The latest article reports this fact. Yesterday I got into a conversation with @dber here on the very complicated confusing tax status of virtual currency, and as cryptocurrency grows to include more users there will only be greater confusion on how to report it on taxes.
So we have good news in terms of growth yet we still have a lot of grey areas and regulatory uncertainty. Is cryptocurrency fully legal? Can it be used practically without relying on a CPA to determine the tax significance of every transaction? Congress is asking for answers to this question and I would suggest you write, email and call your congressman if you hold cryptocurrency to push for at a minimum additional clarity and preferably a better more realistic tax status.
The current policies depending on which interpretation is correct, threaten to tax cryptocurrency out of existence. Simply by enforcing the tax code in the most radical interpretation the IRS can single handedly prevent mainstream adoption of this technology because people will be afraid to spend cryptocurrency. In addition, if someone gives you a cryptoasset as a gift, how is this treated by the tax code? Just receiving a cryptoasset could be confusing, so people might be afraid to even set up a wallet out of fear someone somewhere might send them something valuable which can later crash in price.
The entire cryptocurrency industry, as well as the online gaming community, must join forces to figure out how to deal with regulatory risk. If taxes are deemed to high or too complicated then there is a political process which has shown to work for other industries and which worked for the Internet itself (Internet Tax Freedom Act). I would also say, if we pay attention to what isn't be done rather than the nice words congress says about blockchain technology then we can get an indication of what regulators and policy makers actually think about the tech. The lack of a similar to Tax Freedom Act would indicate that cryptocurrency is not ready for a push to mainstream adoption and is still seen by the IRS and law enforcement as a tool for tax cheats, organized crime, and terrorism. When the policies begin to reflect the words uttered publicly then that in my opinion is the signal to go all in on blockchain tech as it will have been given the green light be regulators rather than merely being ignored.
References
- https://www.jbs.cam.ac.uk/faculty-research/centres/alternative-finance/publications/global-cryptocurrency/#.WR4T-WjythF
- https://www.financemagnates.com/cryptocurrency/bloggers/bitcoin-tax-implications-six-facts-every-businessperson-must-know/
- https://www.aier.org/blog/dont-tax-bitcoin-out-existence
- https://en.wikipedia.org/wiki/Internet_Tax_Freedom_Act
I disagree with your assessment. I think that the tax status is pretty clear for the vast majority of users and that, with a simple utility, the calculations aren't all that difficult either (since all it takes is running a fairly simple bot against the blockchain -- and then, if you wish, make a decision as to your sales strategy).
See my comments at https://steemit.com/steemit/@mark-waser/steem-goes-through-the-roof-and-the-taxman-cometh.
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Show me where I can find a bot which can tell me exactly how much I owe for everything I earned from Steemit automated? And how does that help me with every other possible transaction I can make?
Realistically, most people don't have bots running telling them how much they owe in taxes. Also we don't even know for sure how to code the bots because not enough clarification has been presented to know for certain which interpretation the IRS intends to enforce. It is just as much of a burden for the IRS to try to enforce this as it is for us to comply.
For example, suppose I gift you a token worth $100,000. Do you instantly now owe $100,000 in income taxes because someone on the Internet sent a token to your wallet speculatively worth $100,0000 at the time? What if the very next day after the pump and dump the same token is worth $5? Did you just get screwed? How can a bot protect you from situations like that?
As for the Steem blog chain, Steem doesn't contain the values in USD of every transaction. The Steem Dollar values aren't perfectly tracked to USD and only give an illusion. The price of Steem itself is volatile. And when you have possession, do you have possession when it's Steem Power or when it's Steem Dollars? If Steem Power counts too then people can owe more in taxes than their Steem account is worth because for instance suppose you received Steem Power when the price is high like it is now, but then 6 months later the price is crashed?
I disagree that the tax issues are very clear. It's clear if you're a miner in 2014. It isn't as clear if you're on Steem.
In your own post you said:
This is very bad news for people who received Steem in 2016 when prices for Steem were even higher than they are now. Also at the time they only really had control over the Steem represented as Steem Dollars because the rest was locked away. If they powered down they still wouldn't know how much they owe, do they owe based on the amounts their Steem converted at the power down, or do they owe at the amounts their account received the Steem? These could produce different tax implications.
And there is no clarity at all from the IRS about it. The IRS speaks of minting cryptocurrency and mining, but no one on Steem is minting new tokens. They get rewarded by the network and earned, but not mined. If it's treated like mining then Steem will never be useful because Steem itself is volatile and the tax situation would make Steem Power itself harmful. In specific harmful because you wouldn't be able to access it yet it would register on the blockchain, so you cannot cash it out 100%.
I'm currently working on it and will make it publicly available. Since all your transactions are on the blockchain, it can easily tell you what your income and capital gains numbers are (modified by your sales strategy -- e.g. FIFO, LIFO or selected batches).
Yes, after your gift, I would owe income taxes on your gift subject to the gift tax rules on property. If it devalued to $5, I am only screwed if I don't sell it. If I do sell it, I'm fine. The bot doesn't "protect" you -- it simply tells you what the effect of your various (but rather few) options are.
It is NOT going to be a burden for the IRS to enforce this. The calculations are really quite simple. The biggest hassle is going to be linking your Steem account to your social security number -- and for people like us who use our names . . . .
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In theory yes, but we don't know they'll accept FIFO or LILO. I've used similar apps so I know what you're referring to. It's the best we can do right now but still we don't know for sure.
It will be a burden for the IRS to enforce it because there will be millions of people to enforce it on. Not that the information on Steemit is impossible to detect, but more that the IRS should have more important cases to handle.
And this is based on what? I looked up gift taxes and see no evidence the receiver of the gift owes taxes. The sender of the gift is supposed to owe taxes. If what you say is true, couldn't someone screw you over by giving you a taxable event which bankrupts you? Who says there is enough liquidity for you to sell it at $100,000 just because the market that day says it's the price?
The issue here is there is a cap on capital losses but there is no cap on capital gains. So you get some fixed amount you can declare as losses. It is these many trap scenarios which will keep Steem and cryptocurrency from having mainstream adoption as long as taxes remain so complex.
Reference
The gift tax laws are constantly in a state of flux but the following items have always been constant.
The sender does NOT owe taxes because he is giving a gift per se. On the other hand, because it is a transaction/transfer, any previously untaxed appreciation is taxed to the sender at the time of the transaction.
When there is a limit on tax-free gifts, it is not possible to screw someone over. Look at the rules for property. If someone gives you a $20M house (when the tax-free limit is low), you are going to be forced to sell it -- but you're never going to owe more than the normal taxes on the money that you receive when you sell it (and you're certainly not forced to sell it in one day).
And you don't think these rules are too complicated for casual people? I don't understand all this stuff, and probably no one but a tax lawyer will. This will keep cryptocurrency from mainstream adoption.
What you're saying basically is we all need to consult with a CPA to participate in Steemit in a significant way.
I'm not even sure two tax lawyers would agree.
Tax laws, in general, are far, FAR more complicated than they should be.
What I'm trying to do is to make it so that a CPA isn't necessary.
TL;DR @dana-edwards - the 2014 guidance is perfectly clear to me in its intent and how to implement it. You can try arguing that it isn't all you like -- but that won't get you anywhere when you are audited.
My point is there might not be any practical way to avoid being audited. Also the 2014 guidance if it applies to all kinds of virtual currency, would be extremely broad and radical. It would mean gamers in WoW potentially also would owe taxes for trading items which have obtained some dollar value on some market. If it applies to all virtual currency everywhere, then the issue is bigger than Steemit, Bitcoin, Ethereum, etc.
Also you claim LIFO/FIFO are options but how do you know that will be accepted? What if they don't accept that? The main issue, well several, there aren't any built in tools to automate the process of determining what is owed. I know you promise to make a bot, but the bot currently doesn't exist and many people honestly wouldn't use it unless it's built into Steemit itself.
Yes, if the IRS decides to go after WoW players, it would be radical -- and they would win. The laws are pretty clear unfortunately. I don't see there being enough money in it for it to be worth the hassle.
EDIT: Unless the WoW players successfully argue that it isn't a convertible currency because there are no legally recognized, sanctioned and regulated conversion markets . . . .
I know that the various sales options will be accepted because the IRS said that cryptocurrency is to be treated per the standard rules for property.
The IRS could easily build a bot and then charge you back taxes, interest and penalties. Rational people will use what will prevent them from drawing the ire of the IRS.
It's not a debate about what the IRS can do if they take the radical interpretation. The debate is whether it defeats the purpose and function of the IRS to take that interpretation? They won't get more money cracking down than they would if they encouraged legitimate users to pay taxes.
Same with WoW, they can crack down on it but doing that would not seem to be worth it politically or economically. It would hurt the economy and make the IRS look evil. The question is whether the IRS is willing to work with the community or are they intent on cracking down and from the John Doe summons to Coinbase it is looking bad but we don't know for sure.
The value is always calculated at the time of the transaction (when you received the award, when you converted it to/from STEEM/STEEMPOWER/SBD, when you sold it). Grab a historical feed from any of the exchanges and the IRS will be happy.
Yes, trying to keep 100% of your STEEM POWER (if that is all you are receiving) will result in a tax bill. No, people who received STEEM when it was higher won't be screwed as long as they sell it (and can report the sale at a lower price).
In that case can we use the trades on Poloniex? That is information we can access and they put a format for that. The Steem Power situation is very confusing because their guidance doesn't mention anything resembling Steem Power.
In fact I read some of their paper and they mention a specific quote which generates more confusion:
This means what exactly? What is a "real world economy"? Is Steem considered "real world economy" or "virtual world economy" and how do we make a distinction? Does it even matter or should we assume every transaction is "real world"?
Convertible virtual currency is Bitcoin or anything like it, but they also define it as a virtual currency which has a dollar value.
This would go for more than just cryptocurrency but also include anything else used as a currency in any virtual world we can think of as long as it has a dollar value? What impact does this have on gamers, or virtual worlds like Second Life?
This is considered a capital loss, but they would be screwed by income taxes right? Capital losses are capped at some amount. As you can see I'm not a lawyer or an accountant, but neither are the vast majority of Steemians who likely are even more confused about this than I am.
Yes, you certainly can use trades on Poloniex. It is a legally recognized, sanctioned and regulated conversion market.
All three of STEEM, STEEMPOWER and SBD are convertible virtual currencies (because STEEM and SBD are traded on exchanges and STEEMPOWER is convertible to STEEM). One argument that could protect WoW players is that there are no real (i.e. legally registered and sanctioned) conversion markets like the cryptocurrency exchanges. Don't worry about "real world transactions". The mere fact that STEEM etc. is convertible means that any transaction has a real world effect.
If you are given a $20M property and then it is destroyed by fire, you aren't screwed by taxes (that'd be an awesome way to wreck your enemies if it were).
I don't see how Steem Power is a convertible virtual currency, can you send Steem Power to someone else? Is it tradeable? I don't know how that works.
Also from what I read, you cannot declare $20 million in capital loss which is exactly the problem. You can get $20 million in gain but not declare $20 million in losses. Maybe I'm interpreting things wrong, any lawyer want to clarify?
References
Steem Power is convertible to Steem.
You do DECLARE a $20 million capital loss if that is your NET loss during a year because not only can you apply $1500/$3000 per year against income but any excess will carry over to be used next year. You simply can't get a massive amount of money back from the IRS for it.
About Poloniex, I've used their info before to do my taxes. The issue is which tax form is appropriate?
Are each trade supposed to be treated as stocks? Then we need to use that form we would use for stocks which is probably what I'll end up doing for capital gains. As far as Steem goes, Steem doesn't convert into fiat anywhere does it? I don't see how it's different from WoW. You can sell your WoW item for Bitcoin and then send that to Poloniex just like you can do with Steem. You can sell entire WoW accounts or any game account in this way for Bitcoin and shapeshift it.
But before I take further steps, I'll likely contact a CPA.
Each trade is like stocks. Rewards are income.
https://steemit.com/steem/@charlieshrem/steem-token-will-be-added-to-jaxx-wallet-and-other-fiat-integrations
It's different from WoW because, as far as I know, WoW is not traded on regulated exchanges. Steem also (obviously) isn't going to get hit until after the market-cap leaders.
It's counter-intuitive but it would be better if the IRS just starting taxing BitCoin and making the rules clear. I think that the uncertainty is hurting wide cryptocurrency adoption more than taxes will.
Well put. It's an important conversation to have and reaching out to representatives is a great starting point. The IRS is also open to communication on the topic and they actually requested as much in their notice on cryptocurrency.
Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2014-21)
Room 5203
P.O. Box 7604
Ben Franklin Station
Washington, D.C. 20044
or hand delivered Monday through Friday between the hours of 8 A.M. and 4 P.M. to:
Courier’s Desk
Internal Revenue Service
Attn: CC:PA:LPD:PR (Notice 2014-21)
1111 Constitution Avenue, N.W.
Washington, D.C. 20224
Alternatively, taxpayers may submit comments electronically via e-mail to the following
address: [email protected].
Even the IRS understands it is not sufficiently knowledgeable on this topic and it would probably help to get a good tax rule from them and politicians if the crypto community is upfront and engaging on the topic rather than perceived as trying to hide tax revenue.
That was in 2014 though. They need to put out a new updated guidance and then ask for comments. I'll gladly send them comments if they were to show some indication that they'd even care what I have to say. I'm sure the vast majority of people would also comment, especially coming from Steemit.
The main issue is it's not feasible for anyone to be expected to track every single transaction for capital gains / loss unless it's all done in some automated fashion. When it's manual then it's the equivalent of being put through an audit where a person is asked to find every receipt of every purchase. If it's just about collecting the tax dollars then they'll probably get their money either way, but the main issue is the difficulty of calculating what that is.
The longer you've been in the space, the more you actually use cryptocurrency for legitimate purposes, the harder it is to comply. The first thing I think policy makers need to do is come up with some simple rules which anyone can follow to pay their taxes without having to worry about capital gains / losses on every little thing, or questions about whether the tax happens the instant they receive a cryptocurrency or when they turn it into money.
Because as it is right now, under the radical interpretation someone can send your grandmother a token and put her in tax trouble. She would have no reasonable way of even knowing necessarily how to cash out the token, but even if she does know, she's not automatically going to track the capital gains. The wallets would have to have this all built into them from the start. Steemit looks like bait to the IRS by offering dollar amounts (which I always thought was a stupid idea), and no privacy, so it looks like people have a lot of money but the actual amount they can cash out could be entirely different from whatever those dollar values say. An account with 1 million in imaginary value is still only value based on the assumption that Steem Dollars hold the peg, that Steem can be traded and cashed out, etc.
Here is a scenario based on something which happened to me:
Suppose you mined or bought or earned or obtained or were gifted cryptocurrencies, and these trades you made under an account were valid, but you lost possession of the account because your computer or storage media broke? Do you get to pay taxes on something you were never able to cash out or spend merely because at some point in time you had possession? A lot of people have lost private keys, or lost access to accounts, so if even they owe taxes on that then you have even more confusion.
2014 for the most part was the year of losses for people. People who did file their taxes from 2013-2014 likely saw only capital losses. Bitcoin price and most everything was beginning to go down and by 2015 it was a recession. Now people call this a bubble but again, eventually the prices will go down, and then what happens to people who bought or were given cryptocurrency at the peak of the bubble but sold at the bottom? In theory I can imagine ridiculous situations where people owe more in tax than their entire crypto stash is worth with no way to pay it. I'd like to see more bloggers and lawyers discuss these hypothetical tragic scenarios to make a case for why laws have to change and the tax code must be simplified.
Well, the notice was from 2014 - but the contact information is no doubt correct and as a public agency they might be responsive to a large influx of comments. Especially if the comments are primarily people trying to figure how best to pay them money.
The obvious choice for newly mined currency - or newly mined currency divied out to steemit users for instance, is to decide the tax basis at the moment the currency is converted into actual dollars. Or potentially at rhe moment is is converted into bitcoin - which Japan for instance treats as currency.
I think what I'll do eventually is write a stock letter and post it to try to get some cpmmunity edits going on it. Once we have a letter we all roughly agree on - or at least that many of the bigger users agree on, we can make another post trying to have everyone send it out.
I might write a similar letter and do a similar process asking for steemit management to remove the fiat currency references. I agree it paints a not entirely accurate picture and supports the notion that users with large steem banks are just sitting on millions of dollars they could get at like an atm or somethibg - as opposed to through a minimum of two currency exchanges on constantly fluctuating markets, themselves still in infancy.
I support this and will sign a petition if you set it up. We should not deliberately design the UI to provoke the IRS into thinking Steem is more than it is. I already mentioned to developers that the main flaw in Steem is lack of privacy of the wallet but I was more concerned about hackers at the time.
Ill try to have a draft by next week or sooner
There are rules about losses. The question, of course, is if they claim that you DO still have access despite your denials . . . .
Can you describe a scenario where selling their entire crypto stash results in a greater tax burden than the sale proceeds. I don't believe that it is possible.
You can definitely be screwed by not selling -- but that is true of any property.
Yes many many scenarios. Someone can send you something worth something on an index which you cannot sell at that liquidity for that price. Someone can send you something which you can sell but don't, but I don't see why a person should be punished for not selling the instant they get it either. Of course that is a moral not legal argument I'm making and whatever the law says is what it says.
In the case of Bitshares, I believe when they raised money via Angelshares they almost got screwed by a technicality like that. Then the market for Bitcoin and everything crashed and they couldn't get out as much as they were sent at the time to pay their tax. This happens a lot actually because the price you receive payment isn't necessary what you end up selling it for if the price crashes before you can sell it.
Probably most of these projects if it really is a bubble, are in position to be screwed by the IRS. How will they deal with it if they received $150 million dollars in ETH today, but a few months from now that's $5 million and they owe taxes? My whole argument is if the IRS cracks down on stuff like that it actually results in them getting less money than they could get if people just paid taxes.
Projects and people who are bankrupt cannot pay as much over the long term.
If I were to get $150M today, I would immediately start selling what I expected to owe for taxes. Then I could hold the rest after the crash.
If you don't have such foresight, you WILL be forced to sell it all. Also, while (estimated) taxes are due on a quarterly basis, the reality is that you'll have until April 15th of the following year (i.e. longer than the 3 month power down) to power down and sell. (The 2-year power down could have caused a nightmare scenario though)
I think tax cheats, organized crime, and terrorism starts in DC.
It will be interesting to see what they come up with. The obvious answer is whatever the most restrictive option they have is, but there's a good chance they will have little ability to enforce it, making it game-theory correct to regulate in a more reasonable fashion. I have a hard time believing they are competent enough to realize this fact yet, though, since after all they can just put a tax on the series of tubes which constitutes the internet(s).
It's not really possible to enforce it but that isn't the issue. The fact is if compliance is made impossible or just very very hard, it will discourage use of Steem, use of cryptocurrency, etc. In a sense if they were to enforce the rules, then almost every user of Steem could have under paid or calculated something wrong.
And Steem developers haven't made it any easier. Is there any automated process to determine how much you owe in taxes per account? The developers who paid their taxes should come up with an app so we can pay ours.
Since there is currently no clear rule on how one would pay taxes on something like Steem, it's extremely difficult to prove intent in tax evasion cases. Anyone who follows a consistent strategy will have a solid defense. IANAA, but personally, I don't think you can simply count it as income upon receipt in your account at the market rate, plus you have the added complexity of the SBD/Steem power split. The market rate is not some sort of immutable price and moves on every purchase and sale. If you suddenly make 1 million Steem, and Steem is $1, you could never sell it all immediately and get anywhere close to $1 million for it. You'd tank the order book, so how can it be valued at $1 million upon receipt? Then you've got the power-down situation which further complicates how accurate the "liquid value" is upon receipt.
There need to be exemptions or some clear capital gains rules applied which are likely to look much different from the logical way to tax an entity like Genesis Mining.
That is the exact dilemma I was mentioning but couldn't word as well as you.
Aww, shucks.
Mark and a few others say the rules are very clear. If the rules have been so clear all along what excuse do the Steemit developers have for not automating and streamlining the process?
Those tubes themselves are about to be decentralized. The longer they wait on this, the greater the difficulty in creating 'effective' power & turf-preserving regulation.
Thanks for sharing this data with us.l really look forward to see what is going to happen