Any idea or further information on how to calculate the cost basis of STEEM earned from blogging? I've seen several different opinions on this, but don't think it makes sense to declare it as "income" per say, and pegging acquisition to USD seems dubious especially if I never actually convert to fiat.
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There is information in Notice 2014-21 that may helpful for you, Q3 and Q4 in the link below. Effectively, I would expect that the SBD earned on this platform is income, and potentially the SP (see note about steem power below however); and the cost basis going forward is the amount that is recognized in taxable income upon receipt (at fair market value at time of receipt).
https://www.irs.gov/pub/irs-drop/n-14-21.pdf
I will also be explaining this in my blog in more detail, as well as the assessing whether it is appropriate to treat Steem Power as either (1) income when received, (2) not within the IRS scope as a convertible currency or (3) restricted property / non-constructively received income until "powered down" for STEEM (or #4 something completely different). Still, I want to get more time to research court cases, old rulings etc to find some good guidance, and in the end get things right. I tend to be conservative (picking up income for the Steem Power to establish basis), but I hopefully find something good to prove myself wrong :).
Edit: Last - converting between the various Steem currencies could create taxable events.
The fact that you have to research court cases to answer these basic questions shows the problem exactly. I'm not a tax lawyer and am just a blogger. The conservative approach would be okay if there were some automatic means of following it. Such as with Bitpay and Coinbase where our Steem Dollars automatically converts to Bitcoin the instant received.
Steem Power also has a lot of other issues too so when you research consider the fact that the developers still have centralized control over Steem Dollars. At any time the developers can decide to change for example the vesting period as they have done in the past to make powering down slower or faster. So we don't even have assurance when we will be able to access by powering down let alone what it will be worth once it reaches our bank account. It's an accounting nightmare.
You are absolutely right, the IRS has some work to due and owes us an explanation. At the same time, Steem made these currencies complex even more so than standard Bitcoin trading. That fact that I have to go beyond basic publications/code/regulation to explain the treatment is ridiculous, but I think it will be necessary to have the most informed path, until the IRS can catch up.
Yet you cannot even spend Steem Power until it's powered down so how is it income? Steem Dollars if there were a reliable and instant way to convert it then maybe it will be treated as Bitcoin but even with that I'm not entirely sure. The problem with Steem Dollars is we don't have a reliable way to know how much 1 Steem Dollar is worth, but we know for sure it's not worth 1 USD. If somehow 1 Steem Dollar were always exactly 1 USD then it would be trivial to do the taxes and treat Steem Dollars as income.
Honestly I have no idea how much my Steem Dollars or Steem will ultimately be in terms of USD value until it reaches my bank account. When it's in my bank account or at least in Bitcoin in my Coinbase account then I know and Coinbase gives me all the tools to deal with income once it reaches there. Prior to that I have limited access to tools, limited clarity from the IRS, and no clear and reliable way to exchange Steem even into Bitcoin. For all we know, all of our Steem Dollars and Steem Power could end up being worthless tomorrow, yet you would say we still have to pay income taxes on it?
As far as converting between Steem to Steem, isn't that like kind? Even if it's not like kind, there is no confirmation that Steem or Steem Dollars are a currency. If it's a currency do we have capital gains taxes? So the SEC can't regulate it? Since we can't buy anything in the real world with Steem Dollars I find it hard to believe it's even a currency but this could change and perhaps it is.
This is why the IRS needs to either clarify or we will just have to pay what we think we owe and wait and see. Worst case is we get audited in which case the IRS can say we owe some additional amount which we didn't think we would owe, and in that case we pay up. I just hope they don't assume we owe based on what Steem Dollars say on the site because for the most part those dollar values are BS and what we actually cash out can be more than that or less than that.
For example at one point in time Steem Dollars were going for almost x2 the amount in USD on Poloniex. I'm guessing the IRS isn't going to mind if we pay some sort of capital gains on that, as if it's a security? At the same time are we supposed to pay income on what value exactly? On the value the instant we receive it? So what if we sent our Steem Dollars that instant and Poloniex goes down, and now what?
Just receiving it doesn't mean we have an ability to convert it immediately. Bitcoin because of Bitpay and similar actually did give companies the ability to instantly convert to fiat to make taxes easier. We don't have that ability. If we blogged and got paid in Bitcoin we could use Coinbase or Bitpay to track the taxes automatically and even instantly convert it to USD for us so we don't lose anything.
So many great observations.
The value of Steem Dollars is most likely taxable income when it reaches our wallet from rewards (at the trading value if there is even an exchange to cash it out at this point).
Trading Steem Dollars to STEEM may be a like-kind exchange, but there are many tricky exceptions such as "reason for holding the asset" For example, even trading gold for gold under certain circumstances doesn't qualify for a like kind.
Typically, one would report a gain when they receive the Steem Dollars based on the US exchange value on that day (and the gain is the new basis); then when one sells the Steem Dollar for USD (or USD value of bitcoin/altcoin), another gain/loss occurs.
I share frustration with the lack of guidance, and I am passionate about trying to help the crypto community at least have some food for thought on the issues. I'm thinking about creating an excel template for Steemit users, and then hopefully take it further with help from with someone who would be able to load data necessary from Steemit or Steemd. It's a high ambition I know, it's something for the future.
Steem Power from what I can see doesn't meet criteria of constructive receipt because until we power it down we don't have control over it. We also have no way to determine with 100% certainty when we'll receive it even if we power it down because developers can decide to alter that.
I think this is going to be central to one of the core issues involving Steem and taxes. At what moment is it considered received? Steem Power can't be sent to an exchange the moment received so how can it under even the most conservative perspective be income?
I would tend to agree on the constructive receipt analysis (if the rule applies) which you are setting forth (subject to my deeper dive of cases); with one key caveat. The IRS might argue, if someone elects to receive 100% Steem Power instead of 50% Steem Power / 50% Steem Dollar, then at least 50% of the Steem Power received out of 100% is constructively received as we had control to take Steem Dollars and cash out instead of locking the extra 50% up. And, I also want to point out, the crypto currency if it is "property", then property rules apply too (Section 83). I haven't yet researched whether constructive receipt still applies, or becomes non-applicable, for property transactions.
Other than the 50% electable Steem Power, it would be unfair in my opinion to be forced to treat the Steem Power as received before it is available to withdraw through a long power down (who knows what the right way is though), when we have no say otherwise (standard 50% reward, or curation rewards etc). Still, it is ridiculous (even if the correct way) that we may have to pay taxes on earnings that are tied up and unusable for withdrawal or even to pay the taxes on such earnings; however the stock compensation rules show the IRS has no problem with this happening; and Section 83 makes it so.
Yes but there is no legal guarantee that we will ever get out Steem out of Steem Power. It's speculative and so to pay income tax on something we might never receive is strange to me. At best Steem Power is some sort of smart contract.
It's not really clear. I guess if we do it wrong the IRS will correct us later. What I do know for sure is once it reaches our bank accounts it is for certain. As far as how to calculate the income that is really hard and then you don't know if it's a security or money either. Only a tax lawyer and accountant can help with these and even they don't seem to know for sure.
How much of these Steem Dollars can actually be converted? If you can get it to an exchange, then at the price you exchange it for Bitcoin, that would be a conversion and income can be based on that. Again I'm not an accountant or lawyer but thats a way to go about it. Exchanges make it easier as you can just export your CSV, so send it over to Bittrex and convert your Steem Dollars to Bitcoin.
The price you convert it at once you convert, you can declare as the income. At least that is one way of doing it because we know for sure Bitcoin can be traded for US dollars on many exchanges. Steem Dollars can only be traded for Bitcoin and only on one or two exchanges at that.
Dana, there is some true wisdom in your post, eventually when we exchange into US dollars, we can gauge our aggregate income (at least an estimate). The trail from receiving the Steem currencies and getting to the US dollar "exit" event, and getting each year right in between, is the unclear path. If we were all receiving Bitcoin for authoring/curating, the taxable earnings event would be when Bitcoin reached our wallet, and then we would get basis, and compute a second gain/loss when later exchanging for USD. The Steem currencies creates some muddy additional steps.
I pretty much agree, with Bitcoin at least we know where the IRS stands to some degree. Also with Bitcoin there are exchanges like Coinbase which are regulated which convert Bitcoin into USD. There isn't a single regulated exchange for Steem that I know of and while Bittrex is semi regulated it's also the case that for whatever reason these exchanges are unreliable. Poloniex for example for a while wouldn't even let me get my Steem Dollars in and out at a predictable time and Bittrex while more reliable is still the only place to convert that I know of.
All I can say to the IRS is I'm doing my best with the information I have and understanding I have. There are more conservative approaches but those approaches are approaches few of us understand and even fewer can afford in terms of accountants and overall cost. It might even be the case with the most conservative approach that a person can owe more in taxes than their entire cash in bank income due to some weird interpretation of what is income.
I said this in another post but taking the conservative approach, suppose you earned a lot of Steem Dollars when the price of Steem is high and then we enter a bear market. So now your entire stash isn't enough to pay the taxes you owe?
The central question is at what point is a person truly in possession of "income"? A person can receive a token which only one exchange on the Internet is exchanging for some ridiculous price and then that one exchange can crash or stop trading, yet you owe taxes at the receipt price despite the fact that the exchange is unreliable?
If the goal for us bloggers is to both lower our risk of being audited as much as possible while also not paying more taxes than necessary, what can we do to protect ourselves? I'm not sure there is anything we can do even with the most conservative (costly) approaches. I suppose better tools, better exchanges, etc can all help but they aren't here yet.
If we are going to promote the conservative approach then we should be very concerned about Bittrex being the only semi regulated exchange for Steem Dollars and Steem. This is extremely risky as if that one exchange does go down then what are we supposed to do if we owe taxes which we can't pay due to no exchange? This scenario is actually something I'm personally worried will happen and have no idea what to do if it does.
Thanks Dana. What you are describing happens to stock compensation recipients all the time, you definitely ask all the right questions, you could have been a tax person :).
My overall plan is to not promote conservatism for conservatism sake, my goal to give people the information they would normally have to pay for (research and analysis) to make their own decision, and if the guidance supports a certain approach as a "bright line", I will share that information. This way, people will be better off whether they take a conservative or non-conservative approach, because there will be some level of technical guidance behind their decision (although it's impossible for me to give personal advice to any one person without their entire situation).
I think most people will not be able to afford to take the most conservative approach because there is no automated cheap way of doing it. Manually entering everything into a spread sheet is a full time job which can take weeks. And the Steemit site doesn't make it easy, and they could.
Provided that we can run the calculations then people can pay the estimated taxes just to protect themselves from future audit but that might not even work.
Thank you @cryptotax and @dana-edwards for your input and excellent discussion! Your comments alone could be an article or two. Great working hypotheses until we hear more from the IRS.