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12
www.ctcpas.org
and start probing your clients who hold
cryptocurrencies to ensure they are
also aware of the reporting implications.
Cryptocurrencies are currently treated
as property, and the general rules for
property transactions apply. There
are some nuances, however. If you
receive cryptocurrency for a service
or product, it is taxed like receiving
ordinary income (at that time), but if
you purchased cryptocurrency, you
are required to report capital gains on
Schedule D of Form 1040. As most
cryptocurrency holders will likely not
receive a Form 1099, they will need to
calculate and report the figures.
Another major issue is that the rising
crypto exchange from one party to an-
other (such as receiving bitcoin, trading
to another cryptocurrency such as Ethe-
reum, and holding) may not be treated
as a like-kind exchange and conse-
quently allowed on property transfers.
If you decide to use this method, you
may find yourself recalculating prior tax
years if the IRS audits you.
If you purchased and sold cryptocur-
rency during the same tax year, you
can simply take the amount you re-
ceived on the sale (less the cost to
buy them and any fees) to determine
gains. If you hold them for more than
a tax year, you will need to ensure you
have access to their cost basis (what
you bought them for) to perform these
calculations. Clearly, this may start to
become difficult.
Know-Your-Customer and
Anti-Money Laundering
As we discussed in part one of this se-
ries, distributed ledgers as a whole will
bring about significant improvements
in both efficiency and risk mitigation.
One area that is important to under-
stand in this endeavor within newer
cryptocurrencies like Ethereum is the
smart contract and know-your-cus-
tomer (KYC) and anti-money launder-
ing (AML) platforms and services.
Many large organizations and smaller
fintech companies have been vying
to produce a KYC/AML platform (or
"as-a-service" offering, similar to le-
veraging cloud services), which will
greatly simplify and enhance the on-
boarding of new clients and compa-
nies for banking, insurance, or other
regulation-heavy needs, and also help
with tracking the movement of value.
Many options launched in this field
are starting to gather attention and
momentum. As a user of the service,
you will be able to track and poten-
tially revoke who has access to your
information by both wallet control or
via smart contracts.
Smart Contracts
Smart contracts (self-executing code
that sits on a blockchain) may become
common vehicles for the transaction
of value and be tied into various pro-
grammable components or terms of an
agreement between parties.
The Australian Securities Exchange is
investing in a new blockchain-based
post-trade execution solution to replace
(continued)
We will likely see a new form of accounting and auditing that
is directly related to design, review, execution testing, and
after-the-fact audit of smart contracts.

In this way, computer programming will play a more significant
role, but it will be up to humans to determine whether certain
steps have been processed correctly or whether they have
gone awry.
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