BitClout and Creator Coins
Soon people will be able to begin participating in BitClout's decentralized social network by acquiring "Creator Coins". I have no position as to whether BitClout or Creator Coins are a good investment, that's not my skill. However, I have been thinking about what it means to acquire a Creator Coin (particularly the tax aspects of that transaction).
As I understand the network's structure, holders of BitClout will be able to "pledge" their BitClout to acquire Creator Coins. Ordinarily an exchange of one variety of token for another would be a taxable transaction and it's unfortunate that BitClout is describing the acquisition of Creator Coins as an exchange. However, on these facts, I think that holders of BitClout have a good argument that this transaction is more similar to staking than it is to an exchange (note, "good argument" does not necessarily mean "winning argument"):
- As with staking, you may receive more BitClout back than you "pledged" (if the particular creator's coins go up in value).
- As with staking, you are putting your BitClout at risk (if the particular creator's coins go down in value).
- As with staking, you can get your BitClout back at any time.
- Finally, Creator Coins are not truly a separate interest. They are reflected on the same block chain ledger as the BitClout and the Creator Coins can't be exchanged on the ledger for anything other than BitClout.
Which leaves us with a question: If the pledge of BitClout for Creator Coins isn't taxable, when are the additional BitClout taxable to the "pledgor"? Is it only when the Creator Coins are exchanged for BitClout? is it on a periodic mark to market basis? is there some other event that requires the "pledgor" to measure and "recognize" taxable income?
Because the US tax system operates on an annual accounting system, I would recommend that "pledgors" mark their Creator Coins to market as of December 31 and pay tax on the excess of the number of BitClout that they are worth on that date over the number of BitClout pledged in the first place (Choosing December 31 is designed, in part so that any interim ups and downs would be reflected in the annual total). The "pledgor" might have some exposure for estimated taxes and might be deemed to have prepaid tax (if the IRS agrees that no income is recognized until the Creator Coins are actually exchanged for BitClout), but neither of those risks (in my opinion) outweigh the risk that the "pledgor" does have taxable income during the year.
So for example, if a "pledgor" pledges 100 BitClout for 100 Creator Coins, and at at the end of the year, the Creator Coins can be exchanged for 120 BitClout, the "pledgor" would recognize 20 BitClout worth of income. It wouldn't matter if the Creator Coins were worth 150 BitClout on June 30, because, even if the "pledgor" should have recognized 50 BitClout of income on June 30, he/she would have had a loss of 30 BitClout at the end of the year, leaving him/her in the same place.
It's possible that the IRS might say that the "pledgor" should have accrued the 20 BitClout ratably over the year and made estimated tax payments on 5 BitClout each quarter, but the penalty for the failure to make estimated tax payments is essentially interest on the unpaid tax. It's also possible that the IRS will say that the "pledgor" should not have been taxed at all until he/she redeemed the Creator Coins for BitClout, but in that event, the "pledgor" will have simply prepaid the tax and (other than some administrative headaches) avoid penalties.
Full Disclosure: The Author holds 2,000 BitClout and in the past has been compensated for consulting with the founders of BitClout's sponsor.