RE: Tax AMA - 2018 Tax Season - Ask Me Anything
Good morning 🌄 (here) @cryptotax!
As a resident of the U.S. and in response to your AMA offer, I would be very interested in your perspective on the tax implications of some Steem blockchain (unique to it?) specific transactions. Here are three different, but conceptually related examples:
- The Steem Basic Income (@steembasicincome and related accounts) program created by @josephsavage.
- The UpvoteShares (@upvoteshares / @minnowshares accounts) program created by @costanza.
- The Smart Steem (@smartmarket account) program created by @therealwolf.
In each of these examples, the common feature is we have “sold” some Steem tokens, either STEEM or SBD. Presumably that would normally be a taxable event, like the sale of a share of stock. We "bought" t one price and "sold" at another ...
But … In these instances, we get back a "benefit!" In the 3rd example, almost immediately (since it is a type of "bid bot" promotion vehicle). And in the first 2 examples, over time …
In addition, the first two have a bit of what I would assume would be considered a “gift” feature, for those who are the recipients of either SBI shares or “Minnow” shares.
Thank you, in advance, for the investment of your time!
Here are my thoughts... From a taxation-perspective... there is not a lot of precedent for something like Steem, but the closest analogues are blogging and stake-based mining (depending on how much you rely on networking versus stake-driven upvote service (bid bots, subscribed votes, purchased votes, explicit vote-swapping).
I mark all post payouts as revenue and all payments to promotion services as expenses. Factor in capital gains/losses on the crypto, and see where things shake out.
As for SBI:
Steem Basic Income is fairly explicit that it's a subscription-based upvote service. We initially said 'shares', which caused some confusion, but a 'share purchase' or enrollment is actually a subscription payment. All we deliver is upvotes, which provide visibility to your content, and we track everything in 'rshares', which is how the protocol tracks upvotes.
The conversion of those rshares into cryptocurrency is handled by the witnesses and is completely outside our control. We also make no guarantees about the estimated value of our votes, relying instead on complete explanations of how our tracking and reward mechanisms work so that Steemians can make their own decisions.
We treat enrollments as revenue and pay taxes on any profits Steem Basic Income makes as a hybrid promotion service / dPOS stake-based mining business.
But then I'm not a tax adviser or lawyer and the counsel I received may be less relevant to your situation, so of course you should consult your own advisers.
Excellent @josephsavage. May I ask a follow-up question?
By "revenue," trying to precise and clear in my own mind, do you mean you count post payouts as "ordinary income," much as we would with a paycheck?
Thank you very much for your contribution to this. I really appreciate it! 👍
You start with revenue (gross receipts), you subtract expenses and anything left over would be "earned income" but the paperwork is quite a bit more complicated than with a paycheck.
For example, let's say I earned $100 in curation/author rewards over the year and I spent $95 on promotion services (all three types you asked about would be treated as promotion services). Only the $5 profit becomes taxable as 'earned income'.
Now SBI doesn't reach ROI in the first year, so if you're going heavy into SBI you could have a loss. If you keep plowing all your profits into promotion services to grow your Steem presence, you might have a loss every year until you reach your target levels and start taking big profits out. That's pretty normal for small businesses.
Okay, that makes sense @josephsavage. You are distinguishing, I believe then, post payouts from SBI or any similar promotion service, from post payouts "earned" by simply investing our time into the writing of Steem content. Is that right?
Assuming so, the transaction accounting becomes almost impossible to keep on top of, particularly with a service like Smart.Steem. At least upvotes from the SBI or UpvoteShare accounts are named as such, so can be distinguished ...
Still, even that would require accounting for every one of them ... 😧 If they are to be classified differently from a "normal" upvote, from a Steemian who just likes your work ...
And then, do we take into account the price of STEEM, at the point in time we received each of these individual bits of "revenue" ... 😞
No distinction required. An upvote is just an upvote and has no material value until crypto is issued for it at post payout.
For my personal accounts, I am treating all block rewards (curation, author, & beneficiary) as 'revenue' or 'sales' and all promotion costs, including SBI enrollments, as expenses. If you try to roll all your promotion costs up into 'cost of goods sold' instead, then you would need a more clear link between each promotion cost and the upvotes it generated (good luck with doing that for MB or SmartMarket)!
Sum of all post payouts (in $ value at time of reward) = revenue
Sum of all money spent on promotion = costs
Revenue - Costs = profit
If you're not incorporated, then you put everything in the appropriate boxes on Schedule C (and supply whatever supplemental worksheets needed) and only the profit (or loss) appears on your 1040.
For full support of your gross figures, you may need transaction-level supplemental information, but it's a blockchain so that's easy to get.
Excellent @ josephsavage. Thank you very kindly for the investment of your time into this exchange. Much appreciated!!
@josephsavage Is your advisor helping you consider other costs deductible against Steem earnings outside of promotion (the cost of your equipment, the home office allocation if you are working from home, etc.)? As well as the 20% deduction on qualified business income for Schedule C and pass-through entities. Just food for thought :).
@roleerob As far as everyday users, some individuals are operating as a "hobby", not at trade/business, so the different rules apply (Schedule C wouldn't be filed in this case).
Yes of course, and even the appropriate deductions for travel expenses for the Steem-related conferences that I attended last year.
The 20% deduction I don't remember if we discussed last year but I will check on it this year.
It's called 199A, depending on your personal situation certain mechanical limits kick in based on W-2 wages, business assets and classification of the line of business, but some taxpayers can skip all the limits and claim the benefit, all depending on personal situation and single vs. married.
While I would need to read the detail on the specific programs, My perspective is - the purchase of an upvote (one-time or subscription) using Steem/SBD, this is effectively the purchase of marketing/advertising.
Whether the marketing expense is deductible/will benefit your personal income taxes depends on the net income position, and whether the Steem account is a trade/business for you or just a hobby.
On the flip side, compensation for selling/leasing upvotes or SP would be income.
See Notice 2014-21 and Section 83. I have more detailed general guides on Steem earnings taxation in the e-book in my blog.
See general disclaimer above
Thanks!
Thank you for your prompt response @cryptotax. Similar to @josephsavage, you are indicating these are expenses, although you are perhaps classifying them slightly differently. If so, not sure, for tax purposes, that it matters.
On my own, I assumed your first bullet point, in figuring out my taxes this year. The application of it as an expense, from both of you, is very helpful.
It will be quite something to see the "evolution" of how these transactions are accounted for over time unfolds. Specifically, to whom will the IRS assign the responsibility for the (compared to other areas of taxes anyway) remarkable level of detail to track.
With stocks, investment firms are required to track and issue related forms. Hard to see how anything like that responsibility could be assigned to a "decentralized" blockchain ...
P.S. And, yes, for the sake of both of you, I understand and respect the disclaimers.
It's interesting because the IRS came after Coinbase (who now issues Form 1099-K to individuals with significant transactions). In Notice 2014-21, it was established that payments in digital currency are subject to general 1099 reporting, etc. If you have any other questions please feel free to reach out!