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RE: US Tax Considerations – Tax Guidelines for Mining Cryptocurrencies (Bitcoin, Ethereum, STEEM, etc.)
Would you expect some difference with how this is handled with steem power vs steem? With payments in steem power, the miner or writer would only have access to the funds after a set date or schedule.
@lafona Thanks for taking the time to read and comment. I appreciate it
Block rewards, author rewards and curation rewards all have a dual tax component to them regardless of how the reward is paid (STEEM, STEEM Power or STEEM Based Dollars). The first component is income tax on the reward component on the determinable fair market value of the reward received when awarded- essentially it is treated as income. The second component is capital gains tax on any sale or transfer of STEEM, STEEM Power or STEEM Based Dollars upon exchange or transfer.
Bearing that in mind, the question asked is would the tax treatment be different if awarded with STEEM Power as opposed to STEEM, and if so, how?
The first tax component (income tax) would not any different. When a block reward is awarded to a miner in STEEM Power, at that point in time, the award has a determinable fair market value, the same as being awarded in STEEM tokens. Per the Internal Revenue Service guidance issued on March 25, 2014 (Internal Revenue Notice IR-2014-36 IRS Virtual Currency Guidance), this determinable fair market value must be reported as ordinary income.
The second component (capital gains tax) would not be different either.
Something which should be considered and was not touch upon in the article is, according to the March 25, 2014 guidelines, all inflation awards (interest) awarded to both STEEM Power and STEEM Based Dollars held by the taxpayer are subject to these same reporting and taxation rules.
Is there a way to change the tax treatment?
The answer is yes. It was alluded to in the article in the very brief discussion of a for profit entity whose business is mining crypto. The entity would have to satisfy the definition and guidelines of a for profit business as outlined in the Internal Revenue Code or it could be reclassified as a Passive activity or a Hobby, eliminating many tax deductible expenses.
I hope that answers your question.
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
@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.