Information reporting on cryptocurrency transactions
On January 1, 2016, the European Union adopted Common Reporting Standards (“CRS”) to provide centralized exchange information reporting with tax authorities to help avoid tax evasion. The idea stems from the U.S. Foreign Account Tax Compliance Act (“FATCA”), which requires non-U.S. foreign financial institutions to search their records and report on assets and identities of such persons to the U.S. Department of Treasury. The first reporting under CRS occurred in 2017, with the majority of countries beginning reporting in 2018. The Organisation for Economic Cooperation and Development (OECD) is in the process of clarifying regulations regarding CRS reporting for cryptocurrency transactions. This article will explain: 1) the history behind CRS and its relation to FATCA; and 2) the information that is subject to CRS reporting and how it relates to cryptocurrency exchanges.
U.S. brokers have strict information reporting requirements to ensure that taxpayers are properly complying with their tax reporting obligations. U.S. exchanges are required to report to the IRS on the financial activity occurring on their platforms. Reporting is frequently done through 1099’s and these include: 1099-B’s for capital asset dispositions; 1099-INT’s for interest payments; 1099-DIV’s for dividends; 1099-MISC for payments; and 1099-K’s for goods and service providers selling on third party platform such as Etsy and Ebay sellers. U.S. companies are required to comply with information reporting requirements through issuing 1099’s to the IRS and the user.
In 2010, the U.S. passed FATCA to obtain greater tax reporting on individuals trading through non-U.S. financial institutions. The purpose of FATCA is to detect U.S. resident taxpayers who are evading taxes by trading through a foreign broker. The IRS will cross-check what was self-reported by the taxpayer to what the broker reported through FATCA. If the taxpayer’s tax return fails to include the foreign transactions reported by the broker then the taxpayer may face fines and penalties.
The regulatory framework for FATCA obtained mainstream adoption and led to the formation of CRS to share taxpayer information amongst all member countries, rather than FATCA that only pertains to foreign exchanges reporting on U.S. traders. The OECD developed the framework for CRS reporting in 2014 and the first reporting under CRS began in 2017.
All European Union countries, China, India, Hong Kong, Russia and 109 countries have agreed to become signatories to CRS reporting. This new regulatory framework will drastically reduce tax evasion through offshore accounts.
CRS provides a framework and standards for countries to gather and exchange information with respect to foreign financial accounts. The purpose is to increase global tax transparency and efficient tax administration.
It is anticipated that CRS regulations will apply to virtual asset service providers (i.e. exchanges; wallets facilitating trades; and other brokers) in the same manner that CRS applies to other foreign financial accounts. Accordingly, exchanges likely will be required to submit information regarding: personal identifying information; year-end account balances; income; gross proceeds; and transactional level reporting upon request.
With further CRS guidance sure to come, it is imperative that cryptocurrency exchanges comply with their obligations in collecting taxpayer identification numbers, names, and addresses prior to trading on the platform.
The OECD has taken interest in applying existing CRS requirements to virtual assets. Formal meetings are currently underway with regulations expected to come later this year. It is anticipated that existing requirements relating to foreign financial institutions will apply to virtual asset service providers. It is important for virtual asset brokers to perform adequate due diligence on their users in order to be ready to comply with new foreign reporting regulations. Furthermore, it is important for taxpayers to self report their cryptocurrency taxes in order to avoid discrepancies between their personal tax returns and the information reported by an exchange.