Are Steemit Author Rewards a Non-Taxable Gift in the U.S.?
Today, I tackle a very interesting question/argument that I've seen a few times in the course of my time on Steemit. The question can be paraphrased as:
In the U.S., property received as a gift can be nontaxable to the recipient under certain circumstances - does Steemit upvotes fit into this since payments/upvotes are usually voluntary by the voter to the author?
Crypto Tax E-Book: Part I-B – U.S. Tax Consequences of Performing Services for Crypto: Appendix B - Are Steem Upvotes a Non-Taxable Gift in the U.S.?
General Rule
According to Notice 2014-21, if a U.S. person receives convertible virtual currency (CVC) as payment for services, he/she must include the USD value of the CVC in income on the date the virtual currency was received (Q&A 3). "CVC" means Bitcoin and other similar cryptocurrencies that can be traded between users and exchanged for USD (or other currencies). "CVC" are treated as property for U.S. tax purposes (subject to potential gain/loss when exchanged/sold).
The discussion to follow assumes Steem (including it's restricted form known as "Steem Power") and Steem Dollars are each CVC's, although this is a subject of further discussion regarding Steem Power. The arguments for/against classifying Steem Power as a CVC are ignored for this article.
I have written extensively on the topic in relation to Steemit. My belief is earnings from Steemit are treated as property received as compensation for services, the service is the value of the entertainment/information/contribution to the ecosystem. The introduction article is below:
https://steemit.com/steemit/@cryptotax/are-steemit-author-and-curation-rewards-taxable-usa-edition
Non-Taxable Gift Rules
Below I may use the terms "giver" and "receiver" related to a gift, but the technical terminology is "donor" and "donee/recipient."
Under IRS Section 102, Gifts are not included in the recipient's income. But what is a gift?
A gift meets the following criteria established in case law:
- (1)Voluntary transfer of property from one person to another, that is
- (2) Without any consideration or compensation, that proceeds from a detached and disinterested generosity, out of affection, respect, admiration, charity or like impulses.
In addition, general common-law has it's own criteria.Due to the technological advancements of peer to peer currencies, some of the common law steps are stale and hard to apply, however I've bolded the area that creates obvious issues for Steemit earnings.
- (1) A competent giver,
- (2) A receiver capable of accepting the gift;
- (3) A a clear intention of the giver to give up title to, dominion, and control of the property,
- (4) A "donative" intent of the giver (no business or investment reasons);
- (5) A an actual irrevocable transfer of the legal title to the receiver
- (6) Delivery of the property to the receiver; and
- (7) Acceptance by the receiver
In general tax law, the clear factual issue is that a taxpayer must prove the giver of the cash/property intended for the transfer to be a gift with no strings attached. In addition, the transfer cannot reflect payment for past/future services. This is not always easy to prove but tends to be a critical factor in concluding that a property transfer between a giver and receiver is truly a gift.
Donative Intent in Upvotes
When a curator upvotes content on Steemit, there are financial rewards that are returned to the upvoter via the Steemit mechanism via the curation reward mechanism. The award for curation is up to 25% of the post value. Source below:
https://steemit.com/faq.html#How_is_the_reward_pool_split_between_authors_and_curators
Under the common law definition, the curation mechanism would seem to violate the clear requirement that there is no investment motive in gifting property.
Court Case
The closest example of tax guidance on gifts that could apply to Steemit is a court case, Edward F. Webber, Petitioner, v. Commissioner of Internal Revenue.
Backstory
A minister of a church and his wife hosted a religious radio show in the United States. Listeners would send in payments for various reasons: A payment in support of the the radio station/program itself, a donation to the church itself, undesignated donations, book sales, and payments written out directly to the minister/wife with no explained purpose. Sometimes, a letter would come with the payments directly to the minister/wife.
The minister/wife treated any payments that were made out personally to their name as nontaxable gifts. The IRS disagreed and argued the nonclassified payments were compensation, and the Tax Court and 10th Circuit Court both agreed with the IRS.
The reasoning for the compensation treatment
The court argued that the clear donative intent of the individual givers was necessary to treat the payments to the minister/wife as gifts for U.S. tax purposes. There was no such proof because
- The letters accompanying the payment didn't explicitly state there was a gift
- There was no personal relationship between the givers and the minister/wife to provide evidence of a gift intent.
- The taxpayers bookeeping/judgement alone does not provide sufficient evidence of the intent of the donors.
- The minister/wife were in the business of hosting the radio show, and thus were routinely soliciting funds to maintain the program and compensate the minister/wife for their efforts in carrying out the program.
Link below if you prefer a detailed read:
https://law.justia.com/cases/federal/appellate-courts/F2/219/834/264681/
Application to Steemit
Many Steemit authors are aware of the financial rewards provided by posting their content on this website and not another platform. In addition, the upvotes of content in many cases are receiving a financial reward in terms of Steem, and thus a clear donative intent is difficult to establish on a person by person basis.
Conclusion
Steemit awards are most likely treated as taxable compensation in the U.S. It took me a while to getting around to fully document why Steemit rewards are likely not treated as a gift for U.S. tax purposes, but I have always felt this way and I am not surprised by the result after taking a deeper dive.
If you have any questions or other considerations to point, out, feel free to in the comments. Also, please upvote if you enjoyed an consider re-steeming to spread awareness for tax season.
The latest edition of the e-book is here https://steemit.com/money/@cryptotax/crypto-tax-series-e-book-february-2018-edition-u-s
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Disclaimer: This series contains general discussion of U.S. taxes in a developing and unclear area of tax law. As always, you should consult your own tax advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions. This post does not create a client relationship between the author and the reader.
So it seems to hinge on intent of the giver. That seems so open to interpretation. It seems like there would be some cases when upvotes, or their equivalent, should be gifts.
Is there a limit at which curation rewards are so small that they are inconsequential? That is, the curation rewards are obviously so small, or so disconnected from a clear potential for reward, that they are not the reason for my upvotes. Or can I just say that my intent for curation is personal, and not for business or investment? I'm thinking of real-life analogies.
My dad gives me a subscription to Outside magazine for Christmas. But with your interpretation, it's not really a gift, because he gets a little pocketknife from them for renewing each year. It sounds like I'm supposed to declare that subscription as property income. That seems more severe than the IRS intends, especially with friends and family.
When I visit my grandmother, she gives me gas money to drive home. When I'm there, I do a lot of chores that she cannot, and would have to pay someone to do. She would not give me the gas money if I didn't visit. But everything stems from our prior relationship. Would that cross-over to upvoting for friends and family here on Steemit?
If I set someone on autovote, but never read their posts, is that a gift? Even if they are family, or friends? Or is that too dependent on them producing something? What if I set up a recurring monthly transfer, that does not depend on their production?
I appreciate you providing a place for all of us to think about the tax implications of what we do here. It does seem like there is a continuum of 'taxableness' of activities on the blockchain, just like in real life. It will be interesting to see how this all evolves over the years. And I hope that people don't get burned by not considering taxes! Thanks!
All great questions and to be honest there remains much uncertainty in applying historic tax law to internet transactions. But let me give my best shot at the friends/family point, and then link to an interesting article on crowdfunding (which discusses the significance of contribute-for-reward arrangements in the context of US tax).
On one hand - in theory it should be easier to substantiate a gift from a family member (presumably the family member is available to testify). In the minister court case, lack of friends/family relationship was a negative fact against the arbitrary payments.
On the other hand, let's ask the question one level deeper - is the upvoter really the person giving the SP/SBD to the author? We could also consider that Steem tokens come from the Steem network, not from upvoters. Upvoters simply help determine the allocation of a fixed set of post rewards that released by the Steem network. In the future, it is uncertain whether the IRS will recharacterize all Steemit activity as a component of mining. The IRS Notice 2014-21 which taxes mining is really aimed at proof of work mining structures. However technically Steem is under the DPOS model the block producers are the witnesses who only receive 10% of the allocation of tokens, and the remaining 90% of rewards are released to content creators/curators who are "voted" into their tokens based on the stake-weighted voting of Steem. What's my point? - Well if the friends/family are "upvoting" my content, they aren't really "giving me" the rewards, because the rewards technically aren't their sole entitlement to give (a whale could wipe the impact of their vote out via a flag) - the friends/family are just helping my chances.
I will leave you with an article I have enjoyed from time to time, related to crowdfunding, another developing area with uncertain tax treatment. It briefly discusses the gift concept when some valued reward is received in return for contributing to a cause.
https://www.journalofaccountancy.com/issues/2015/oct/crowdfunding-and-income-taxes.html
I appreciate you continuing adding to the discussion and keeping the conversation balanced, as I am just one person's opinion in this uncertain area of tax.
Disclaimer: This series contains general discussion of U.S. taxes in a developing and unclear area of tax law. As always, you should consult your own tax advisor in your jurisdiction to determine your specific situation as this is not personal advice; and consider any future guidance by the Congress/IRS after the date of this article. Under Circular 230 to the extent it applies, this article cannot be used or relied on to avoid any tax or penalties in the U.S., its States or any other jurisdictions. This post does not create a client relationship between the author and the reader.
Thanks for that thoughtful answer, @cryptotax. Your description of how Steemit works - as the reallocation of fixed rewards released daily by Steemit, Inc - is the clearest and cleanest argument I've seen so far, about why our curation rewards are taxable. I read both your articles about crowd-funding (thanks for their links). It does seem like their could be multiple interpretations of the rewards for articles. Although, since authors can't get author rewards without writing something, does make it harder to be a patron of anyone -- to give them a recurring gift. The structure just isn't there, like on Patreon where the system allows monthly giving, and not just production-unit-based giving. But I bet someone figures out how to do that on the blockchain before too long, lol.
It's inconvenient to have to pay taxes on our Steemit earnings. But it's not terrible. Depending on what we write about, there should be plenty of opportunities for deductions. I have an LLC for my YouTube videos, that is broad enough to cover my Steemit writing, too. But being paid in property, while having to pay taxes in US dollars, is not ideal. I appreciate all your perspectives, for sure!
Also, I came across a more recent article on crowdfunding, coincidentally came out this month:
https://www.journalofaccountancy.com/issues/2018/mar/donation-based-crowdfunding.html
Thanks! That was helpful, too.
Great analysis! Not at all surprised at your conclusion as there are limited situations where a citizen can get something that is nontaxable. It will be interesting to see if they would ever distinguish anything different in the space such as utility tokens.
Thanks! Agreed, hopefully more regulatory clarity also results in more general tax clarity.
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well understood