Now that 2017 is almost over, let's get informed before tax season! In this article, we look into how the U.S. taxes the author/curation rewards earned on Steemit.
Are Steemit Author and Curation Rewards Taxable? Crypto Tax Blog Part I-B, Section 1
General IRS Property for Service Rules
Normally in the U.S., employees or contractors receive a "salary" in U.S. dollars (USD) in exchange for the work they do (called “services performed”). However, some people actually receive property instead of U.S. dollars as part of their salary, such as executives receiving restricted stock compensation.
Similar to being taxed on U.S. dollar salaries, receiving property is also treated as a salary (or contractor income) subject to income tax. Under Section 83(a), for U.S. income tax purposes, if property is transferred related to the performance of services by a person, the person who performed the services has taxable “gross income.” The income is calculated as the excess of “fair market value” of the property over the amount paid by the person who performed services. The date at which “fair market value” of the property is measured, as well as the date that income has occurred, is when the property is either (1) transferable or “(2) not subject to a substantial risk of forfeiture – having just one out of two of these criteria occur makes the property “substantially vested.”
IRS Cryptocurrency Rules
The IRS provides limited guidance on the taxation of cryptocurrency in Notice 2014-21. For U.S. income tax purposes, “convertible virtual currency” (CVC) is treated as property. But what is a CVC? To re-cap, a CVC is a virtual currency that can be:
(1) Digitally traded between users and
(2) Purchased (and sold/exchanged) for U.S. Dollars (or other currencies including virtual currency).
More information can be found in the Part I-A blog:
https://steemit.com/money/@cryptotax/crypto-tax-blog-investing-in-bitcoin-let-s-learn-u-s-tax-rules-part-i-a
Cryptocurrency Property for Service Rules
According to Notice 2014-21, if a U.S. person receives convertible virtual currency (CVC) as payment for services, he/she must include the USD value of the CVC in income on the date the virtual currency was received (Q&A 3). This happens regardless of whether the recipient of the Crypto immediately cashes out for U.S. dollars, or alternatively he/she decides to hold the Cryptocurrency received.
Furthermore, the person’s cost basis for a future sale of CVC received for services is the fair market value on the date of receipt of the cryptocurrency. This cost basis rule is put in place to avoid double taxation of the same amount that was treated as a salary/contractor income upon initial receipt (see Q&A 4). In a future sale of the CVC for U.S. dollars (or Bitcoin), the amount of USD received in the sale less this cost basis results in another gain or loss.
In order to determine the USD equivalent value, if an exchange or public market exists to convert the CVC into USD (or into another currency that can convert to USD), a U.S. person should use a “reasonable manner that is consistently applied” to convert the CVC to USD each time that is required for tax purposes (Q&A 5).
IRS Taxation of the Three STEEM Currencies
In General
Whether the STEEM currencies are subject to Section 83, and the clarifying guidance of Notice 2014-21, depends on whether the STEEM currencies are properly classified as a convertible virtual currency (CVC). The CVC status would mean the STEEM currencies are property for income tax purposes.
There are three currencies used on Steemit:
STEEM – STEEM is the base token, the platform’s equivalent to Bitcoin. STEEM can be “powered up” to Steem Power (SP), traded on an exchange, or traded for Steem Dollars (SBD).
STEEM Power (SP)– STEEM Power (SP) is a currency that allows a user to have more influence in the voting mechanisms on the platform. STEEM Power (SP) can be converted into STEEM over a 13-week period known as “powering down.” It can also be delegated to other users.
Steem Dollars (SBD) - Steem Dollars (SBD) is intended to hold a stable value similar to $1 US dollars. However, Steem Dollars (SBD) can in fact be traded on an exchange, or otherwise converted into STEEM after 3.5 days.
A more detailed explanation can be found at:
https://steemit.com/faq.html#What_is_the_difference_between_STEEM__STEEM_Power__and_Steem_Dollars
Earning Currencies on Steemit.com
STEEM Power (SP) or Steem Dollar tokens are rewarded to authors/curators on Steemit.com each day, through a fixed amount allocated to the reward pool by the Steem Blockchain. The platform’s holders of STEEM Power (SP) will vote on which authors receive rewards for their posts; the act of voting allocates certain STEEM tokens to that author (“author rewards”). In turn, curators (the voters) will receive a cut of an author post’s rewards, known as the curation reward; and authors sometimes receive a cut of curation rewards depending on how quickly votes were cast on a new post.
As stated above, rewards will generally be a combination of STEEM Power (SP) and Steem Dollars (SBD), unless an election for 100% SP is made. Also, the platform can change this based on economic conditions.
https://steemit.com/faq.html#What_is_the_reward_pool
https://steemit.com/faq.html#What_do_the_dollar_amounts_for_pending_payouts_represent
Convertible (CVC) Requirement #1 of 2- Tradeable Between Users?
Both STEEM and SBD can be traded on exchanges, or transferred directly to users on Steemit.
While STEEM Power (SP) cannot be traded between users, it can in fact be “delegated” to other users. STEEM Power also can be converted into STEEM, which is then tradeable to other users as explained above.
Convertible (CVC) Requirement #2 of 2 - Exchangeable for USD or Bitcoin (& other CVC’s)
Both STEEM and SBD can be exchanged in Bittrex (as just one example) for Bitcoin (BTC), which can then be traded for USD.
On the other hand, STEEM Power (SP) must first be converted into liquid STEEM to be tradeable. However, on the platform some users are “leasing” STEEM Power in return for compensation and thus have monetized SP through a temporary transfer.
Conclusion
My conclusion is that each of the three currencies, STEEM, STEEM Power (SP) and Steem Dollars (SBD) would be treated by the IRS as Convertible Virtual Currency subject to Notice 2014-21 as meeting both criteria. Therefore, the author/curation rewards in the form of SP/SBD are taxable income on the date received, using the USD value of the rewards on that day.
If this is you by now, don't worry, it's all going to be ok!
Counterarguments - STEEM Power SP
Cryptocurrency is an unclear and developing area, only Bitcoin has received a definite status of Convertible Virtual Currency.
Some may take issue with the conclusion that STEEM Power is taxable because of a few arguments:
(1) Inability to cash out SP immediately,
(2) SP is not on an exchange & thus has no determinable value, or
(3) SP is not tradeable between users.
I am posting separately this week a “Too Long Didn’t Read (TLDR)” follow-up article to address all three of these arguments for SP. It doubles the size of this article and it is a lot to digest in one read, which is why I am separately writing about it. But I form my conclusion that SP is a taxable CVC with consideration of these three arguments.
Are there any deductions against this reward revenue that can reduce my tax liability?
There are potential allowable deductions if Steemit authorship is a trade or business (or to the extent of revenue for a hobby). More information to come in a future article. Deductions that will be addressed in a separate article include Post promotion, home offices and computer equipment.
Does the US Wallet value provided by Steemit help me with taxes? Will they issue a 1099?
The US value of the wallet includes unrealized gains. For example, today my account value is $36 USD. if Steemit currencies goes up by 10 times, meaning I have an account value of $360, I shouldn't be taxed on an additional $330 because i have not cashed out my Steemit yet. Therefore, the USD wallet may be misleading from a tax perspective.
Steem will not issue a Form 1099 as of the date of this article. By signing up for Steem, we take the responsibility for taxes (as explained in the facts).
Do you have any examples to show the application of this complex taxation rule?
I am going to make an example of one 50/50 reward transaction, this week!
Coming up with an efficient methodology for 365 days of transactions is going to more time.
Takeaway
Taxes can be confusing enough, and participation in Steemit could make taxes even more complicated. Consider approaching your tax advisor with your personal situation.
Disclaimer: This series contains general discussion of U.S. taxes in a developing and unclear area of tax law. As always, you should consult your own tax advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions.
Picture Credit
https://pixabay.com/en/users/nattanan23-6312362/
https://pixabay.com/en/users/ErikaWittlieb-427626/