What qualifies me to have a discussion on magic internet money and taxes, you might ask?
I have spent the past 16+ years of my life in the field of accounting and taxation (United States), I hold an Enrolled Agent license, and I am a Fellow of the National Association of Enrolled Agents (NAEA), America’s Leading Tax Experts. If you are curious about what an Enrolled Agent is check out the links below.
*From the IRS Website: https://www.irs.gov/tax-professionals/enrolled-agents/enrolled-agents-frequently-asked-questions
*From the NAEA Website: http://www.naea.org/taxpayers/what-enrolled-agent
My goal with this series is to help educate the community, in at least a fundamental way, on topics of both the tax treatment of their STEEM rewards for federal tax purposes in the US, and basic small business accounting and tax issues. I feel deeply that the future growth of this community will require building entrepreneurs who need to both receive value for their services and retain that value so they can grow, create and contribute more material each of us finds valuable.
This can be a pretty deep discussion hitting on a number of topics, so I have decided to break this out into a series rather than asking anyone reading this to sip water from a fire hose.
But First, Some Required Legalease
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.
So You Decided to Blog for Magic Internet Money. What Could Possibly Go Wrong?
So you discovered the STEEM platform, and like me and many others, you see the incredible potential to creators of original content. Maybe you decided to pursue blogging about your passion, or to make a side business to earn money, or get paid for your craft. Once you have the right content for the right audience, you hit pay dirt and receive STEEM and STEEM Based Dollars- a.k.a. Magic Internet Money. Perhaps you think because it’s an alternative cryptocurrency and Miami-Dade Judge Teresa Mary Pooler ruled on July 25, 2016 Bitcoin is not equivalent to money you don’t have to report the income to the IRS.
Free lunch?
No.
There is no such thing as a free lunch with the Internal Revenue Service and income tax reporting requirements. Guidance issued by the Internal Revenue Service in 2014 says you have been paid…with property and that income is taxable even though it’s in the form of property.
So I Have Been Paid in….Property? (WTF?!?)
That’s right. Not just property, but property that has a “determinable fair market value.” In other words, you have been paid with property whose US Dollar value is easily determined.
On March 25, 2014, The Internal Revenue Service released Notice IR-2014-36 IRS Virtual Currency Guidance: Virtual Currency is Treated as Property for US Federal Tax Purposes; General Rules for Property Transactions Apply, which gave guidance on how existing General Federal Tax Principles apply to Bitcoin and other convertible virtual currencies.
The nutshell version of this notice is the IRS decided not to treat Bitcoin (and other convertible virtual currencies) as a currency, but rather as property subject to a different range of tax laws and reporting requirements for capital assets (WTF, again!?!?). IRS Notice IR-2014-36 and a subsequent notice released April 2014 (Internal Revenue Bulletin 2014-21) both explicitly touched on the fact that a taxpayer must include all payments received in virtual currency (measured in US dollars on the date of receipt) when reporting their total income.
To simplify this, there are two things you will need to do when being paid out in STEEM and STEEM Based Dollars (SBD). You will need to record the reward as income (most likely on a Schedule C) and when you sell STEEM Power (STEEM) or STEEM Based Dollars (SBD) for fiat (USD in this case), you will need to record the sale of a capital asset (on a Schedule D) on your tax return.
This article will focus on how income for US tax purposes is calculated. It is a critical component for the next piece recording the sale and capital gain or loss when you exchange your STEEM Based Dollars (SBD) or STEEM Power (STEEM) for US Dollars (USD), which will be covered in a future article.
Calculating Your Taxable USD Income from STEEM
I think the income calculation explanation is best handled with an example.
Imagine that you have a successful series on STEEM and you have written three articles which received major upvoting by the whales of the community and the payouts were as follows:
Article #1: Butter Sculptures
Award: $500 SBD $250 STEEM
Article #2: That Kid from David Letterman Showing off His Toe Cheese Collection
Award: $1,000 SBD $500 STEEM
Article #3: Top 10 Reasons Why You Suck and I Don’t
Award: $250 SBD $125 STEEM
The requirement the IRS has lain out is that any compensation received in convertible virtual currencies must be valued and reported in US Dollars and the USD valuation of the convertible virtual currency must be, …”as of the day of the payment or receipt.”. In the above example, we have two convertible virtual currencies (STEEM Based Dollars and STEEM) with two separate valuations which change at regular intervals. Let’s look at the two possible scenarios: scenario #1 all of these rewards were received on the same day and scenario #2 all these rewards were on different days.
Scenario #1 All Rewards received the same day
The major issue facing us to value our rewards properly is (at the time of this writing) no exchange offers direct STEEM Based Dollar (SBD) to USD conversion or STEEM Power (STEEM) to US Dollar (USD) conversion. Sensing a migraine coming on yet? In an ideal world, possibly in the near future, there would be an exchange which could exchange both STEEM Power tokens (STEEM) and STEEM Backed Dollars (SBD) for US Dollars (USD) directly, and eliminate the need for a “peg”.
If we decided to liquidate our holdings, we would need to convert both our currencies (SBD and STEEM) into another currency that can be sold for USD (such as Bitcoin, Ethereum, Ripple, Litecoin) basically creating a “peg”. This peg will help us to determine the USD value of our STEEM rewards. For purposes of this example, I am going to value the rewards based upon Bitcoin (BTC) first. After valuing the holdings in BTC, we can easily value them in USD by using the daily close price at any of the exchanges offering that currency pair price (BTC/USD). Let’s look at an example.
Imagine that we are going to use Poloniex for purposes of valuing our rewards. On the day we received the rewards; I take a look at the 24 hour closing price of STEEM Based Dollars (SBD) and see that the currency closed at a price of 0.0012 BTC per SBD. I then look for the 24 hour close price of STEEM and discover it closed at a price of 0.0042 BTC per STEEM on the day we received the rewards. Lastly, I take a look at the 24 hour closing price of Bitcoin (BTC) and see that the currency closed at a price of $655.00.
Step one: Value all STEEM Based Dollars in Bitcoin
Total STEEM based Dollars Received (SBD Article 1 + SBD Article2 + SBD Article 3) X 24 Hour Close of BTC/SBD
Bitcoin value of SBD = (500 + 1,000 + 250) X 0.0012
Bitcoin value of SBD = 1,750 X 0.0012
Bicoin value of SBD = 2.10 BTC
Step 2: Value all STEEM in Bitcoin
Total STEEM Received (STEEM Article 1 + STEEM Article2 + STEEM Article 3) X 24 Hour Close of BTC/SBD
Bitcoin value of STEEM = (250 + 500 + 125) X 0.0042
Bitcoin value of STEEM = 875 X 0.0042
Bicoin value of STEEM = 3.675 BTC
Step three: Add the BTC values of both currencies together
Total BTC Value = (BTC Value of all SBD) + (BTC Value of all STEEM)
Total BTC Value = 2.10 BTC + 3.675 BTC
Total BTC Value = 5.775 BTC
Step four: Multiply the Total BTC Value against the BTC/USD 24 hour close price
USD Income = (Total BTC Value) X (BTC/USD 24 Hour Close Price)
USD Income = (5.775) X ($655.00)
USD Income = $3,782.63
So in the first scenario, there would be $3,782.63 of taxable income earned from STEEM Rewards which was paid out as property in the form of virtual convertible currency.
Scenario #2 Rewards received on different days.
In this scenario, we would basically repeat scenario #1 over each of the days. For instance, suppose we received STEEM rewards for Article #1 and Article #2 on day #1 and received STEEM Rewards for Article #3 on day 2. We would gather the price close information for day #1 and run the scenario 1 calculations for Article #1 and Article #2 to get the taxable USD income for day #1. Then for day #2, we would repeat the process to get the taxable USD income for day #2. Once we have the taxable USD income for both days, we would add them together to get the total taxable USD income.
Wrapping it up
Feeling a bit overwhelmed? I can understand. A couple of thoughts on this before we wrap this first section up. The IRS, in Internal Revenue Bulletin 2014-21 lays out the guidelines for computing fair market USD value of convertible virtual currencies.
“If a virtual currency is listed on an exchange and the exchange rate is established by market supply and demand, the fair market value of the virtual currency is determined by converting the virtual currency into U.S. dollars (or into another real currency which in turn can be converted into U.S. dollars) at the exchange rate, in a reasonable manner that is consistently applied.”
The key phrase in this excerpt is, “…in a reasonable manner that is consistently applied.” Be sure to keep your “peg” and your calculation method consistent when valuing your STEEM moving forward.
So now you have learned how to calculate your taxable income, but we have not even discussed the tax implications when you exchange STEEM and/or SBD for US Dollars. In the next installment, we will discuss the tax implications of disposing (selling/exchanging) a capital asset (STEEM or STB). See you in the next installment.
IRS Recordkeeping Requirements
https://www.irs.gov/businesses/small-businesses-self-employed/recordkeeping
Links
https://www.irs.gov/uac/newsroom/irs-virtual-currency-guidance
http://www.miamiherald.com/news/local/crime/article91682102.html
https://www.irs.gov/irb/2014-16_IRB/ar12.html