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New tax transparency framework for crypto-assets

31 March 2022

On 22 March 2022, the OECD began consulting on a new global tax transparency framework for reporting and exchanging information in relation to crypto-assets: its aim is to enhance the Common Reporting Standard (CRS) under which financial account information is automatically exchanged between countries.

Why is this happening?

Tax authorities around the world began automatic exchange of individuals’ financial account information in 2017. Most crypto-assets can be transferred and held without the involvement of traditional financial institutions that have to report under the CRS, and growth in the use of crypto-assets by individuals and some businesses since 2017 has been rapid. This means that tax authorities get little information about crypto-asset transactions or holdings – a growing part of the world economy.  

The G20 governments are concerned that crypto-assets might be used to undermine existing international tax transparency initiatives like CRS, thus facilitating tax evasion and other criminal activity. So the G20 has asked the OECD to develop a framework for automatic global information exchange for crypto-assets (including non-fungible tokens (NFTs)), to bring them within the CRS.

How would it work?

The proposed Crypto-Asset Reporting Framework (CARF) involves revenue authorities (e.g. HMRC) collecting data from resident crypto-asset intermediaries and exchanges that effect transactions for or on behalf of their customers. The data will provide details of the intermediaries’ customers (individuals and entities) and their aggregate investments and crypto-asset transactions. The data will then be exchanged between national tax administrations so that each administration will receive data about the crypto-assets of taxpayers resident in their country.

The proposals would make four types of transactions reportable under the CARF:

  • Exchanges between crypto-assets and national (fiat) currencies
  • Exchanges between one or more forms of crypto-assets
  • Retail payment transactions using crypto-assets
  • Transfers of crypto-assets.

The legal requirement to report would have to be legislated by each adopting country following the final template agreed by the OECD. The current proposals would allow countries to opt-in to create a further reporting requirement on the list of external wallet addresses to which Reporting Crypto-Asset Service Providers transfer Relevant crypto-assets for their users.

The end of crypto anonymity

The CARF proposals also aim to ensure that individuals and entities providing business services to exchange crypto-assets (for other crypto-assets or for national currencies) apply standard due-diligence procedures to:

  • Identify their customers (as well as the natural persons controlling certain Entity Crypto-Asset Users)
  • Determine their tax jurisdiction, and
  • Collect the information needed to enable them to comply with the CARF’s reporting requirements.

Updating the CRS

The proposals extend the CRS’s scope to cover electronic money products, Central Bank Digital Currencies and indirect investments in crypto-assets through investment entities and derivatives, thus enabling countries to automatically exchange crypto-asset trading information.

To help integrate CARF data into the CRS, the OCED is also proposing a number of amendments to its CRS model (eg to ensure there is no duplicated reporting). Newly proposed provisions also focus on updating the CRS to make the data more usable by tax administrations and limiting burdens on Financial Institutions. The changes are intended to ensure administrations have visibility of:

  • The type of controlling persons of the entity holding the account, to help tax authorities distinguish between ownership and control structures and the management team, as well as checking if taxable income or wealth should be allocated to the controlling person
  • Whether the account is new or pre-existing
  • Whether the account is a joint account (and how many joint holders there are)
  • All the countries in which an account holder is tax resident.

The CARF and CRS consultation closes on 29 April 2022 and the OCED plans to finalise the rules and guidance to countries on how to implement them, with a report on its progress scheduled for the G20’s meeting in October 2022. The likely timescale for implementation of the CARF and CRS changes is unclear at this point.

Impact on crypto-asset providers

The obligation to carry out due diligence would bring crypto-asset providers into line with mainstream financial service providers and impose significant administrative burdens – a major change to some established business models. Many who offer services exchanging crypto-assets and national (fiat) currencies may already be regulated in some form, but those that simply offer crypto-to-crypto exchange may need to start such compliance from scratch. Although we know many already undertake stringent due diligence on customers, will it be sufficient to meet the new requirements?

The wider requirement to report transactions will be a major exercise for all businesses in crypto-asset markets which will both increase their administrative overheads and compliance risks: the implementing legislation can be expected to include penalties for non-compliance. All businesses should track the development of the rules and begin assessing how they will need to update their systems to be able to comply.

What does this mean for crypto-asset holders?

The CRS is helpful for HMRC. It compares the information reported annually on taxpayers’ bank accounts and income to data from tax returns and other information held in HMRC’s Connect databank. Where discrepancies are identified, it can take action in a number of ways.

The CARF would give HMRC additional information on the crypto-asset transactions of taxpayers, and can be expected to lead to more compliance and enforcement activities in the future. For example, HMRC is likely to issue ‘nudge letters’ to prompt taxpayers to check to see if they need to correct their position for past years. In other cases, HMRC may open detailed investigations into taxpayers’ UK tax affairs (as in most cases taxpayers should declare worldwide income and gains in the UK). These can be both time-consuming and expensive, as HMRC can charge tax-geared penalties for careless or deliberate mistakes.

Any taxpayers who think they may need to correct errors or omissions in past years’ tax returns (in relation to cryptos or any other assets or income) should consider taking specialist advice on making an unprompted disclosure to HMRC to bring their tax affairs up to date before the new rules take effect. Making disclosures before HMRC starts any sort of compliance check usually results in lower penalties on top of the peace of mind of drawing a line under problematic historic issues.  

Read the OECD consultation

Read more on the UK tax treatment of crypto-assets