Back in the Wild West days of crypto, when it was all about Bitcoin and Litecoin, the idea of stateless currencies and how to treat them for tax purposes was at best, a gray area with little to no guidance. It was unclear if cryptocurrencies would be taxed as currency, a commodity or property and the deafening silence from the United States Treasury Department as Bitcoin swelled to $1,200 per coin left everyone riding that wave with some concern in the back of their mind.
After much internal debate and the rapid rise in popularity of cryptocurrencies, March 25, 2014, the IRS released guidance for the tax treatment of Bitcoin and cryptocurrencies as a whole (Notice IR-2014-36 IRS Virtual Currency Guidance). The decision was cryptocurrencies would be treated as a capital asset for purposes of US Federal income taxation.
Needless to say the decision was one which left many scratching their heads, but it finally brought certainty to the cryptocurrency market.
How is this good for STEEM?
The decision to treat STEEM (and all cryprocurrencies) as property helps the long term success of STEEM in two ways. First, this decision encourages STEEM investors to hold their tokens longer than one year before selling or powering down. Waiting over one year allows STEEM holders to secure favorable long term capital gain tax rates rather than ordinary income rates. Second, property exchange rules would allow individuals who have other cryptocurrencies to exchange them for STEEM without triggering a tax event (such as purchasing STEEM with Bitcoin), effectively deferring the tax event until, ultimately, cashing out into fiat.
Let’s take a closer look.
But first, Required Legalese…
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
Favorable Capital Gains Rates
Let’s imagine that you’re a minnow who’s been interested in STEEM, and you have either, through the sweat of your brow (writing and publishing content) or by investing your dollars, acquired STEEM. Let’s also assume you have a modest income from your day job (assume $60,000 per year salary) and you are not married for tax purposes. If you decided not to hold your STEEM for more than a year before selling, you would have a marginal tax rate of 25% on every dollar you earned from the capital gain on the sale of STEEM. In essence, you are being taxed at your ordinary income rate according to your tax bracket (https://www.irs.com/articles/projected-us-tax-rates-2016). If you had waited to sell for a year and one day, that marginal rate would drop to 15%, saving you 10% just for waiting one year before selling. In fact, depending upon which income tax bracket your earnings place you, the savings potential could be as high as 20%.
That is a great incentive to hold your tokens for over a year, and holding STEEM tokens longer helps legitimize and grow the ecosystem as well.
Property Exchange Rules
Generally speaking, the sale of property generates a taxing event. If property is sold for US Dollars, generally a short term or long term capital gain or loss must be recognized. What happens if you decide to exchange a Bitcoin for some STEEM? Is it a sale for tax purposes? The answer is no. It is not a sale for Federal Income tax purposes. You have just exchanged one capital asset for another capital asset (property for property).
Property exchange rules in US Federal Tax law permit the holder the ability to exchange one property for another (within a set of guidelines and reporting rules) without triggering a tax event. This permits the property holder the ability to defer the capital gain taxe until he or she sells the property for US Dollars. The catch is one has to keep good records of basis to fairly value the property as it is exchanged.
This is a fantastic tax-advantaged incentive to pull investment in from whales and individuals holding other cryptos as the STEEM ecosystem grows and matures.
In the end, for STEEM to truly flourish the ecosystem needs quality content and a solid rewards system which cannot be gamed or abused. I am encouraged with the new reputation system and think the ecosystem is moving in the right direction Personally, I am holding onto my STEEM rewards for the long term. It makes sense from an investment perspective and a tax perspective.