Masternode Rewards as Taxable Income

Feb 02, 2017

The Dash model of offering incentives to run network infrastructure is a revolutionary approach to supporting a decentralized digital currency. While masternode owners certainly enjoy getting paid for supporting the Dash network, there could be a catch depending on your tax jurisdiction.

Disclaimer: I encourage anybody with questions about their taxes to reach out to a professional accountant. This post is NOT legal advice, nor does it constitute advice regarding your personal tax situation.

If you have been wondering about your tax liability, here are some things to consider.

  1. The Internal Revenue Service (IRS) classifies digital currency as property. Any time you transact with a digital currency like Dash or Bitcoin, you are triggering a taxable event. This is one of the reasons people don’t use gold to purchase goods and services. The book-keeping for transacting in precious metals is burdensome. The same goes for digital currency. You have to track the cost basis of every unit of digital currency you have and then calcualte the gains and losses when forming a transaction.

    “A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property.” https://www.irs.gov/uac/newsroom/irs-virtual-currency-guidance

  2. The incentives paid to masternode owners are mined currency, and the IRS considers mined currency taxable income.

    Notice 2014-21 “A-9: If a taxpayer’s “mining” of virtual currency constitutes a trade or business, and the “mining” activity is not undertaken by the taxpayer as an employee, the net earnings from self-employment (generally, gross income derived from carrying on a trade or business less allowable deductions) resulting from those activities constitute self employment income and are subject to the self-employment tax.”

  3. Any exchange of your Dash into another currency may be taxable.

    Notice 2014-21 “A-6: If the fair market value of property received in exchange for virtual currency exceeds the taxpayer’s adjusted basis of the virtual currency, the taxpayer has taxable gain. “

  4. The service fee you pay to Node40 may be tax deductible. Many fees related to management of assets are tax deductible. Of course you will want to check with your accountant first. If you determine the fees are deductible, you can review past invoices from within Nod40.

Portfolio Insight Reports

If you have been hosting your masternodes with Node40 for more than a month, you’ll have access to our Portfolio Insight Reports. These reports show total accumulated Dash rewards along with a corresponding U.S. dollar value. Referring to point two above, these rewards may be considered taxable income.

The reports will also show any realized short or long term gains. These figures are calculated whenever your Dash is removed from a masternode.

If your goal is to self-report your masternode income and gains, the Portfolio Insight Reports may be enough for your accountant to determine your tax liability.

Blockchain Accounting Service

If you’re looking for more detail about your overall gains, losses, and income we’ll have a solution for you soon. Our new blockchain accounting service will allow you to generate detailed reports based on the transactions in your Dash or Bitcoin wallet. If you would like to learn more about the service, please check out https://accounting.node40.com/. While you’re there you can sign up for early access and be among the first to try it out.

Tax season can be a real burden for digital currency owners. Our goal is to take the pain out of reporting.