Have you been Flagged - do you still have to pay TAXES on your Upvotes?

One very hot topic on Steem has been the flag wars. Almost every angle has been debated, but did you consider whether you still have to pay tax on the Upvotes?

This post is not a debate on the ethics of such action or taking a side in any viral flag wars, rather this is an academic discussion of income tax considerations for U.S. individuals.

Crypto "Salary/Free-lance pay" for Services

Under the IRS-issued Notice 2014-21, if a U.S. person receives taxable crypto as payment for services, he/she must include the USD value on their tax return as taxable income, on the date the virtual currency was received (Q&A 3). This taxation happens regardless of whether the recipient of the Crypto immediately cashes out for U.S. dollars, or alternatively he/she decides to HODL the crypto (see discussion of Section 83 below).

Earning Currencies on Steemit.com

STEEM Power (SP) or Steem Dollar tokens are rewarded to authors/curators on Steemit.com each day, through a fixed amount allocated to the reward pool by the Steem Blockchain. The platform’s holders of STEEM Power (SP) will vote on which authors receive rewards for their posts; the act of voting allocates certain STEEM tokens to that author (“author rewards”). In turn, curators (the voters) will receive a cut of an author post’s rewards, known as the curation reward.

The monetization period lasts 7 days, allowing for adjustments to the USD value of the author/curation reward. The typical reasons for changes in the value are the change in the market value of Steem, additional upvotes.... or flagging.

So in theory, on day #1, an author could review upvotes worth $100, and then before the end of the next seven-day period, he/she could receive downvotes of ($100), meaning the reward is worth $0 at the end of the monetization period.

Are Steemit Awards received each minute as we receive Votes, or at the END of the Reward Period

For purpose of U.S. federal income tax, if property is transferred related to the performance of services by a person, the person who performed the services has taxable “gross income.” The income is calculated as the excess of “fair market value” of the property over the amount paid by the person who performed services. The date at which “fair market value” of the property is measured, as well as the date that income has occurred, is when the property is either (1) transferable or “(2) not subject to a substantial risk of forfeiture.

The same rule applies to CEO's. Typically, the CEO's of publicly traded companies will receive restricted stock as part of their compensation package. Under Section 83, restricted stock is subject to substantial risk of forfeiture and is nontransferable until a vesting date. The Vesting criteria could be based on time, such as number of years with the company, or on achievement of a financial target for a certain fiscal year. If restricted shares are not vested because the executive quits their job or misses the numbers, the restricted stock will not be awarded to the executive (legally, the company might take them back, cancel them, or never issue in the first place). Surely, before vesting, the CEO will know the estimated value of the publicly traded shares every day, and then can know the value of the restricted award; but this doesn't mean the restricted award is guaranteed income to the CEO.

What this means is, when the crypto becomes (1) no longer forfeit-able or (2) transferable, just one of these events results in vesting AKA taxable income.

There is a strong argument that Steemit rewards are not transferable and not substantially vested until the END of the rewards period.

Risk of Forfeiture under Sec. 83

For one, if someone upvotes this post I am making right now, for $100, they have a chance to remove their upvote before the end of the windows. Plus, I also have a risk of forfeiture because any whale can just come along and flag my post, completely negating my right to the SBD/SP. This means, that as a Steemit author, I still have a risk of losing the monetary reward from the upvote until the end of the monetary period. The value was at one point $100, then it became $0 by the end of the period in this example. Also, consider in terms of units instead of dollar value. Today, due to the approximately $3 USD price of STEEM, my initial $100 upvote was really 50 SBD and approximately 16.6 SP. If I am flagged to zero, I would receive 0 SBD and 0 SP. This is in the intentional mechanism of the STEEM block-chain, a true social proof of work that gives the community seven days to come to a (weighted) consensus on the value of the contribution. Therefore, the earliest upvotes may sway the value higher than my reality, i.e. the $0 eventual vested value.

Lack of Transferability under Sec. 83

Further, during the monetization period, I cannot sell the SBD/SP that I might receive at the end of the window, and I cannot delegate the SP, and I cannot transfer to another Steemit user.

What about Declining a Payout?

At first glance, it would seem the declined award is not taxable to the recipient. However, the long-established assignment of income doctrine provides that income tax cannot be avoided by simply assigning a right to income to another. Stay tuned for a future discussion, I need to research what happens with declined awards.

Takeaway

For a U.S. taxpayer that had a significant dollar value post that was flagged at the last minute before the close of a monetization period, not to worry. Only property that is actually received free of the risk of forfeiture, or, that is transferable to others, is treated as taxable income under Section 83. Of course, this is my general opinion, not personal advice, so it is recommended to consult your personal tax advisor for their opinion.

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/book does not create a client relationship between the author and the reader.

Picture Credit

https://pixabay.com/en/users/geralt-9301/