Income Taxes

12 Months Ended

Dec. 31, 2020

Income before income taxes and noncontrolling interest is as follows for the years ended December 31, 2020, 2019 and 2018:


	Years Ended December 31,
	2020		2019		2018
(in thousands)
U.S. operations	$	1,214,282	$	(103,080)	$	659,937
Non-U.S. operations	168,555		(12,902)		36,426
	$	1,382,837	$	(115,982)	$	696,363

The provision for income taxes consists of the following for the years ended December 31, 2020, 2019 and 2018:


	Years Ended December 31,
(in thousands)	2020		2019		2018
Current provision (benefit)
Federal	$	148,034	$	(1,861)	$	49,047
State and Local	52,040		4,362		18,697
Foreign	37,474		3,675		4,276
Deferred provision (benefit)
Federal	26,255		(13,422)		4,986
State and Local	(2,580)		(1,455)		(1,599)
Foreign	701		(3,576)		764
Provision for income taxes	$	261,924	$	(12,277)	$	76,171

The reconciliation of the tax provision at the U.S. federal statutory rate to the provision for income taxes for the

years ended December 31, 2020, 2019 and 2018 is as follows:


	Years Ended December 31,
	2020		2019		2018
(in thousands, except percentages)
Tax provision at the U.S. federal statutory rate	21.0	%	21.0	%	21.0	%
Less: rate attributable to noncontrolling interest	(7.5)	%	(8.1)	%	(10.2)	%
State and local taxes, net of federal benefit	3.4	%	2.4	%	1.9	%


Non-deductible expenses, net	0.1	%	(3.7)	%	(0.3)	%
Other, net	1.9	%	(1.0)	%	(1.5)	%
Effective tax rate	18.9	%	10.6	%	10.9	%

The components of the deferred tax assets and liabilities as of December 31, 2020, and 2019 are as follows:


	December 31,
(in thousands)	2020		2019
Deferred income tax assets
Tax Receivable Agreement	$	199,107	$	197,598
Share-based compensation	17,140		15,572
Intangibles	2,563		2,467
Fixed assets and other	37,100		44,908
Tax credits and net operating loss carryforwards	60,597		86,420
Less: Valuation allowance on net operating loss carryforwards and tax credits	(60,385)		(60,594)
Total deferred income tax assets	$	256,122	$	286,371

Deferred income tax liabilities
Intangibles	$	63,052	$	71,700

Total deferred income tax liabilities	$	63,052	$	71,700

The Company is subject to U.S. federal, state and local income tax at the rate applicable to corporations less the rate attributable to the noncontrolling interest in Virtu Financial. These noncontrolling interests are subject to U.S. taxation as partnerships. Accordingly, for the years ended December 31, 2020, 2019 and 2018, the income attributable to these noncontrolling interests is reported in the Consolidated Statements of Comprehensive Income, but the related U.S. income tax expense attributable to these noncontrolling interests is not reported by the Company as it is the obligation of the individual partners. Income tax expense is also affected by the differing effective tax rates in foreign, state and local jurisdictions where certain of the Company’s subsidiaries are subject to corporate taxation.

Included in Other assets on the Consolidated Statements of Financial Condition at December 31, 2020 and December 31, 2019 are current income tax receivables of $83.1 million and $39.3 million, respectively. These balances primarily comprise income tax benefits due to the Company from federal, state and local, and foreign tax jurisdictions based on income before taxes. Included in Accounts payable, accrued expenses and other liabilities on the Consolidated Statements of Financial Condition at December 31, 2020 and December 31, 2019 are current tax liabilities of $37.9 million and $11.5 million, respectively. These balances primarily comprise income taxes owed to federal, state and local, and foreign tax jurisdictions based on income before taxes.

Deferred income taxes arise primarily due to the amortization of the deferred tax assets recognized in connection with the IPO (see Note 7 "Tax Receivable Agreements"), the Acquisition of KCG and the ITG Acquisition (see Note 3 "ITG Acquisition"), differences in the valuation of financial assets and liabilities, and other temporary differences arising from the deductibility of compensation, depreciation, and other expenses in different time periods for book and income tax return purposes.

There are no expiration dates on the deferred tax assets. The provisions of ASC 740 require that carrying amounts of deferred tax assets be reduced by a valuation allowance if, based on the available evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. Accordingly, the need to establish valuation allowances for deferred tax assets is assessed periodically with appropriate consideration given to all positive and negative evidence related to the realization of the deferred tax assets. At December 31, 2020, the Company did not have any U.S. federal net operating loss carryforwards and therefore the Company did not record a deferred tax asset related to any federal net operating loss carryforwards. At December 31, 2020, the Company recorded deferred income taxes related to state and local net operating losses of $0.4 million. These net operating losses will begin to expire in 2039. The Company did not record a valuation allowance against this deferred tax asset.

As a result of the ITG Acquisition, the Company has non-U.S. net operating losses at December 31, 2020 and December 31, 2019 of $75.1 million and $86.3 million, respectively, and has recorded a related deferred tax asset of $15.2 million and $17.9 million, respectively. A valuation allowance of $15.1 million and $15.6 million was recorded against this deferred tax asset at December 31, 2020 and December 31, 2019, respectively, as it is more likely than not that a portion of this deferred tax asset will not be realized. As a result of the Acquisition of KCG, the Company has non-U.S. net operating losses at December 31, 2020 and December 31, 2019 of $239.0 million and $239.0 million, respectively, and has recorded a related deferred tax asset of $44.9 million and $44.9 million, respectively. A full valuation allowance was also recorded against this deferred tax asset at December 31, 2020 and December 31, 2019 as it is more likely than not that this deferred tax asset will not be realized. No valuation allowance against the remaining deferred taxes was recorded as of December 31, 2020 and December 31, 2019 because it is more likely than not that these deferred tax assets will be fully realized.

The Company is subject to taxation in U.S. federal, state, local and foreign jurisdictions. As a result of the ITG Acquisition and the Acquisition of KCG, the Company has assumed any ITG and KCG tax exposures. As of December 31, 2020, the Company’s tax years for 2015 through 2019 and 2017 through 2019 are subject to examination by U.S. and non-U.S. tax authorities, respectively. In addition, the Company is subject to state and local income tax examinations in various jurisdictions for the tax years 2013 through 2019. The outcome of these examinations is not yet determinable. However, the Company anticipates that adjustments to the unrecognized tax benefits, if any, will not result in a material change to the financial condition, results of operations and cash flows.

The Company’s policy for recording interest and penalties associated with audits is to record such items as a component of income or loss before income taxes and noncontrolling interest. Penalties, if any, are recorded in Operations and administrative expense and interest received or paid is recorded in Other, net or Operations and administrative expense in the Consolidated Statements of Comprehensive Income.

The Company had $8.6 million of unrecognized tax benefits as of December 31, 2020, all of which would affect the Company’s effective tax rate if recognized. The Company has determined that there are no uncertain tax positions that would have a material impact on the Company’s financial position as of December 31, 2020.

The table below presents the changes in the liability for unrecognized tax benefits. This liability is included in Accounts payable and accrued expenses and other liabilities on the Consolidated Statements of Financial Condition.


(in thousands)
Balance at December 31, 2017	$	7,300
Decreases based on tax positions related to prior period	(840)
Increase based on tax positions related to current period	868
Balance at December 31, 2018	7,328
Increase from ITG Acquisition	2,713
Decreases based on tax positions related to prior period	(1,263)
Increase based on tax positions related to current period	—
Balance at December 31, 2019	8,778

Decreases based on tax positions related to prior period	(311)
Increase based on tax positions related to current period	110
Balance at December 31, 2020	$	8,577

- Definition

The entire disclosure for income taxes. Disclosures may include net deferred tax liability or asset recognized in an enterprise's statement of financial position, net change during the year in the total valuation allowance, approximate tax effect of each type of temporary difference and carryforward that gives rise to a significant portion of deferred tax liabilities and deferred tax assets, utilization of a tax carryback, and tax uncertainties information.

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