Simplifying Hive Bookkeeping
Taxes are always a concern here at TravelWriteMoney when it comes to crypto. It is not so much paying the taxes. After all, if you are paying taxes, it is because you are earning money. We think we are much better off making money. Therefore, taxes are a natural consequence. The concern is, however, is keeping track of our cryptos, particularly Hive, which has no tool to export your transaction history for doing your taxes. You essentially have to manually keep track of transactions, which can slow down your creative mojo. This way, you can accurately track how much tax to pay, and not one cent more.
Before you go listening to anything you read here, you should be aware that TravelWriteMoney has no qualifications to be a financial advisor. I would double-check with a professional before putting anything written here into practice.
At TWM, we have three sources of income. We have mining income, rental income, and interest income. This is a bit of a mess already as mining income is ordinary income, rental income is passive income, and interest income is ordinary income. They get reported differently as you earn. Once you sell Hive or HBD, now you're getting into capital gains or capital losses, which are another mess. Your life is simpler hodling your Hive.
When you write a post, you are mining Hive. This is how Hive was designed under the proof of brain concept. When you curate, you are also mining Hive. Mining generally has some expenses associated, such as mining equipment, electricity, space to do the mining, and other business expenses. Except that Hive has those abstracted to the witnesses. So, we practically earn 100% of our mining proceeds.
In addition, this is income you are generating through your own efforts. It is, effectively, a form of self-employment. Therefore, any Hive and HBD you earn from curating and blogging can be considered somewhat of a business. And, any self-employed person is still required to pay self-employment taxes. On the other hand, as a business, you have the advantage of business expenses, which can be deducted to lower your taxes. We'll discuss that below.
Also under ordinary income is interest income. I have no idea why interest income is considered ordinary income. You also do not pay self-employment taxes for interest income. Interest income is reported separately as it is further broken down into categories including tax-exempt municipal bonds, which is where hiring a pro to do your taxes comes in. In our case, HBD interest earned would count towards interest income.
Passive income is not taxed as ordinary income in the sense that you aren't taxed on the face value. That is, if you have a house you are renting out and get paid $1000 per month, you would not pay taxes on the $1000 after deducting taxes, insurance, maintenance, and other expenses necessary to maintaining the home. Your taxable income will likely be closer to $200 per month.
Similarly, leasing out your Hive Power could potentially be considered rental income, which is pasive income. Where I am hesitant on this is that there are no expenses to offset the income. This might seem strange and trigger an audit. Or not. Perhaps there are landlords who don't report expenses. Not having a rental property, I do not have experience in reporting rental income.
One of the advantages of Hive is that transactions are feeless and the brunt of the work is paid through resource credits. When you have beneficiaries to your posts, these are paid prior to you having realized any income. Any expenses you incur on Hive come after you have claimed your reward. At that point, the rewards are officially yours.
So, if you have decided to make Hive more than a hobby, then you can deduct costs for your work. As a writer, you could deduct the office space needed to do your work. You could deduct cameras, office equipment, and possibly even travel, if they are necessary for your work. As a travel writer, for example, you would need to travel and stay at the places you write about.
You would be better off having a separate business credit card and business checking account to help you track these business expenses. Comingling business and personal money aren't encouraged.
It is important, however, that your Hive income exceeds your expenses. The IRS will only allow you to lose money for so long before they come and investigate.
Given all the different rules for the types of income and expenses, it is necessary to not cause yourself bookkeeping headaches. There are some things you can do to make it easier to account for your Hive earnings. Keep in mind, that US citizens do not have exchanges that can receive Hive or HBD to convert straight to fiat. We are forced to have an intermediate coin that can be converted to fiat.
If you are claiming your rewards every hour, you are looking at potentially 8,760 transactions to go through at the end of the year. Each claim is an instance of income. It helps your record keeping considerably to reduce your rewards claims to once daily, which results in 365 transactions, or monthly for 12 transactions. If you have more than one Hive account, you can see how this could be an epic nightmare.
Rental income is paid daily. There is no way to alter that other than not leasing. That is 365 transactions in a year paid in liquid Hive rather than Hive Power.
Interest income, fortunately, is paid monthly. This means that you only have 12 transactions to record per year.
Content and curation rewards are consistent in that they go straight into Hive Power and HBD. There is no choice in the matter.
Lease income allows you to either power up the liquid Hive, or cash it out. Powering up would be the simplest thing to do as you preserve the cost basis. You are merely locking it up.
If, however, you are cashing it out, it would be best to do it consistently. If you are cashing out to BTC, continue to cash out to BTC, or whatever crypto you chose. On the other end, to finalize the bookkeeping, I would convert to cash to avoid having to track cost basis. For this reason, it would be easier to have a transfer coin that is different from all your other holdings. Open, close. Once you have it in cash, you can spend it or open a new position in your long-term crypto. This makes the bookkeeping less confusing. Whatever method selected for the lease income, it is best to be consistent. You might very well choose to power it up. If this is the case, then always power up in consistent batches to reduce the number of your transactions.
One new, somewhat clean way of liquidating your liquid Hive from leasing is to convert it to HBD. This has the advantage that your earnings stay on-chain and earn interest. Thus, whenever you need to take your earnings out, there is less to worry about in terms of capital gains, assuming HBD can keep the dollar peg.
Finally, interest income. We prefer to roll it into the HBD savings. The interest earned is currently too little to withdraw without significant losses. Given the relative stability of HBD, it seems best to add the interest to the savings for compounding benefits.
Paying Out of Pocket
Earlier, I mentioned converting lease earnings into fiat for spending as a possibility. This could be an important flow, depending on your circumstances. The problem of earning yield on your crypto, particularly if you are taxed on it, is exactly that, you have to pay taxes on it. And, to avoid also paying capital gains taxes, you would need to pay in fiat out of your own pocket. Imagine that you are making $40,000 per year in crypto income. For simplicity, let's assume a 15% tax rate. Then, you would have to cough up $6,000 annually to pay the taxes out of your own pocket. Otherwise, you'd have to sell crypto to pay the taxes and also incur capital gains taxes. Strategically, it makes sense to have some portion of your earnings cashed out into fiat or stablecoin periodically to have the funds available to pay for taxes.
It is for this reason that converting liquid Hive into HBD is attractive. Over time, any capital gains realized from selling HBD would be miniscule. But, by collecting your tax money in HBD Savings, you benefit from earning 10% interest the entire year. And, you only have to withdraw once per year to make the tax payment, unless you are on a quarterly schedule. Doing it this way takes away some of the tax bite from liquidating.
Thinking it through, I think routing all Hive related earnings through HBD would be the best way in our circumstances. This makes for a more predictable withdrawal. If I have a tax bill of $1000, for example, and I withdraw $1100 to allow for exchange and transfer fees, I should end up with the necessary amount of fiat, maybe a little extra.
Here, I have not covered any plan on tracking Hive Engine tokens. Where do you even start? The sheer number of them is a quagmire of record-keeping. As with Hive, there is no tax report or data export you could easily convert into a prepared tax form. My thought is to convert things into SWAP.HBD and withdraw that to HBD to start the income trail. My reasoning is that HE tokens, like LEO, for example, are meta tokens. We can't exactly do anything with them except stake and monkey around on HE exchanges. But, ultimately, the value is established on withdrawal through an intermediary like SWAP.HIVE into HIVE, or the other SWAPs into their corresponding coin. Therefore, for the moment, I am thinking of funneling all Hive Engine liquidations into HBD so that I can set (more or less) a dollar price on it prior to withdrawal.
I have also not covered Splinterlands. To quote Kelly Bundy, "the mind wobbles".
The upcoming Speak Network should also present the need to figure out how to account for earnings there.
My accountant says that the IRS requires us to make an honest effort to try to figure out our taxes. For the most part, we are on an honor system. However, to back that up, they also penalize you heavily on the chance they catch you trying to pull a fast one. So, all of this is my attempt at trying to make an honest effort.