Posted: 07 Apr. 2022

Tax authorities want a slice of the virtual pie: a new OECD Crypto-Asset Reporting Framework is on the horizon

Since the creation of the world’s first cryptocurrency by Satoshi Nakamoto in 2008, over 5’000 types of cryptocurrencies have emerged. The World Economic Forum estimates the total market cap of digital currencies at USD 1.7 trillion with over USD 90 billion of worth traded daily. In Switzerland, the use of blockchain technology and cryptocurrencies is also on the rise. Lugano recently launched “Plan B” making bitcoin legal tender and allowing citizens to pay for public services or taxes in Bitcoin, while Zug is known to many as the Swiss “Crypto Valley”.

With cryptocurrencies strongly asserting themselves on the financial sphere, concerns that these could be misused by those looking to operate in the shadows for illicit purposes, such as money laundering, tax evasion and terrorist financing also developed. As a result, the need for cryptocurrencies’ regulation found its way into national and international agendas with the goal to hinder their criminal usage and produce some guidance. Against this background, the G20 asked the OECD to develop a framework for the automatic exchange of information on crypto-assets and expects a report in October 2022.

This blog is the second of a two-part series and describes selected key provisions of the proposed CARF, a new global reporting framework that aims at ensuring the collection and exchange of information on transactions in Crypto-Assets.

On Tuesday, 22 March 2022 the OECD published the anticipated Crypto-Asset Reporting Framework (CARF), which consists of three building blocks:

  1. CARF rules and commentary that can be transposed into domestic law to collect information from resident Crypto-Asset intermediaries
  2. A framework of bilateral or multilateral competent authority agreements or arrangements for the automatic exchange of information collected under the CARF with jurisdiction(s) of residence of the Crypto-Asset Users, based on relevant tax treaties, tax information exchange agreements, or the Convention on Mutual Administrative Assistance in Tax Matters; and
  3. Technical solutions to support the exchange of information

The public consultation document discusses the first building block, i.e. the rules and commentary. Once the work on the rules and commentary is completed, the OECD will then further develop the second and third building blocks.

The rules and commentary of the CARF have been designed around four key areas that are generally similar to those we have seen under the OECD Common Reporting Standard (CRS):

  1. The scope of Crypto-Assets to be covered
  2. The intermediaries subject to data collection and reporting requirements
  3. The transactions subject to reporting as well as the information to be reported in respect of such transactions; and
  4. The due diligence procedures to identify Crypto-Asset users and the relevant tax jurisdictions for reporting purposes

Reporting Crypto-Asset Service Providers (RCASPs) are defined as “any individual or Entity that, as a business, provides a service effectuating Exchange transactions for or on behalf of customers, including by acting as a counterparty, or as an intermediary, to such Exchange Transactions, or by making available a trading platform.”

The Commentaries indicate that “as a business” should be determined in reference to local rules. Further, it explains that a service effectuating Exchange Transactions includes “any service through which the customer can receive Relevant Crypto-Assets for Fiat Currencies, or vice versa, or exchange Relevant Crypto-Assets for other Relevant Crypto-Assets.” An individual or Entity may also conduct Exchange Transactions for or on behalf of customers by making available a trading platform enabling such transactions.

The reader will have noticed that the definition of RCASPs is much broader than what we saw for Reporting Financial Institutions (FIs) under the CRS and US Foreign Account Tax Compliance Act (FATCA) regimes, and Service Providers covers individuals and entities that were not in scope of CRS. Examples of intermediaries in scope under CARF include crypto-exchange providers, brokers, dealers, and operators of Crypto-Asset ATMs.

These Service Providers will be required to annually report on Reportable Users an array of personal and financial information, similar to what is required for CRS and FATCA, however more enhanced.  

CARF deviates from CRS and FATCA when it comes to what is in scope and what values should be reported at year end. While under CRS and FATCA, the year-end balances represent a central aspect of the reporting, under the CARF Relevant Transactions (i.e., Exchange Transactions, Reportable Retail Payment Transactions and other Transfers of Relevant Crypto-Assets) are of interest. Specifically, RCASPs will be required to report as applicable the following:

  • Aggregate payments made and received (net of transaction fees)
  • Aggregate fair market value of acquisitions and disposals (net of transaction fees)
  • Wallet addresses where the Service Provider has effectuated a transfer of Crypto-Assets from its Reportable User to a user outside of its platform.

Further, if the proposal is adopted as it is drafted, reporting on Exchange Transactions will have to distinguish between Crypto-to-Crypto and Crypto-Asset-to-fiat transactions. RCASPs will also categorise transfers by transfer type (e.g., airdrops, income derived from staking or a loan), where they possess such knowledge. Additionally, there are specific rules related to aggregation and currency translation. This increased granularity required will pose a greater burden not just on new in-scope intermediaries but also on intermediaries that were already complying with CRS and FATCA rules.

We note that the public consultation document does not provide a relief from reporting based on a de-minimis threshold for transactions in scope.  However, the OECD asks for feedback from interested parties with respect to whether a de-minimis threshold for low-value Reportable Retail Payment Transactions would help to reduce compliance burdens and whether there are potential additional categories of Crypto-Assets that present a low risk from a tax compliance perspective, and thus should be excluded from the scope. This potentially opens the door for additional relief.

As it is the case for CRS, the information reported will then be exchanged annually with Partner Jurisdictions, which will be identified on a public list issued by each jurisdiction. The CARF contains rules to avoid duplicative reporting in case a RCASP has links to more than one jurisdiction.

To meet the reporting requirements, the document also outlines the due diligence procedures that RCASPs must follow to correctly identify Crypto-Asset Users and determine the relevant tax jurisdictions for reporting purposes. The OECD takes care, to the extent possible, to align the due diligence procedures with those of CRS, with which FIs are already familiar. It also builds on the self-certification process for identifying the Crypto-Asset Users. We note however that for preexisting and new individuals as well as entity accounts, the RCASP must obtain a self-certification (at the latest within 12 months for a preexisting account) and cannot rely on information on file, as was possible for preexisting accounts under CRS. If the intermediary is not able to obtain such self-certification, it must refuse to effectuate any Relevant Transactions on behalf of the Crypto-Asset User until such self-certification is obtained and its reasonableness confirmed.

Additionally, intermediaries should be mindful of the fact that the validity of information provided on the self-certification must be reconfirmed by the Crypto-Asset User or the Controlling Person at least once every 3 years.

Finally, for entities that are already obligated to comply with CRS in their role as FIs, it is worth noting that they will be captured under both CARF and CRS, as certain assets will qualify as Financial Assets under CRS and as Crypto Assets under CARF. The proposal foresees that where the disposal of a Financial Asset is reported under the new Crypto-Asset Reporting Framework, no gross proceeds reporting is required under the CRS.

Deloitte's View

This new OECD regime, although building on CRS and perhaps conveying a sense of déjà vu for some, is meant to be a stand-alone framework aiming to provide tax authorities with an instrument to enforce tax transparency on Crypto-Assets (fungible, and non-fungible tokens) and should involve a larger number of jurisdictions, with the US being a noteworthy potential participant. 

Below we discuss a few takeaways from the OECD proposal document:

  • FIs under CRS that offer crypto services should consider that an update of their processes, policies, and procedures is likely required, as the CRS definition of Financial Assets will be expanded to also include Crypto-Assets.
  • Reporting Crypto-Asset Service Providers include individuals and more types of entities than FIs that have reporting obligations under CRS and FATCA. Therefore, these new rules will be particularly onerous for those that were not previously affected by tax transparency regimes or were not subject to regulatory supervision. Such persons will need to establish processes and procedures and put controls in place to ensure that they can fulfil their new due diligence and reporting obligations.
  • The CARF also introduces “Merchant provisions”, expanding the scope to Reportable Retail Payment Transactions. This means that a RCASP must, in addition to the merchant, treat the merchant’s customers as Reportable Crypto-Asset Users when transactions are above a de-minimis threshold. This could add substantial complexity to the affected RCASPs’ obligations, as they will need to obtain documentation from and report the Merchant’s customer. It is unclear whether the RCASP will also need to monitor any changes in circumstances (e.g. change of tax residence) with respect to such Crypto Users and how this could be done. We note that a question relating to the Merchant provisions has been raised for public consultation and we expect that the challenges regarding this provision will be addressed by the industry participants.
  • CARF envisages to also include the US. If this happens, intermediaries in the US will need to comply with these new provisions in addition to the domestic reporting requirements mandated by the Infrastructure Bill recently passed by the House on 5 November 2021 requiring reporting on Form 1099 B or similar, or Form 8300 (starting in December 2023). Additionally, it is worth noting that on 28 March 2022, the US Treasury Department released revenue proposals and explanations in the fiscal year 2023 (“Green Book”), which include new reporting obligations for US FIs on their non-US account holders. The proposal aims to strengthen the reciprocal tax information exchange between the US and jurisdictions implementing FATCA and includes obligations for digital asset exchanges to report gross proceeds from digital asset sales effectuated on behalf of foreign customers (including Substantial Foreign Owners in case of Passive Non-Financial Entities). The proposed changes will effectively include digital asset transactions in scope of FATCA reporting. The amendments are proposed to be effective for returns required to be filed after 31 December 2023.
  • Lastly, the data collection requirement under CARF may raise data privacy concerns, especially for individuals and entities that were previously not materially impacted by GDPR. 

We believe that once the OECD document is final, jurisdictions will need approximately two to three years to translate the new framework into local law. Although, especially in the uncertain times we are living, this timeframe may seem far away, intermediaries should not find themselves unprepared and should already start thinking about what the CARF might mean for them and how they might be impacted.

The first step to this, as mentioned in our previous blog, is to comment on the proposal and raise any concerns and suggestions by 29 April 2022.

By: Brandi Caruso, Partner, and Atila Demiraj, Assistant Manager, Financial Services Tax

If you would like to discuss more on this topic, please do reach out to our key contacts below.

Key contacts

Brandi Caruso

Partner, Financial Services Tax & Legal

Karim Schubiger

Director, Financial Services Tax

Olvia Plousiou

Manager, Financial Services Tax

Atila Demiraj

Assistant Manager, Financial Services Tax