Twenty One Capital, Inc. Income Taxes Disclosure
Note 11 — Income Tax
The Company’s net deferred tax assets as of December 31, 2025 are as follows:
| December 31, | ||||
| 2025 | ||||
| Deferred tax assets: | ||||
| Stock based compensation | $ | 12,117 | ||
| Change in fair value of digital assets | 29,651,948 | |||
| Loss on purchase of Bitcoin | 12,859,323 | |||
| Net operating loss carryforwards | 926,316 | |||
| Total deferred tax assets | 43,449,705 | |||
| Valuation allowance | (43,449,705 | ) | ||
| Deferred tax assets, net valuation allowance | ||||
As of December 31, 2025, the Company had federal net operating loss carryforwards of $4,411,028 which may be available to reduce future taxable income, and may be carried forward indefinitely. At December 31, 2025, the Company had no available state operating loss carryforwards no general business tax credit carryforwards available to reduce future tax liabilities.
In accordance with FASB ASC Topic 740, Accounting for Income Taxes, the Company has evaluated the positive and negative evidence bearing upon the realizability of its deferred tax assets, which are comprised principally of net operating loss carryforwards, change in fair value of digital assets and share-based compensation. The Company has determined that it is more likely than not that the Company will not recognize the benefits of federal and state deferred tax assets and, as a result, a full valuation allowance of $43,449,705 has been established at December 31, 2025.
A reconciliation of the to the Company’s effective tax rate is as follows:
| December 31, | ||||||||
| 2025 | ||||||||
| Pre-tax book loss | $ | (217,339,312 | ) | |||||
| U.S. federal statutory income tax rate | $ | (45,641,256 | ) | 21.0 | % | |||
| State tax benefit (expense), net of federal benefit | 0.0 | % | ||||||
| Stock based compensation | 2,191,551 | (1.0 | )% | |||||
| Change in valuation allowance | (43,449,705 | ) | (20.0 | )% | ||||
| Income tax provision | $ | 0.0 | ||||||
The Company had unrecognized tax benefits or related interest and penalties accrued for the period March 7, 2025 (inception) to December 31, 2025. The Company did not make any payments of income taxes to any state for the period from March 7, 2025 (inception) to December 31, 2025.
The Company is subject to U.S. federal income tax and Texas state income tax. The statute of limitations for assessment by the IRS and state tax authorities is open for the tax year 2025; currently, no federal or state income tax returns are under examination by the respective taxing authorities.
In July 2025, the One Big Beautiful Bill Act (Public Law 119-21) was enacted. The Company recognized the income tax effects of the legislation in the period of enactment in accordance with ASC 740. The legislation did not have a material impact on the Company’s consolidated financial statements for the period from March 7, 2025 (inception) to December 31, 2025. The Company will continue to evaluate the impact of the legislation on future periods.
About Income Taxes Disclosures
The income tax disclosure reveals how much a company actually pays in taxes versus what the statutory rate would predict. Analysts focus on the effective tax rate (ETR) reconciliation, which breaks down every item driving the gap between the 21% federal rate and the company's reported ETR — including R&D credits, foreign rate differentials, and state taxes. Deferred tax assets (DTAs) and their valuation allowances signal management's confidence in future profitability: a rising allowance suggests the company doubts it can use accumulated tax benefits. Uncertain tax benefit (UTB) reserves quantify exposure to IRS challenges on aggressive positions.
Key signals to watch: sudden ETR drops without clear operational reasons, large increases in valuation allowances, growing UTB balances, and significant unremitted foreign earnings. Post-TCJA, pay attention to GILTI and BEAT provisions that affect multinational tax structures. Compare the cash taxes paid (from the cash flow statement) against the income tax provision to gauge earnings quality.