I'm surprised this hasn't been a bigger discussion point on the trending section of Steemit. Instead, as the whale wars rage, we ignore a change to the US tax bill that might have to change the way Steem Rewards work.
Disclaimer: I'm not a certified tax professional, and the below is simply my opinion.
So what's this new bill say that makes Jan 1 any different than Dec 31? Well, the change has to do with exchanges. But not fiat to crypto exchanges, which are already taxed under the Capitol Gains Tax, but instead cryptocurrency to other cryptocurrency exchanges.
Currently (as of 2017) when you traded one cryptocurrency for another, it fell into this grey area, and could be considered a "like-kind exchange". And such, those trades are not taxable events.
But the new law does away with this grey area, and explicitly states that trading between one cryptocurrency and another now is subject to Capitol Gains Tax. Basically, under CGT, you would now be taxed for any "Gains" (profit) you accrued between the time that you acquired the cryptocurrency you are trading and the date of the trade. (note that you can also now report the losses up to a point). I'm not going to delve any deeper into the details of CGT, as I both don't know them, and the point is simply the fact that these trades are now taxable.
The question is: How does this change affect Steem and Other Cryptocurrencies?
The first and most obvious impact is that the acquisition of almost all "altcoins" will now become a much more complicated financial decision. Currently, you can only purchase a handful of crypto with fiat directly (Bitcoin, Ethereum, Litecoin and BitcoinCash via Coinbase). That initial investment was simple, and you were only taxed when you sold one of those coins for USD and cashed out. And using those crypto to purchase other altcoins was non-taxable.
So Buying STEEM was not subject to CGT in 2017, but IT WILL BE IN 2018
Now if you want to buy STEEM, or any other altcoin, you will pay CGT on the "gains" between the time you purchased the crypto that you are using to buy the altcoin with fiat, and the date of that trade. Example below:
Charlie bought 1 ETH on December 10 for $450 USD
Charlie got scared when the market started to correct on Dec 22
Charlie TRADL his 1 ETH, now worth $690 USD on Dec 22 for 230 STEEM ($3/STEEM)
Charlie now owes Uncle Sam 37% of the gains ($240 USD) from his 1 ETH, which is around $88 USD
That's quite a hefty transaction fee. Maybe Charlie made the right decision, maybe it was worth it. But let's fast forward 6 months shall we, when Charlie wants to buy some new toys, and needs his crypto money to do it...
Charlie wants to go to Vegas for his birthday, but Charlie has no cash money.
Charlie decides to SODL his STEEM, which now worth $10 USD. (good investment Charlie)
But first Charlie must TRADL his 230 STEEM ($2,300 USD) to 2.3 ETH ($1K/ETH)
Charlie now owes Uncle Sam 37% of the gains ($1,610 USD) from his 230 STEEM, which is around $595 USD.
Let's assume Charlie cashed out to fiat instantly, without Ethereum going up or down (But you can imagine even more CGT if the ETH he transferred to first changed between the trade and the sell).
In Total, Charlie made $1,167 and paid $683 in Capitol Gains Taxes. Which is roughly 37% taxed, which is the CGT on cashing out anyway. It's way more complicated, but the math works out. So, alls well that ends well right? Not so fast.
The big problem is when we dive into the world of SMTs and ICOs. And Even SBD. While Charlie had a simple buy/sell journey, because he only held each coin for less than a year, he had to pay up to the full 37% tax rate. If you HODL for more than a year, the rate drops dramatically, topping out at 23.8%.
Easy, JUST HODL right?
A huge problem with this is the way that SBD and STEEM interact. Under this new law, SBD could be considered another currency from STEEM, as it's listed separately under exchanges like Blocktrades, and has separate values in those exchanges. Which means converting your SBD to STEEM would incur CGT, and vice versa.
"But if you transfer instantly, then there are no gains to report right? Problem solved."
Potentially, yes. But also consider that if that becomes a taxable event, then have you locked in an asset value baseline, similar to if you had made an investment directly? How does acquiring STEEM/SBD via Rewards, which one could see as being an initial investment of $0 affect gains? Is it income? Is it taxed by both Income Tax and CGT? What's the point of having both SBD and STEEM if instant transfers become the norm to avoid taxes?
And regardless of the initial CGT, once you have a token of value in one currency, many people might be hesitant to trade from one currency to another for a year to avoid the higher CGT rate. Might this cripple the economies of some currencies by essentially freezing liquidity?
And consider SMTs and ICOs. If these tokens are seen as currencies as well, then people will be hesistant to trade in/out of those token to the parent currencies (Ether + STEEM). ICOs today work via investors trading ETH for the tokens, but if this becomes a taxable event, does this deter new investors who would be subject to the higher CGT rate as well, if they haven't held their ETH for more than a year?
And beyond all these questions is the question of how do we correlate time and Crypto? If I have had 1 ETH for a year, and buy another, do both ETH fall into the lower or higher tax bracket? Can I mark them as separate but keep them in the same wallet? Do I need a new wallet for each ETH purchase to keep the investments separate?
As I said above, I'm certainly not an expert. I'm not an economist. I'm not even a mediocre mathematician, so forgive me if my assumptions here are way off base. But what this new law does, more than closing a loophole, is make a crypto-landscape filled with thousands of tokens and altcoins WAY MORE COMPLICATED. And the potential benefits and drawbacks of this change are still unknown.
Would love the community to fill in my knowledge gaps, but also discuss how this change does/doesn't affect how you might interact with crypto in 2018.