal statutory rate		$	(8,841,706	)			21.0	%
Permanent differences and other			839,473				(2.0	)%
State income taxes			(1,564,937	)			3.7	%
Research and development credit limitation			381,702				(0.9	)%
Net operating loss carryforward limitation			6,523,237				(15.5	)%
Other			389,084				(0.9	)%
Change in valuation allowance			(3,913,966	)			9.3	%
Effective income tax expense		$	(6,187,113	)		$	14.7	%

 

A reconciliation of the income tax provision (benefit) to the amount computed by applying the 21% statutory US Federal Income tax rate to loss before income taxes for years prior to adoption of ASU 2023-09 is as follows:

 

		For the year ended December 31, 2024
Income tax benefit at the federal statutory rate			21.0	%
Permanent differences and other			(0.2	)%
State income taxes			7.0	%
Research and development credit			1.1	%
Change in valuation allowance			(28.9	)%
Effective income tax expense		$	0.0	%

 

The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2025 and 2024 were as follows:

 Schedule of Significant Components of Company’s Deferred Tax Assets

		2025				2024
		December 31,
		2025				2024
Deferred tax asset (liabilities) related to:
Federal net operating loss carryforward		$	1,266,245			$	4,264,000
State net operating loss carryforward			428,714				1,444,000
Capitalized costs			1,613,924				1,957,000
Acquired in-process research and development			1,341,733				1,027,000
Research and development credit			-				382,000
Stock compensation			403,744				904,000
Accrued expenses and other			24,602				211,000
Digital assets			(117,934,191	)			-
Total deferred tax assets (liabilities)			(112,855,228	)			10,189,000
Valuation allowance			(5,078,963	)			(10,189,000	)
Deferred tax assets (liabilities), net of valuation allowance		$	(117,934,191	)		$	-

 

In assessing the realizability of the net deferred tax assets, the Company considers all relevant positive and negative evidence to determine whether it is more likely than not that some portion of the deferred income tax will not be realized. The realization of the gross deferred tax assets is dependent on several factors, including the generation of sufficient taxable income prior to expiration of the net operation loss carryforwards. At December 31, 2025 and 2024 the Company has recorded a full valuation allowance against its net deferred tax assets of $5,078,963 and $10,189,000 respectively. The change in the valuation allowance during the year ended 2025 was ($5,109,889).

 

At December 31, 2025, the Company had federal net operation loss (NOL) carryforwards of approximately $6,029,739. The federal net operating loss carryforwards begin to expire in 2028, losses generated in 2018 or later of $6,029,739 will carry forward indefinitely. Sections 382 and 383 of the Internal Revenue Code of 1986 subject the future utilization of net operating losses and certain other tax attributes, such as research and experimental tax credits, to an annual limitation in the event of certain ownership changes, as defined. The Company may be subject to the net operating loss utilization provision of Section 382 of the Internal Revenue Code. The effect of an ownership change would be the imposition of an annual limitation of the use of NOL carryforwards attributable to periods before the change. The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company's capital during a specified period prior to the change, and the federal published interest rate. Although the Company has not completed an analysis under Section 382 of the Code, it is likely that the utilization of the NOLs will be limited. The Company has reduced the gross amount of NOL and tax credits included in the calculation of deferred taxes given the expectation that ownership change limitations will apply.

 

In connection with the Cryptocurrency Offering (see Note 5), investors contributed digital assets in exchange for pre-funded warrants in a transaction intended to qualify as a tax-free exchange under Internal Revenue Code Section 351, and the Company has a carryover tax basis in the property contributed. As a result, the company recognized an initial deferred tax liability of approximately $124.1 million which was recorded as a reduction to Additional paid in capital.