Crypto Assets and Tax: Crypto-Asset Reporting Framework (CARF) and Amendments to CRS

Tax Implications on Crypto-Assets

In recent years, the rapid rise of crypto-assets has reshaped financial markets, challenging traditional models of tax transparency and regulatory oversight. In response, in April 2021 the G20 mandated the OECD to develop a framework providing for the automatic exchange of tax-relevant information on Crypto-Assets. In August 2022, the OECD approved the Crypto-Asset Reporting Framework (CARF) which provides for the reporting of tax information on transactions in Crypto-Assets in a standardized manner, with a view to automatically exchanging such information. The CARF defines the Relevant Crypto-Assets in scope and the intermediaries and other service providers that will be subject to reporting. In doing so, the CARF incorporates recent developments in the global Anti-Money Laundering (AML) standards of the Financial Action Task Force. In line with the Common Reporting Standard (CRS), which has been in place since 2014 to promote tax transparency for financial accounts, the due diligence procedures require the identification of both individual and entity customers, as well as their Controlling Persons. The CARF requires reporting on an aggregate basis, divided by type of Crypto-Asset and type of transaction. In August 2022, the OECD has also approved amendments to the CRS to bring certain electronic money products and Central Bank Digital Currencies (CBDC) in scope. In light of the CARF, changes have also been made to ensure that indirect investments in Crypto-Assets through derivatives and investment vehicles are now covered by the CRS. In addition, amendments have been made to strengthen the due diligence and reporting requirements (including requiring the reporting of the role of each Controlling Person) and to foresee a carve-out for genuine non-profit organizations.

What is CARF?

The Crypto-Asset Reporting Framework (CARF) is a standardized reporting system created to address the tax transparency challenges posed by crypto-assets.

CARF aims to:

1. Ensure that crypto transactions are reported for tax purposes, mitigating the risks of tax evasion.

2. Establish a global standard for reporting crypto transactions.

3. Facilitate the automatic exchange of tax-relevant information on crypto-assets between jurisdictions.

4. Enable tax authorities to verify compliance with tax laws in their respective jurisdictions.

Key Components of CARF

CARF consists of four main components:

1. Scope of Crypto-Assets Covered

CARF includes a wide range of crypto-assets, such as:

• Cryptocurrencies like Bitcoin and Ethereum.

• Stablecoins pegged to fiat currencies.

• Crypto derivatives and certain non-fungible tokens (NFTs).

• Other cryptographically secured digital assets.

CARF targets crypto-assets that pose tax compliance risks, especially those that can be transferred without oversight by traditional financial intermediaries.

2. Entities and Individuals Subject to Reporting

CARF places reporting obligations on Crypto-Asset Service Providers (CASPs), which are entities involved in facilitating crypto transactions. These include:

• Crypto exchanges: Platforms that allow buying, selling, and trading of crypto-assets.

• Wallet providers: Companies offering crypto wallets for storage of assets.

• Brokers and intermediaries involved in facilitating crypto-to-fiat or crypto-to-crypto transactions.

Service providers within a jurisdiction must collect information on their users and report it to local tax authorities, who then share this data with other countries under CARF agreements.

3. Reportable Transactions

CARF requires reporting on three types of crypto transactions:

• Crypto-to-Fiat Transactions: Converting crypto-assets to fiat currency.

• Crypto-to-Crypto Transactions: Exchanging one form of crypto for another.

• Transfers of Crypto-Assets: Moving crypto-assets from one wallet to another, especially if the receiving wallet is not affiliated with a service provider.

Service providers must aggregate these transactions by type and report details to tax authorities, enabling better visibility into crypto trading activities.

4. Due Diligence Procedures

The due diligence requirements for CARF align with Know Your Customer (KYC) and Anti-Money Laundering (AML) standards, requiring providers to:

Identify reportable users and their tax residence.

Verify user identities through self-certifications and check for consistency.

Perform ongoing checks for any changes in circumstances that could impact a user’s tax obligations.

Due diligence helps ensure that all relevant information is captured, including details on Controlling Persons for entities involved in crypto transactions.

How CARF Interacts with the Common Reporting Standard (CRS)

The CRS has been the primary standard for tax reporting on cross-border financial accounts since 2014. However, CRS primarily focuses on traditional financial assets and fiat currency accounts, and does not adequately cover crypto-assets.

CARF complements CRS by focusing specifically on crypto-assets, with some overlapping areas:

• Specified Electronic Money Products and CBDCs are included in CRS but excluded from CARF.

• Crypto derivatives and certain investment vehicles that indirectly involve crypto-assets are now covered by CRS due to recent amendments.

• CARF and CRS use similar due diligence procedures to minimize the reporting burden on entities that must comply with both frameworks.

By working together, CARF and CRS provide a comprehensive global reporting standard that includes both traditional and digital assets.

Global Impact of CARF

CARF is expected to have a significant impact on global tax transparency in several ways:

Improved Tax Compliance: By mandating the reporting of crypto transactions, CARF enables tax authorities to detect and address tax non-compliance, especially among those who use crypto-assets for tax evasion.

Enhanced Data Sharing: CARF establishes a framework for automatic exchange of crypto transaction data between jurisdictions, promoting greater transparency and collaboration in tax enforcement.

Impact on Service Providers: CASPs will face new compliance requirements, including setting up systems to collect and report user data. This adds operational costs but brings greater legitimacy to the crypto industry.

Prevention of Illicit Activities: CARF's standardized reporting requirements, aligned with AML and KYC procedures, help prevent crypto-assets from being used for money laundering and other illicit activities.

CARF represents a substantial step toward integrating crypto-assets into the global financial system with accountability and transparency.

Challenges and Future Developments

While CARF addresses many challenges posed by crypto-assets, it also presents new questions and potential challenges:

Evolving Technologies: The crypto landscape is rapidly evolving, with innovations like decentralized finance (DeFi) and advanced NFTs. CARF may need updates to keep pace with new technologies.

Compliance Burden for Smaller Providers: Smaller CASPs may struggle with the compliance costs associated with CARF. Future iterations may consider tiered requirements to alleviate burdens on smaller entities.

Jurisdictional Variances: Not all countries may adopt CARF at the same pace or with the same standards, potentially creating gaps in reporting.

Closing Remarks

CARF and CRS amendments represent proactive steps in global tax governance, setting the stage for greater transparency and accountability in the digital economy. As these frameworks roll out, they will play a critical role in ensuring the continued growth and legitimacy of crypto-assets within the broader financial system.

Marco Beffa

CEO at CryptoComplianceUAE

Published Author of the Book "What The Hell are Cryptocurrencies?"

#CryptoTax #CryptocurrencyTax #CryptoRegulation #BlockchainTax #CryptoCompliance #CryptoTaxation #CryptoReporting #CARF #CryptoTaxLaw #DigitalAssetTax

Source:

OECD (2022), Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard , OECD, Paris,

https://www.oecd.org/tax/exchange-of-tax-info

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