US Tax Considerations – IRS Missed Billions in Backup Withholding and Why Steemit Authors and Curators Should Be Concerned
Recently, the Treasury Inspector General for Tax Administration (TIGTA) released a scathing report showing the Internal Revenue Service failed to collect nearly $9 billion in backup withholding tax in Fiscal Tax Year 2013. From the TIGTA press release:
“TIGTA also identified 13,647 payers who submitted 27,576 information returns with the same missing payee TIN for two years in a row (TYs 2012 and 2013). These returns reported payments of about $14.3 billion. Payers were required to immediately withhold nearly $4 billion from these payees, but just more than $1 million was withheld.”
While the press release above is bad, it skims the surface. TIGTA identified an additional 62,714 taxpayers who submitted a total of 203,751 information returns over a four consecutive year period, and in every year used the wrong Taxpayer Identification Number (TIN). Furthermore, these taxpayers were required by law to withhold and remit almost $5 billion but paid only $1 million to the IRS during this period.
Much like elections in America, this even affects the tax returns of about 1.6 million dead people.
I think it goes without saying, this will become an issue of interest with the audit and enforcement agent of the IRS immediately if not sooner.
Let’s take a look at Backup Withholding Tax….
But First, the Required Legalese…
Any accounting, business or tax advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues, nor a substitute for a formal opinion, nor is it sufficient to avoid tax-related penalties.
What is Backup Withholding Tax?
When banks and businesses pay certain kinds of income, they are required to file information returns (Form 1099s) with the Internal Revenue Service, even though these payments are not frequently subject to withholding tax. The types of payments which require this information return include:
- Interest payments, (Form 1099-INT)
- Dividends, (Form 1099-DIV)
- Patronage dividends, but only if at least half of the payment is in cash, (Form 1099-PATR)
- Rents, profits, or other income, (Form 1099-MISC)
- Commissions, fees, or other payments for work performed as an independent contractor, (Form 1099-MISC)
- Payments by brokers and barter exchange transactions, (Form 1099-B)
- Payments by fishing boat operators, but only the part that is in cash and that represents a share of the proceeds of the catch, (Form 1099-MISC)
- Payment Card and Third-Party Network Transactions, (Form 1099-K)
- Royalty payments, (Form 1099-MISC)
For purposes of this article, we will be looking only at a scenario where a business is making payments to a consultant or subcontractor.
When a business establishes a relationship with a contractor, the business is required to capture some information from the contractor before remitting payments to the contractor – specifically the Taxpayer Identification Number (TIN). If the contractor is an individual, that would be their Social Security Number or Individual Taxpayer Number (ITIN) if they are a non-resident alien. If the contractor is a business, it could be their Employer Identification Number (EIN). The contractor is required to furnish the business with a Form W9, disclosing its Taxpayer Identification number (TIN) along with the legal name of the contractor's business, the address of the contractor and the entity type of the contractor's business. This information is used to complete the 1099 information filing with the IRS.
What if the company either does not require a Form W9 or the contractor refuses to remit the Form W9?
According to the Internal Revenue Code, Section 3406(b), the company must now withhold and remit backup withholding tax to the IRS on behalf of the contractor, even though these payments would not normally be subject to withholding. The amount which must be withheld and remitted is 28% of the total payout to the contractor. Intentional disregard by either party to furnish this information carries a substantial civil and/or criminal penalty.
Why This Matters to Authors and Curators on Steemit
Steemit is a platform which rewards authors for content generated, and curators are paid with curation rewards for upvoted content. Essentially Steemit is a business which is providing payment to subcontractors (authors and curators) much like the example above, which is reportable income. It is entirely possible upon examination; the IRS could determine the rewards distributed by the Steemit corporation to the authors and curators fall into one of two categories:
- Commissions, fees, or other payments for work performed as an independent contractor, (Form 1099-MISC)
- Payment Card and Third-Party Network Transactions, (Form 1099-K)
It may further be determined; the Steemit corporation had an obligation to collect Taxpayer Identification Numbers for a majority (if not every) of the individuals who received rewards (either author or curation rewards). Since the Steemit Corporation did not require this information, nor was it provided by any of the individuals paid, Steemit should have been collecting and remitting backup withholding taxes to the IRS on behalf of the authors and curators.
Setting aside the issues the Steemit Corporation would face, what does that mean for authors and curators?
The immutable blockchain which not only logs all the posts and comments of the community also records all the rewards earned by every individual on Steemit. It is the perfect source document for auditing earnings as well. In a nutshell, be certain to record, report and pay your income tax from your income earned here on Steemit. I cover the topic of how to do this in a previous article.
Wrapping it up
There is a very real possibility upon examination; the Steemit Corporation had an obligation to collect and remit informational tax reporting and/or collect and remit backup withholding tax. Be certain to protect yourself in the event of an examination, and record, report and pay all income and income tax due from both your author and curation rewards. The IRS has determined this is an area of interest this tax season. From Karen Schiller, commissioner of Small Business/Self Employed Division of the IRS:
“We note that, as a result of your previous audit and recommendations, we had convened a team to review the backup withholding process from beginning to end,” wrote Karen Schiller, commissioner of the IRS’s Small Business/Self-Employed Division, in response to the latest report. “The team has been mapping and validating the existing processes in order to identify and evaluate potential gaps. They are looking for solutions to close any identified gaps in our process that can be implemented with our current available resources.”
Have a tax question? Please feel free leave a question in the comment section below and I may feature it in a future blog post.
Please follow me on my blog @lpfaust if you enjoy my content.
Good article! This is a really important thing for people to be considering!
This is not tax/legal advise either (and could be wrong), but I am pretty sure this is how the US gov currently looks at it:
As far as I know, the US government does not consider digital currencies like BTC and SBD/STEEM taxable income. What they consider a taxable event is when the BTC/SBD/STEEM is converted into USD or any other fiat currency.
So basically what that means is if you have earned $1,000,000 in SBD from Steemit, and it is just sitting in your Steemit wallet, you don't currently owe the US government a cent. (Good job on earning $1,000,000 though!!) The moment you cash that out in an exchange though, then you would owe taxes on whatever amount of fiat/USD you received.
Again, this is not tax/legal advise, so please confirm this for yourself by talking to a tax advisor. I am pretty sure that is how it works though. Also, it is good to know that in case STEEM/SBD is (or ever is in the future) considered taxable income, that the blockchain has already prepared all the info we need for us :)
@timcliff thanks for taking the time to read and comment, my friend. I appreciate it.
Let's assume you author a post and receive rewards in STEEM, STEEM Power and STEEM Based Dollars valued at $10 SBD of value. You then take the STEEM and SBDs and exchange them for USD at an exchange. The reality is you have two taxable events to record: you received income in the form of rewards for your post with a determinable Fair Market Value in the form of STEEM, STEEM Power (just more STEEM) and STEEM Based Dollars this is your taxable income, and when you exchange the STEEM and SBDs for USD, you could possibly have a Capital Gain or Capital Loss to record on the exchange.
US Tax Law views fair consideration given in exchange (including property with a determinable Fair Market Value) for a good or service performed as taxable income that must be reported and is subject to income tax.
In the event you purchased STEEM and/or SBDs, you hold it in your wallet and wait until the following year to sell it, then you have only one taxable event: a capital gain/loss to record at the time of the sale and if the conditions are correct, you could have an incredibly favorable Long Term Capital Gain. Mining currency is another issue altogether.
If you have any specific questions, go ahead and ping me at [email protected]. I am an Enrolled Agent licensed to practice before the IRS, and one of the areas I focus my practice on is Bitcoin and other cryptocurrencies (mining, trading, etc.). You can check out my earlier series in my blog US Tax Considerations and Blogging For Magic Internet Money. I go into some considerable detail of the ins and outs of tax law for laypeople.
I hope that clears this up.
Cool, thank you very much for the excellent info!
It is sad but the tax man comes for us all! He is the grim reaper's big brother:)
Death and taxes are the two certainties in life, so it is said.
Yes that was what I was thinking of:)
Feel very valuable
Can somebody explain to me how can Steemit<>User relationship be considered as independent contractor, when there is no contract at all to be signed. There is no business contract, only a TOS which is just the terms to use the site.
We are more likely customers/ users here than contractors, but this is just my opinion, I am not a lawyer.
@profitgenerator thanks for reading and commenting. I appreciated it.
The example I used above only highlighted the independent contractor <> business relationship. There is another piece which I alluded to but did not cover in detail, because I thought it would be overkill to get my point across. It's the relationship of banks and payments processors to report different types of monetary transfers:
Credit card companies and payment transfer networks have an obligation to report all activity over a certain threshhold of value to the IRS via form 1099-K. It is entirely possible this would be determination by the IRS of the Steemit Corporation's relationship to the individual, which creates a whole host of other concerns for Steemit Corporation I will not delve into at this time (simply for brevity sake).
If you remember, about one year ago, Coinbase pissed everyone off because they essentially included all transfers into Coinbase, regardless of their origin point, as income which had to be reported on a 1099-K to the IRS. The whole ball of wax, income earned from services paid in Bitcoin, investment capital from another exchange was treated as taxable income (and shouldn't have been), etc. The position of the IRS would remain, you received income in the form of property which has a determinable Fair Market Value, and it must be disclosed and taxed.
Whether or not I agree with this position is immaterial. I am simply making everyone aware of the rules to prepare before tax season.
Ok but to my knowledge Steemit hasnt been classified yet as taxable or not even on the radar of the tax agents. Besides i think Coinsbase is a money transmitter because they exchange USD.
But here we only have 3 virtual currencies and no USD gateway. It would theoretically be like Shapeshift.io, only cryptocurrencies.
Again this is just my opinion, I have no clue how these laws work, but it would be logical this way to treat Steemit like Shapeshift.
@profitgenerator the IRS on March 25, 2014 with Internal Revenue Notice IR-2014-36 IRS Virtual Currency Guidance did, in fact, classify Bitcoin and all other "virtual convertible currencies" as taxable personal property.
Then in April 2014 (Internal Revenue Bulletin 2014-21) the IRS both explicitly touched on the fact that a taxpayer must include all payments received in virtual currency (measured in US dollars on the date of receipt) when reporting their total income.
Unfortunately the fact there is no direct STEEM to USD or STEEM Based Dollar to USD conversion method does not mean a determinable Fair Market Value does not exist. I reference my previous article which covers the valuation methodology at the end of this article.
The difference I see between Steemit and Shapeshift is in the case of Shapeshift, an individual has purchased one coin and is exchanging one property for another, simply transferring basis. Nothing has been earned, and no capital gain or loss is recognized.
In the case of author and curation rewards with Steemit, the individual is not purchasing the tokens, they are being awarded (in effect earning) the tokens. There is a long history of case law which supports payment in property as taxable income.
Understand, you are free to do what you choose to do, my purpose is simply to inform what the law conveys and help to understand the consequences of failing to do so and being audited.
Well I'm not in the US, i am not effected by this, I was just curious how taxes work out there. Well we shall see in the future how this issue is resolved.
Agreed. My feeling is the decision to tax it as a property must ave been made partly to prevent a competing currency from becoming legitimate. Who knows what the future holds.