In the 14 years since the emergence of bitcoin, cryptocurrencies have proved both highly volatile and deeply controversial. Collapses such as at crypto exchange FTX haven't helped the public image and have fed into the expectations of cryptos' worst critics who, like JP Morgan Chase chairman Jamie Dimon, have warned they represented ‘a fraud that will ultimately blow up’.
Jurisdictions around the world have found it hard to assess this disruptive new asset class. In guidance issued in 2022, regulators in Ireland, for example, noted that ‘there are no special tax rules for cryptocurrencies or crypto-assets’ and said that ‘a trade in crypto-assets would be similar in nature to a trade in shares, securities, or other assets’.
Criminals laundered US$8.6bn of cryptocurrency in 2021, up 30% on the previous year
The challenge for taxation authorities lies in tracking these trades. As the OECD has put it, ‘crypto-assets can be transferred and held without the intervention of traditional financial intermediaries’, thereby ‘increasing the likelihood of their use for tax evasion’.
Their use to evade tax and launder money presents a growing problem. A 2022 report from Chainalysis found that criminals laundered US$8.6bn of cryptocurrency in 2021, up 30% on the previous year,
Improving transparency
In 2022, governments internationally woke up to the fact that more than a gentle nudge is needed to bring crypto-assets into their tax domains. At the behest of the G20, the OECD published the Crypto-Asset Reporting Framework (CARF) with the stated goal of bringing a new transparency to crypto-asset transactions. The CARF provides for the automatic exchange of information between countries on crypto-assets, similar to the OECD’s Common Reporting Standard (CRS).
At the launch of the CARF, OECD secretary-general Mathias Cormann pointed to the success of the CRS in tackling international tax evasion to date and positioned it as the basis for further success with the CARF. ‘In 2021, over 100 jurisdictions exchanged information on 111 million financial accounts, covering total assets of €11 trillion,’ he said. The CARF, he stated, alongside further amendments to the CRS ‘will ensure that the tax transparency architecture remains up-to-date and effective’.
Crypto-asset service providers will be required to provide information on users of their services
Requirements and exclusions
Like the CRS, the basis of the CARF lies in reporting and due diligence requirements. The target in this case will be crypto-asset service providers, who will be required to provide key information on users of their service and the value of the transactions they make.
The CARF will apply to exchanges and transfers within the crypto-asset sphere and to exchanges from cryptocurrencies to traditional currencies. Retail purchases above US$50,000 using cryptocurrency will also be covered, but only where a customer needs to be verified under anti-money laundering regulations.
Certain exclusions will apply, among them central bank digital currencies and crypto-assets that cannot be used for payment or investment purposes. However, to the dismay of many in the sector, non-fungible tokens (NFTs) will be included, as the OECD concluded that while they could be considered collectibles, they could also be used for investment purposes.
Government progress
The CARF framework was endorsed by the G20 in August 2022 with follow-up work on exchanging information between jurisdictions and the IT solutions to support this, as well as the tweaking of guidance and rules, now well under way.
In December 2022, the European Commission proposed its new tax transparency rules for crypto-asset transactions (EU DAC8), which it said would be in line with the CARF and which it hopes to have in place by 2026. The UK is expected to follow a similar timeline. In the US, action has already been taken through the landmark 2021 Infrastructure Investment and Jobs Act, which introduced reporting obligations on cryptocurrency exchanges (notably called ‘brokers’ in the act) for the first time.
The stage is set for some more dramatic turning points in crypto’s short but turbulent history
Maturing market
Commentary around the CARF has largely recognised it as a maturing of both the crypto market and the regulators who once held it at arm’s length. Head of OECD's BEPS project Raffaele Russo observes that ‘success brings about accountability, and regulators around the world have been focusing on the relevant aspects of cryptocurrency for a few years now'.
During the public consultation process, CFE Tax Advisers Europe expressed some concern about whether the framework ‘has the necessary structural foundations to enable implementation’, and warned that it could be a ‘driver for crypto activity to develop in countries which make clear their intention not to introduce regulation and reporting in accord with the CARF’.
Meanwhile, in an article on DLA Piper's website, Tom Geraghty and Kali McGuire suggested problems down the line. ‘The US has adopted its own information reporting regime. This, combined with the fact that the US has not adopted the CRS, leads us to believe that the US will not adopt the CARF,’ they noted.
Nevertheless, with more than 100 countries signed up to the CRS, there seems little doubt of the scope for the CARF to take effect, or of the OECD’s ambition to make it the default framework for global information-sharing on crypto among tax authorities.
Given that all of this is set to coincide with the adoption of cryptocurrencies by mainstream financial institutions in the coming years, and the rebuilding of the existing sector following the collapse of FTX, the stage is set for some more dramatic turning points in crypto’s short but turbulent history. Tax authorities may soon have a powerful new resource at their disposal, but it remains to be seen how easily this ‘Wild West’ will be tamed.
