News and Insights

Understanding the First Global Crypto Tax Reporting Framework

What is the OECD’s Crypto-Asset Reporting Framework (CARF)?

By: Erin Fennimore

Head of Tax and Information Reporting

By: Amy Hatch

Tax SME Manager

Published on:

Key Takeaways:

  • The new OECD reporting framework aims at addressing the need for global tax transparency in the digital asset industry which has given rise to new intermediaries and service providers that have not historically been subject to tax reporting. 

  • CARF covers a wide range of digital assets, including cryptocurrency, stablecoins, tokenized financial instruments, and certain non-fungible tokens. 

  • Reporting will include customer-level activity for buying, selling, trading, and transferring (on and off platform) in-scope digital assets. Also, while reporting will be on an aggregate basis, transaction level tracking, with fair market value, will be required. 

  • Businesses will have enhanced due diligence requirements upon account opening, similar to those already required for CRS reporting which collect customer tax information via a Self-Certification. 

On October 10, 2022, “In light of the rapid development and growth of the Crypto-Asset market,” the Organization for Economic Co-operation and Development (OECD) published the final guidance for the Crypto-Asset Reporting Framework (CARF). In addition to CARF, the OECD has also issued a set of amendments to the Common Reporting Standards (CRS). This is a key milestone in the global pursuit of regulatory clarity for digital assets.

CARF and the changes to the CRS offer a framework specifically related to crypto transactions and the parties who facilitate them. CARF will be presented to G20 Finance Ministers and Central Bank Governors for discussion at their next meeting on 12-13 October in Washington D.C. 

Participating countries may implement CARF into domestic law, thereby authorizing them to collect relevant tax information. This will increase international consistency in tax reporting for digital assets, which in turn will bolster confidence in the sector. Regulatory clarity has been one of the primary concerns for enterprises interested in digital assets, and the CARF presents a viable path forward on a global scale.

The most glaring questions today include - what types of “crypto-assets” and transactions are covered, who will need to collect and report information, and how might CARF be applied.

What crypto-assets are covered by CARF?

CARF has a broad definition for relevant crypto-assets that would be covered by the new reporting requirements. The OECD defines a “crypto-asset” as “a digital representation of value that relies on a cryptographically secured distributed ledger or similar technology to validate and secure transactions.” The OECD explains that this definition is intended to capture all cryptographically secured digital assets such as stablecoins, derivatives issued in the form of crypto-assets, and certain non-fungible tokens. By including a reference to similar technology, the OECD intends to include new assets that may arise as the digital asset ecosystem evolves.

Assets not subject to reporting (the OECD carves three categories of crypto-assets that are exempted from the scope of CARF):

  1. Central Bank Digital Currencies: A Central Bank Digital Currency is any digital fiat currency issued by a central bank, and is specifically excluded because it’s included in the scope of the CRS

  2. Specified Electronic Money Products: Specified Electronic Money Product represents a single fiat currency and that is redeemable at any time in the same fiat currency, and is specifically excluded because it’s included in the scope of the CRS.

  3. Crypto-Assets which cannot be used for payment or investment purposes 

To assess whether a crypto asset cannot be used for payment or investment purposes, the CARF commentary specifically addresses the following three categories:

  1. “Closed-loop” Ecosystem: Assets that can only be exchanged or redeemed within a limited fixed network or environment cannot be used for payment or investment purposes. An example of a closed-loop asset would be a loyalty reward program, such as airline miles or rewards points redeemable only with the rewarding entity. This can also apply to digital music, games, books or other media, as well as tickets, software applications and online subscriptions, as long as the Crypto-Assets cannot be transferred or exchanged on a secondary market.

  2. Crypto-Assets that represent Financial Assets: Such assets are in-scope for CARF because they can be used for payment or investment purposes. Examples include tokenized equities, real-estate, and other asset-backed tokens.

  3. Non-Fungible Tokens (NFTs): The OECD determined that in many instances NFTs are marketed as collectibles, but this function does not prevent an NFT from being used for payment or investment purposes. NFTs should be evaluated on a case-by-case basis taking into consideration the nature of the NFT and its function in practice to determine whether they can be used for payment or investment purposes.

Who is going to be required to collect and report information under CARF?

Reporting Crypto-Asset Service Providers (CASP) are required to collect and report information under CARF. A CASP refers to any individual or Entity that, as a business, provides a service effectuating Exchange Transactions for or on behalf of customers (which for the purposes of this definition includes users of services of Reporting Crypto-Asset Service Providers), including by acting as a counterparty, or as an intermediary, to Exchange Transactions, or by making available a trading platform.”

Most DeFi protocols are likely in scope. With respect to decentralized exchanges or decentralized finance protocols, the commentary section of the CARF indicates that entities with influence or control, but not necessarily ownership, over decentralized exchanges or decentralized finance protocols would also fall within the definition of Crypto-Asset Service Providers and would be required to collect and report the required information.

NFT Marketplaces are likely in scope. CARF clarified that “NFTs that are traded on a marketplace can be used for payment or investment purposes and are therefore to be considered Relevant Crypto-Assets.” Therefore, an NFT marketplace should pay careful attention to whether or not they are considered a CASP with their platform and allowable user transactions. 

Finally, the proposal provides guidance on when a CASP is required to collect and report information. A provider (i.e. business)  will be required to collect and report if any of the following conditions are met:

  • The provider is a tax resident of an adopting jurisdiction

  • The provider is both incorporated in, or organized under the laws of, and have legal personality or tax reporting requirements within an adopting jurisdiction

  • Managed from an adopting jurisdiction

  • The provider has a regular place of business, including a branch, in an adopting jurisdiction.

What transactions are subject to CARF?

The OECD’s proposal outlines four types of transactions that would be subject to reporting.

  • Exchanges between relevant crypto-assets and fiat currency (Buys and Sells)

  • Exchanges between one or more types of relevant crypto-assets (Trades)

  • Reportable Retail Payment Transactions, but only where the value of the transaction  exceeds $50,000 USD (Payments)

  • Transfers of relevant crypto-assets (Transfers on or off-platform)

The first two categories are easy to understand as they are common activities seen on cryptocurrency exchanges. Information on buy, sells, and trades will be required to be tracked at the transactional-level in order to be able to report the required information accurately in the aggregate. This will require CASP’s to implement solutions that track asset pricing at the time of the transaction, report user’s aggregate acquisition obtainment value, and report the aggregate proceeds generated on the platform.

Under the third category, payment processors that facilitate crypto-based retail or merchant transactions exceeding $50,000 USD will be required to collect information and report on the transaction. Implementation of this reporting will require data collection at the point of sale by the payment processor in order to report on the customer. Under current US law, payment processors typically only report about transactions from the perspective of the merchant rather than the customer of the merchant. This appears to change that historical approach.

The fourth category requires the broadest reporting in that it requires CASPs to identify if a transfer off-platform is going to another CASP or a self-hosted wallet. Data must be collected and reported anytime crypto-assets are transferred to an external crypto-asset address that is not associated with another Reporting CASP. In some ways this rule overlaps with the FATF’s Travel Rule for digital assets. It also overlaps with the recent reporting legislation passed in the US that requires brokers to report to the IRS certain information about the transfer of digital assets to non-brokers. This type of transaction reporting is novel from a tax compliance standpoint because it expands reporting to non-taxable transactions. 

Certain crypto assets may be transferred to and held by taxpayers in “cold wallets” (a way to hold cryptocurrency offline), which are not associated with a CASP or other financial institution. In order to increase visibility on these types of transfers, the CARF will require reporting at the aggregate level for transfers by a CASP to a user’s cold wallet. 

What type of due diligence is required for customers?

The CARF imposes certain due diligence requirements for obtaining know-your-customer (KYC) information. These requirements are intended to ensure that reporting businesses have a user’s correct name and taxpayer identification number (TIN), and can identify the proper tax jurisdiction for that user. The due diligence process builds on the pre-existing self-certification process currently in place under CRS.

Who is going to adopt CARF?

It is yet unknown which countries will be officially adopting CARF. The EU is expected to publish DAC8 (which has been in the works for over a year) adopting CARF later this year. The OECD has stated that they will publish global peer reviews on CRS adoption in November, which will set the expectations for how tax authorities will enforce compliance with the new standards. For countries that do adopt the framework, CARF may be transposed into domestic law in order for participating countries to have the authority to collect information from resident crypto-asset intermediaries.  

It is unclear how CARF will impact the US, as the US has existing information reporting requirements, clarified further with respect to digital assets within the Infrastructure Investment and Jobs Act (IIJA) and Treasury is expected to issue detailed regulations on such reporting shortly.  The US has never adopted CRS because, prior to CRS, the US had implemented its own legal framework known as the Foreign Account Tax Compliance Act (FATCA) that largely mirrors the framework created by CRS. Notably, earlier this year President Biden issued legislative proposals directed at amending FATCA to address digital assets as part of his 2023 budget proposal to the US Congress.

What’s next

The current publication contains only the OECD rules and commentary on crypto-asset tax reporting. The OECD will publish revised versions of CARF (expected within the next year) to provide more detailed implementation information, including:

  • A framework of bilateral or multilateral treaty arrangements directed at the automatic exchange of information collected among adopting jurisdictions

  • Technical solutions to support the automatic exchange of information

  • Further elaboration of the requirements to ensure effective implementation of the CARF by Reporting Crypto-Asset Service Providers and participating jurisdictions.

Stay tuned for future updates as we continue to unpack the ever-evolving regulatory landscape for digital assets in the U.S. and abroad.

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