Tax AMA - 2018 Tax Season - Ask Me Anything

in #bitcoin5 years ago


Do you have a U.S. cryptocurrency tax question? Ask me anything! Even if not crypto related, feel free to ask.

It's been a while since I posted. I had a lot of fun with this AMA the last time I did this, and received a few solid questions.


Feel free to ask a basic question and I will reply with a basic answer, and a link to any prior articles I may have written on the matter (if related to crypto).

Note: The information obtained through the AMA is not a substitute for consulting a tax advisor. This AMA does not create a client relationship between the author and any reader. This is not specific tax advice, just general guidance with to help the general public understand the basic U.S. tax consequences of crypto investing. By posting a question, you acknowledge these terms and you agree to hold me harmless for any adverse consequence of relying on any response (including responses of other posters). Again, consult your own tax advisor before taking any action.

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There are tons of people who are curious about the tax consequences of opening/using a Maker CDP. It's one of the most common questions asked on /r/makerdao and the Maker Rocket Chat. Although I don't have any CDPs, I've been curious myself.

The technical steps are as follows:

  1. Wrap your ETH into WETH, which I argue should probably not be a taxable event. (They have the same economic properties, just different technical ones)
  2. Wrap your WETH into PETH (Pooled ETH) which is a token representing a share in all the collateral that the MakerDAO system has. Since the pool can grow or shrink, and thus has different economic properties, I'm thinking this is a taxable event. I've heard arguments against that, though.
  3. Lock your PETH into a CDP. This is probably not a taxable event.
  4. Take out a DAI loan from the CDP. Here's where my layman's knowledge ends. I would hope that it's legally considered a loan, but it's not in USD, or even technically a currency.
  5. Repay the loan, which requires briefly purchasing MKR to pay the interest on it. Also, the effective principle will have fluctuated--you might have taken out the loan when DAI was trading at $1.02, and now it's $0.97.

This is not counting the possibility of one's collateral falling in value, whereupon some or all of it will be repossessed by the system. I'm sure there's something in the tax code somewhere about this sort of thing, but I haven't a clue where.

EDIT: Also, can you deduct the interest on the CDP--say, if it was owned by your business?

Based on the description, this is what I would think (but I would need to review the terms 100% to be certain on this). Below is from the perspective of the borrower itself.

  • I would say ETH-WETH is a non-taxable event if WETH is an alternative digital representation of ETH and they trade in/out 1 for 1. No property has actually been sold.
  • I would say WETH-PETH-CDP is a security deposit. If the borrower would end up with more/less ETH when withdrawing - deemed loss of ETH or realized gain for free ETH . The loss would be nondeductible if the purpose of the loan is non-investment, non-business ( is personal loan collateral).
  • The existence of a loan for U.S. tax purposes would depend on whether there is set maturity dates, interest payments, recourse against borrower. Let's assume this applies. For more reading check out Roth Steel Tube Company V. Comm. Sounds like a loan on the surface.
  • Repaying the loan at a USD premium could be treated as deductible original issue discount on the loan for the issue price versus redemption payment difference (if the loan is personal this is not deductible). However, re-payment of the DAI loan at a discount could trigger cancellation of debt income. All other stated interest is potentially deductible (unless personal).

See disclaimer above in original post (but you already knew that!).

Thanks for the in-depth answer.

  • ETH-WETH is definitely traded in/out 1 for 1.
  • Interesting about PETH. Considering that some people are facing potentially massive capital gains by opening a CDP with early-bought ETH, it'd be worth it for them to consult a professional to be sure.
  • Even more interesting, CDPs sorta fit two out of those three. There is definitely interest, which can be paid at any time, and if the collateral falls in value, it will be seized. But there's no set maturity date. Which makes me wonder if it's not a loan, and instead just a fancy margined long position.

If you're curious, the Maker team goes into more detail in its whitepaper: The Maker team itself has not released any tax guidance of its own, for understandable reasons.

I will have to look into this, it is fascinating. I would argue that a margin call is a maturity date and liquidation of positions would give rise to taxable events. Margin interest in typical investing is deductible.

Great to see you in time for the season! Did we ever get clarity on the EOS ICO in terms of the token exchange when the mainnet went live? I remember you mentioned that it was still uncertain if it would be or not be a taxable event.

Posted using Partiko iOS

Hi, hope all is well!

I plan to treat as a nontaxable event. The ER 20 token was a tradeable digital representation of the genesis mainnet right to EOS tokens. And folks holding EOS on exchanges at the time have the same digital right that they did the day before/after the freeze.

And I hypothesize, if SEC ever treated EOS as a security, I presume they would link the pre-freeze ER 20 token and the post-freeze EOS mainnet token as the same asset, which would support the position.

Linking relevant article that you likely have seen in the past (and I note there is uncertainty at the time of the article):

The good news is, more brainpower is allocated to cryptocurrency and hopefully arguments emerge that support my common sense approach to this all. One research firm provided an interesting argument that chain splits are analogous to free samples and income is not realized until a taxpayer exhibits dominion & control over freely received assets. In RE: the EOS mainnet, if the EOS mainnet token was treated as income upon subsequent sale/disposition post-freeze, this doesn't address the issue of the cost basis locked up in the ER 20 token at the time of the freeze.

On a separate topic, did you see this? Pretty interesting:

To listen to the audio version of this article click on the play image.

Brought to you by @tts. If you find it useful please consider upvoting this reply.

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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:

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?

"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."

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.

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.

  • Gain/Loss on the sale of Steem/SBD - I.e. value of Steem $1, cost basis $0.4, gain $0.6
  • Deemed purchase of marketing expense with the proceeds. - I.e. $1 of expense.

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


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!

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