HIVE Taxes - Was I Thinking Wrong?

In a post a few weeks back, I related my conversation with my new CPA, who will do my taxes. In the meeting, he distinguished that mining income and capital gains income are treated differently.

With capital gains, I need to record cost basis and sale basis to determine what the taxable profit is.

With mining, I'd be creating from nothing. Therefore, it is considered ordinary income.

This morning, @gadrian wrote a post that flicked a switch in my mind. Hive and the other tokens running on Hive are proof-of-brain. This means that posting, commenting, curating, and, arguably, investing within the platforms are all considered mining operations.

Let's think through what this means. If I were to decide to mine Bitcoin or some other coin, I could produce newly minted Bitcoin or other crypto. The cost of electricity, the mining rig, labor, and other costs that go into producing new tokens could be expensed to offset the profit from selling the new tokens. Also, these new tokens become income based on whatever price I decide to sell them. Therefore, I can accumulate a few BTC before selling them off in a batch.

Assuming we treat Hive the same way, as a mining operation. We ought to be able to accumulate Hive until we sell it, thus triggering a taxable event. Selling it would consist of converting it to another crytocurrency for the purpose of converting to fiat. Selling it would also consist of bartering it for another good or service. If the mining analogy holds, once Hive leaves the mining rig, or is exchanged, it becomes ordinary income. So long as it remains in the production environment, it is still mining. After all, staking Hive produces more Hive through inflation.

I am thinking this way because it would be a nightmare to track all the Hive and layer 2 token transactions that occur daily with every transaction.

Something else just came to mind. If you have built up your Hive account from sweat equity, that means that except for the seed Hive needed to create your account, your Hive stake is almost entirely composed of virgin Hive tokens. They have never been spent or transacted. They have no cost basis. We have a rough idea of what they are worth; but, they have still not left your mining rig, which is your blog.

Something to consider. What happens when you lease out your Hive Power? That Hive you are paid in interest is no longer virgin. It has been transferred from somebody else's wallet. It now has a market value. As it is called leasing, we could consider this Hive as rental income.

Converting from Hive to LEO or other tokens also involves market values. In this case, you would establish value for your virgin Hive upon trading it. That is income. This also establishes cost basis for your new token.

As you can see, all of this can be complicated and requires mental contortions to keep sorted out. It may be a simpler matter to have separate accounts for different purposes. You could have mining accounts where you would create new Hive tokens. You could have accounts that do nothing but lease out Hive Power. You could have a Hive account for trading. This should simplify record-keeping. Especially as there is no transaction export feature that could be used for taxes. It helps if the different types of transactions are not comingled. It saves you the trouble of having to untangle the mess at tax time.

Having watched the tax professionals at the MicroStrategy virtual conference, even the Accountants who are figuring these things out and making the rules are not saying that there are clear cut ways to account for crypto. Often, they say "it depends". Getting paid in crypto and buying crypto for your treasury have completely different accounting treatments.

If you have any Hive tax concepts, throw them my way. I am super curious how some of the whales of Hive manage all of this. How are your accountants doing your Hive taxes?

For a future post, I'll think through how to account for expenses when treating my Hive account as a miner.

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