BitClout and Creator Coins


Disclaimer  

    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.

                                                                                    




Comments

  1. UnknownJune 21, 2021 at 4:14 AM

    It seems to me the code seems to reflect "selling" creator coins --really-- as just releasing a savings in a pooled joint amount of pre-allocated Bitclout. It's only coins in language, buying in language, selling in language- sort of like a casino "game" isn't really a crypto-casino. There are crypto-casinos that bet in real cryptocurrency and win real cryptocurrency. And then there are games where you use cryptocurrency as collateral in a way against chips or gold or fake tokens/money. The game is played with the chips. But no matter what you do with chips, those aren't transactions. Only really when you cash out your chips do you realize some kind of income or loss.

    Essentially I think two things happen. Perhaps when buying the Bitclout itself, it is getting an asset. But using the asset to buy creator coins and play in the ecosystem, it's all closed. You can't list your creator coins independently on exchanges the way you can an ERC20 from Rally or Roll. And since Bitclout would be more of a utility for accessing the trading simulation game, it doesn't really seem to even be a cryptocurrency at this point. Even post listing, it feels so much more like Linden dollars (Second Life) or Sims (video game) coins which can go on exchanges, but are really only used for activities related to Bitclout dapps or activities on chain, even real world reflecting ones. Nobody is paying their real world rent with Linden Dollars and if they are, it's more of a barter than a buy regardless of language.

    Language is a tough one when it comes to games and simulations and software. I feel Bitclout should have just branded itself openly and unashamedly as a trading simulation game for entertainment purposes only. It would completely function the same without all the legal questions.

    ReplyDelete
  2. Crypto StructuresJuly 20, 2021 at 5:53 PM

    I think that's right. Very helpful.

    ReplyDelete

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