HBD image by @doze
Short answer, I don't know. When it comes to taxes, everybody should consult their tax experts in their jurisdictions. Everybody's tax situations are different, tax laws in various jurisdictions are also different. One should never rely on blog posts for proper tax information. The content of this post are my opinions and purpose of the post to have a conversation whether Hive rewards are or should be considered taxable events. I don't know much about tax laws outside of the US. For this reason, this post also only focuses on taxes in the US.
Hive is well known for its rewards. There are many of them. There are rewards for creating content. There are rewards for curating content. There are rewards for producing blocks. There are rewards for keeping HBD in savings. There are rewards for staking Hive. And these are just rewards in native coins like Hive and HBD. But there are also airdrops and many layer 2 rewards. Clearly there are many ways of earning real world value in the form of crypto rewards on Hive network.
When people earn financial value, tax agencies want their piece of the pie. However, as always legislature and tax agencies lag behind technologic advancement and never on time with with clear laws and rules. Especially when it comes to crypto assets there has been a lot of confusion how they should be taxed. There is clarity in some areas like bitcoin and crypto in general are considered property for tax purposes, and selling them at a profit would trigger a taxable event. If you simply buy and sell a crypto asset using fiat, you would need to pay capital gains taxes. Or if you accept crypto assets as payment for your goods or services, you may want to keep a record of fiat value of the asset at the time the transactions happens and report that as a taxable event. That much is clear.
However, there is a lot more is going on in the crypto world, and especially on Hive. It is a full economy that hosts smaller economies. In a sense it is a network of economies. There are many types of rewards. Are they all taxable events, are they all same kind of income?
There are many opinions and those who think all rewards are taxable events. They might be right. Even the founder of several DPoS blockchains, Dan Larimer, expressed his thoughts on this when he came back to Hive last year. Here is what he said.
Lastly, anyone building anything that results in economic profit and loss imposes tax consequences on their users. Tokens like Voice or Hive create tax events every time they change hands. This is why I decline rewards when I post on Hive, they are not worth the tax accounting. With the growing sophistication of the tax authorities and the loss of privacy, none of these token-based ecosystems / platforms stand a chance unless they automatically do all of the tax calculations and boil it down to a 1099. The only way to automate such calculations is to have full knowledge of every purchase price and sale price. Such things are not possible if users are trading on multiple exchanges in a decentralized manner.
Those are good points and I am sure he has good reasons and more experience to come to conclusions above.
However, I would like make an argument that most Hive rewards are not necessarily tax events until they are sold to fiat. Today I have a good reason for that. I saw an article today on Bitcoinist, titled IRS Will Not Tax Unsold Staked Crypto As Income and it was talking about a lawsuit filed by a couple last year making a very good case how staked coins are not taxable until they are sold and asking IRS to refund taxes they paid. I read about this lawsuit last year and agreed with their arguments and remember thinking back then that the same logic could apply to rewards on Hive.
This lawsuit is not specifically about Hive. But it is about proof of stake protocols and how tokens obtained through these protocols can be considered taxpayer created property and these taxpayers should not be obligated to pay taxes until they sell or exchange them.
Good news is, the couple who is involved in the lawsuit, Joshua and Jessica Jarret received a letter form Department of Justice stating that IRS had approved a full refund for their 2019 taxes against tokens they earned through staking in the Tezos network. Wow. Full refund. It does seem like IRS accepted their argument. However, the story doesn't and here. This is only a specific situation that applies to this couple and the refund is only for 2019.
It gets more interesting, because the couple is rejecting this settlement and wants more clarification on how such income should be taxed and want to continue with the lawsuit to they have a better and clear understanding for future tax purposes.
Before we start applying the same logic to Hive rewards, let's try to understand two more things: what IRS says about crypto taxes and what taxpayer-created property is.
IRS says:
A taxpayer who receives virtual currency as payment for goods or services must, in computing gross income, include the fair market value of the virtual currency measured in U.S. dollars, as of the date that the virtual currency was received.
In my understanding taxpayer created property is like an artist creating an art, a farmer growing crops, a baker making a cake, an automaker building cars, etc. If you have better definition or explanation feel free to share in the comments. The core idea is something that didn't exist before is being created by the work put in or some actions of a person.
Now let's look at witness or block producer rewards. Witnesses need to run servers, spend time and skills to setup and maintain their witness nodes and perhaps even engage in other activities to produce blocks. Every time they produce blocks, they receive rewards as HP (Hive Power). This HP didn't exist before. These HP are newly created assets. They are the property of whoever created them. Isn't this same as a baker making a cake that never existed before? This HP or a cake may not even be worth anything until they are sold or exchanged for value. If you agree that this is a taxpayer created property, then it shouldn't considered as income?
In a similar fashion interest earned on HP or HBD in savings shouldn't be taxed as income until they are sold as well. Because in both cases again account holders receiving these additional newly created coins for their actions of staking their Hive or HBD assets. To me it is no different than witnesses producing blocks, and being rewarded with newly created coins.
What about content rewards? Doesn't that sound like what IRS is saying in the above quote? Can't the content authors creating be considered as goods and they are receiving virtual currency as payment. I don't believe so. If authors created content and auctioned their content and sold to the highest bidder, or even just sold at a fixed price, that would be a different story. This would require another person on the other side of the transaction. However there is not peer to peer transaction when authors click the claim rewards button. It is simply a rewards distribution mechanism that no individual paying out of their pockets.
Just like witnesses earning block producer rewards, authors are also receiving new created blockchain coins just for participating with their content in the Hive economy. It is no different than mining. Hence, authors are engaging in creating a new property. And this property should not be taxed until sold or exchanged for some financial value. The same logic can be applied to curation rewards, rewards on tribe tokens, airdrops. Because they all share one feature, they are all newly created property due some actions people have made.
Of course none of this means all of these rewards are not taxable. They are taxable and should be taxed when they are sold or exchanged for value just like any other property.
There are situations though we cannot apply this logic, I think. For example if an artists create an NFTs and sells in the market. Just the fact they sold their property would probably trigger a tax event. Also, when Decentralized Hive Fund pays out some funds to proposal creators wouldn't be able apply the logic above. Since in this situation, it is clear that a person or a group are getting paid fixed amount for their services, efforts or product. And it is not clear if the payment is a newly created property or already in existence and belongs to the community.
Of course, most if these opinions are wishful thinking. Taxes do not necessarily follow logic. They follow the laws legislature makes and agencies enforce. There is long ways to go to get any kind of clarity regarding taxes for each action and event in crypto world. But the lawsuit mentioned earlier is a small win and if it can get a win a court of law, it may create a precedent that may shine some light into this confusion.
For now, we will just continue consulting the tax experts and do the best effort to remain compliant with laws and taxes. We can always look at the positive, and make a note that we must have done something right this year if we need to pay taxes. Let me know your thoughts and experiences on crypto taxes in the comments.