Wow, thanks for the response. For the first tax component (income tax) could the fair market value be affected by the ability to sell the property? The reason I ask is because it is impossible to sell steem power on the day you receive it and in a bear market you could be forced to sell it much lower than the value on the day it was received as payment. In an extreme scenario, someone could owe more taxes than the property was worth by the time they had the chance to sell it. Thanks
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@lafona no problem as far as the response goes. I'm glad to help the community with their tax questions related to cryptocurrencies as a whole.
In terms of your question as to whether or not determinable fair market value would be affected by the ability to sell the virtual convertible currency, the short answer is it would not.
The guidance provided by the IRS on this subject reads:
For U.S. tax purposes, transactions using virtual currency must be reported in U.S. dollars. Therefore, taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt.
The ordinary income portion of the first tax component is time independent, meaning the tax event is triggered by accepting the reward because a fair value can be determined at the time when goods or services are exchanged for the crypto.
So where do we get to recapture that loss to offset the value lost when we sell?
That is captured and recognized when the sale of the crypto occurs at a loss because a determinable fair value exists when the sale completes and the loss can be quantified and reported. This would be the second tax component (the capital gain/loss). This component is time dependent.
Regarding your question asking if someone could owe more tax than the property was worth by the time they had a chance to sell the property, I think the wrong question is being asked. I think the question which should be asked is in an extreme situation, is it possible a person could have to pay tax for the full value of the earned rewards (first tax component) before recognizing the full tax deduction associated with the loss of value (second tax component)? The answer to that question is yes due to rules regarding limitations related to capital losses being used against ordinary income. If the total capital loss exceeds $3,000, then it will take multiple tax periods to "use up" that capital loss. In the end, you will still receive all of it, just not all in the same period.
I hope that answers your question.