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I had some self employment income where I was paid in

bitcoin. I also made some...
I had some self employment income where I was paid in bitcoin. I also made some bitcoin payments to a couple of businesses for what would be considered commissions. Would I report the income and expenses on schedule C as I normally would with cash, credit or check payments and then use form 8949 and schedule D for all bitcoin transactions with realized gains or losses?
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10/20/2017
Chad EA, CFP ®
Chad EA, CFP ®, Enrolled Agent
Category: Tax
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Hello my name is ***** ***** I will be able to assist you today.

Even though you were paid in bitcoin, you should receive a 1099 that reports in dollars, how much was paid to you.

For payments made to vendors you should also convert the bit coins to dollars and report the expenses on Schedule C as a sole proprietor or disregarded LLC would.

Gain or loss from the sale or exchange of virtual currency depends on whether the virtual currency is a capital asset in your hands.

Please see the below information from IRS Notice 2014-1

"Q-4: What is the basis of virtual currency received as payment for goods or services in Q&A-3? A-4: The basis of virtual currency that a taxpayer receives as payment for goods or services in Q&A-3 is the fair market value of the virtual currency in U.S. dollars as of the date of receipt. See Publication 551, Basis of Assets, for more information on the computation of basis when property is received for goods or services. "

Q-7: What type of gain or loss does a taxpayer realize on the sale or exchange of virtual currency?

A-7: The character of the gain or loss generally depends on whether the virtual currency is a capital asset in the hands of the taxpayer. A taxpayer generally realizes capital gain or loss on the sale or exchange of virtual currency that is a capital asset in the hands of the taxpayer. For example, stocks, bonds, and other investment property are generally capital assets. A taxpayer generally realizes ordinary gain or loss on the sale or exchange of virtual currency that is not a capital asset in the hands of the taxpayer. Inventory and other property held mainly for sale to customers in a trade or 4 business are examples of property that is not a capital asset. See Publication 544 for more information about capital assets and the character of gain or loss.

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Q-10: Does virtual currency received by an independent contractor for performing services constitute self-employment income?

A-10: Yes. Generally, self-employment income includes all gross income derived by an individual from any trade or business carried on by the individual as other than an employee. Consequently, the fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax. See FS-2007-18, April 2007, Business or Hobby? Answer Has Implications for Deductions, for information on determining whether an activity is a business or a hobby.

Q-11: Does virtual currency paid by an employer as remuneration for services constitute wages for employment tax purposes?

A-11: Yes. Generally, the medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages is subject to federal income tax withholding, Federal Insurance Contributions 5 Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported on Form W-2, Wage and Tax Statement. See Publication 15 (Circular E), Employer’s Tax Guide, for information on the withholding, depositing, reporting, and paying of employment taxes

Q-12: Is a payment made using virtual currency subject to information reporting?

A-12: A payment made using virtual currency is subject to information reporting to the same extent as any other payment made in property. For example, a person who in the course of a trade or business makes a payment of fixed and determinable income using virtual currency with a value of $600 or more to a U.S. non-exempt recipient in a taxable year is required to report the payment to the IRS and to the payee. Examples of payments of fixed and determinable income include rent, salaries, wages, premiums, annuities, and compensation.

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Customer reply replied 4 months ago
I wouldn't realize any gains or losses on the vendor payments would I? I'm thinking as the price fluctuates between when i received the income and exchanged it for USD I would realize a gain or loss on that, but the vendor expense would just be the amount I sent them.

Most likely you wouldn't, but bitcoin does fluctuate. Your basis would be the value on the day you received the bit coin and then you would determine a gain or loss based on the value the day you sold it.

Bitcoin has been on a roller coaster ride for valuation this year.

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Yes, the vendor expense would be the amount you sent them

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In my opinion as long as you have a reasonable explanation of how you came up with the value, you would be fined if questioned.

The crypto currency market isn't exactly priced to perfection

Chad EA, CFP ®
Chad EA, CFP ®, Enrolled Agent
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