The tax implications of cryptocurrency, Steemit, and Steem/SBD/SP have been one of my main interests since first joining this community.
My first post was on tax implications and a couple of weeks ago I posted a draft letter making several tax related requests of the Steemit UI developers. After combing through the comments by community members, including a couple of CPAs, that letter was boiled down to requesting an export cvs function within the Steemit UI. In the last week I had a conversation with @ned on that very topic, and I'm going to be addressing the request - and some alternatives - with a finished letter soon.
Today, I want to talk about something related to all this:
What are the tax implications of vests or Steem Power.
DISCLAIMER - I am not a tax lawyer or a CPA - and this post, the comments in this post, and my prior posts are not intended as tax advice. Rather I am simply trying to foment a conversation in this community about the issue of taxation and expressing my thoughts about the issue in a public way. In the end I am advocating that each user, especially those with substantial Steemit income, should hire their own tax adviser to help navigate these waters
Before we talk about SP or Vests, lets sum up what the consensus seems to be on Steem/SBD tax implications. For a more detailed discussion on these issues, check out my first tax post and comment thread with @dana-edwards, as well as the open letter to Steemit and the edifying comments by @sean-king.
TL:DR:
- Cryptocurrency is treated as property for tax purposes, and yes, when you transfer it into fiat currency or bitcoins you pay capital gains tax on your gains and can take tax deductions on any losses.
- However, newly "minted" or mined cryptocurrency is treated as income at the moment it vests to you - and you are taxed on it based on the fair market value of the currency at the moment it vests to you.
- It is pretty unequivocal that SBD you make on comments, curation and authorship are included as taxable income, the moment it is available to you to "claim", with a tax basis equal to the fair market value of SBD at the same moment.
If SBD is income the moment you receive it, what is SP/Vests?
Originally, when arguing all this, I figured SP must be included in the taxable income the moment that the SP is claimable in your account.
However, at that point in time, I had not yet received a payout, and had no SP in my account. As a result, I did not fully understand the nature of the SP asset.
After a few weeks, and a clearer understanding, I now have my doubts about when the taxable moment hits for SP.
What is SP
Steem Power is an illiquid, non tradeable asset. The purpose of SP is to be a non-liquid point system - Indeed it is made this way by design. In order to turn SP into cash, you need to "power down" which involves waiting 13 weeks for all of your SP to turn into Steem, 1/13th at a time.
The only time you can trade you SP or convert it into BTC or fiat currency is after it has been powered down
To my mind, this is super important.
SBD/Steem is taxable income on receipt BECAUSE IT IS LIQUID
You are able, immediately upon receiving SBD or STEEM to transfer it on an exchange into BTC and then into dollars in your bank account, all at the value of the SBD or STEEM at the moment it is received. As a result, taxing this asset at that moments value makes perfect sense.
But SP is not at all the same thing. SP is only an internal point system until you turn it into the liquid asset, Steem. Until that moment, it is not liquid, and cannot be turned into any fiat or BTC currency. Moreover, because it takes a week to get 1/13th of the SP value, doing a fair market valuation of SP at the moment it enters your account is totally contrary to the reality of the asset.
What kind of asset does this relate back to in the real world?
There are two possible examples I can think of:
The most aggressive, anti-tax interpretation of the SP asset's tax implications would paint SP as the 1 to 1 equivalent of "in-game" MMORPG currency. In this interpretation, SP has no real world value unless and until it is powered down, in the same way WOW gold or a Diablo account has no value until I place it on ebay and sell it, at which point it would be taxed as income.
The alternative, and for me more confusing interpretation tax wise, is that SP is essentially a kind of "stock option". You are being given a placeholder in SP which entitles you to a certain amount of equivalent STEEM, if/when you decide to exercise that option. This interpretation would still result in income, valued every week as SP is converted to STEEM. **The more interesting question is what value does this interpretation place on SP?
Steem Power = A NonStatutory Stock Option = No Taxable Event Until The Option Is "Exercised"
Take a look at the IRS discussion of stock options.. There are two types of stock options - statutory stock options and non-statutory stock options. The Former is provided to an employee by their employer. That paradigm doesn't apply here at STEEMIT.
So we are left with the Non-statutory stock option, or "Stock options that are granted neither under an employee stock purchase plan nor an ISO plan are nonstatutory stock options."
These stock options are taxed dependent on whether the FMV of the option can be readily determined. Usually this would be the case if THE OPTION ITSELF WAS READILY TRADED ON A MARKET. SP is not such an option.
As a result, we are left with the following taxable scheme by the IRS:
Not Readily Determined Fair Market Value - Most nonstatutory options don't have a readily determinable fair market value. > For nonstatutory options without a readily determinable fair market value, there's no taxable event when the option is > granted but you must include in income the fair market value of the stock received on exercise, less the amount paid, when
you exercise the option. You have taxable income or deductible loss when you sell the stock you received by exercising the > option. You generally treat this amount as a capital gain or loss.
TL:DR2: SP Seems To Meet The Definition For A Non-Tradable Stock Option - And IRS Interpretations Seem To Support The Notion That SP Should Be Taxed As Income Only When You Exercise The Option And Convert To Steem.
This does not eliminate the tax requirements regarding SBD, nor the need for some kind of reporting assistance, both for SP and SBD. But it does make tax preparation significantly simpler.
As always, I am very very interested in the opinions of CPAs and/or tax attorneys on this topic, as well as any and all members of the community.
Best,
DBER
Photo: By Panapp (Own work) [GFDL (http://www.gnu.org/copyleft/fdl.html) or CC BY-SA 3.0 (http://creativecommons.org/licenses/by-sa/3.0)], via Wikimedia Commons
Nice post. I've been wondering about how the taxes are going to work since joining Steemit a couple weeks ago.
Thanks - i wish it were more than a guess. But that seems to be the nature of the beast so far - but if you find yourself making bank on steemit i can't reiterate enough that actual tax advise from a professional becomes a necessity.
Here's hoping that's a problwm you encounter in the future! ;)
Taxes do need to be considered. For me as a self employed person, I can simply add it to my other self employment income. I have expenses so those are already reducing my income.
The best advice I ever got from a cpa/bookkeeper was that the sole proprietorship business is one of the best situations for individuals, and married couples can combine all their various businesses (separate sched c's for each business). This is of course United States...
Like any business you can deduct the expenses from the income before calculating taxes. Never throw away a receipt! Keep good records of expenses including that $5 usb cord at the dollar store!
We've had sole proprietorship businesses for about 40 years...
Like here on Steemit, nothing is too small it all adds up.
My disclaimer : this is not legal or financial advice but financial common sense. Do invest some $ in a sit down with a tax pro or cpa and find what works best for your own situation. Everyone's life is different, every state has it's own little rules!
Couldn't agree more that taxes really do have to be considered. Different people may find different plans work for them, but at some point Steemit behavior is going to be taxed and it's better to be prepared than to ignore the issue wholesale.
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Thanks as a non US resident or citizen , i find this is extremely interesting as the us government would have a way to trace the coin exhanging to fiat even you have a offshore bank account due to the FATCA agreement signed globally. But i am not sure how they could keep track of the capital gain nor it may be better off the use steem to purchase item from online store and then exchange for cash?
Interesting
I have everything in SP
That's what i'm going to be doing for the most part as well - but again i am not a cpa or a tax attorney- i'm hoping we can lure some in to give their interpretation
Is there a group on steemit that discusses tax implications of SP, STEEM and SBD? Did they add an export csv feature in steemit ui? If they did not I need to write some code to tally all my transactions on the block chain.
Does this report from @steemreports help any? http://www.steemreports.com/financial-accounts-summary/