July 21, 2024

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On October 10, 2022, the Organisation for Economic Co-Operation and Development (OECD) released its new global tax reporting standards for cryptocurrency and other digital assets, the Crypto-Asset Reporting Framework (CARF) and Amendments to the Common Reporting Standard.[1] The CARF provides standards that, if adopted by jurisdictions, would require cryptocurrency exchanges, intermediaries, and other service providers to report to tax authorities required tax information related to certain crypto-asset transactions.

In response to the rapid use and adoption of cryptocurrency, the G-20 mandated the OECD develop a framework for the exchange of tax information for crypto-assets. According to the OECD, crypto-assets are often transferred without the use of traditional financial intermediaries and the CARF addresses coverage gaps in the Common Reporting Standard (CRS) to develop an international reporting framework to ensure standardized tax reporting for crypto-asset transactions.

The CARF includes model rules and commentary for countries to implement domestic laws to collect information related to crypto-asset transactions and is focused on four key areas: (1) the scope of crypto-assets to be covered, (2) the entities and individuals subject to reporting, (3) the transactions subject to reporting, and (4) due diligence procedures.

Earlier this year, the OECD released the CARF for public consultation and comments, and stakeholders throughout the cryptocurrency and digital asset industry submitted feedback.[2]

The OECD approved the CARF in August 2022, and the CARF will be presented at the October G-20 Finance Ministers and Central Bank Meeting in Washington, DC as part of the OECD Secretary-General’s Tax Report.

The CARF Requires Reporting for a Broad Scope of Crypto-Assets

Similar to the proposed CARF, the final CARF broadly defines a “Crypto-Asset” as “a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions.”[3] The proposed CARF contained exceptions for (i) closed-loop Crypto-Assets, which are intended to be redeemed against goods or services within a clearly defined, limited setting, and (ii) Central Bank Digital Currency (CBDC). The final CARF attempts to align reporting with the Financial Action Task Force (FATF) and the CRS by excluding (i) Crypto-Assets that cannot be used for payment or investment purposes (which include but are broader than closed-loop crypto-assets[4]), (ii) Specified Electronic Money Products that represent a single fiat currency (generally, stablecoins backed by fiat currency), and (iii) CBDC.[5]

Despite comments requesting non-fungible tokens (NFT) be excluded from the scope of the CARF, the final CARF does not provide a broad exemption for NFTs. The commentary to the final CARF notes that NFTs can be collectibles, but that does not prevent them from being used for payment or investment purposes and thus within the scope of the CARF.[6] The commentary further notes that NFTs that are traded on a marketplace can be used for payment or investment purposes and thus within the scope of the CARF.[7]

The CARF Subjects Exchanges, Brokers, Dealers, and ATMs to Reporting

Similar to the proposed CARF, the final CARF considers intermediaries and other service providers that effectuate exchange transactions for or on behalf of customers to be a Reporting Crypto-Asset Service Provider (RCASP) under the CARF.[8] The CARF states that this definition covers exchanges, brokers, and dealers of Relevant Crypto-Assets as well as operators of Relevant Crypto-Asset ATMs.[9]

Even with the attempts to align reporting requirements, the final CARF still subjects financial institutions to reporting under both the CARF and CRS, with additional information required under the CARF. The final CARF retained the option for financial institutions that are subject to both to turn off gross proceeds reporting under the CRS if it is reported under the CARF.[10] The final CARF also rejected recommendations for a simplified reporting requirement for small businesses or start-ups.

Like the proposed CARF, the commentary to the final CARF states an individual or entity that makes available a trading or decentralized finance (DeFi) platform is considered an RCASP and subject to reporting under the CARF if the individual or entity “exercises control or sufficient influence over the platform.” However, the final CARF narrowed the scope of control or influence to align with the 2012 FATF recommendations and other FATF guidance to allow it to comply with due diligence and reporting obligations.[11] Under the proposed CARF, this was just one way to exert control; an individual or entity could also exert control or influence by having the ability to develop or amend software or protocols governing the conditions under which transactions could be concluded on the platform.

The CARF Requires Reporting of a Broad Range of Transactions

Like the proposed CARF, the final CARF requires reporting and information sharing for:

  • Exchanges between Relevant Crypto-Assets and Fiat Currencies;
  • Exchanges between one or more forms of Relevant Crypto-Assets; and
  • Transfers, including Reportable Retail Payment Transactions, of Relevant Crypto-Assets.[12]

Although the CARF still requires reporting of a Retail Payment Transaction with respect to both the merchant and the retail customer, the final CARF includes a new de-minimis threshold to only require reporting for retail transactions that exceed $50,000.[13] Further, the final CARF requires reporting on the retail customer only if the RCASP is required to verify the customer under the domestic anti-money laundering (AML) rules.[14]

The final CARF also limits the transfer of wallet addresses. The proposed CARF would have allowed tax authorities to opt-in to receive reporting on the list of external wallet addresses to which an RCASP transfers Crypto-Assets for the user. The final CARF incorporates feedback from the cryptocurrency industry to eliminate the reporting requirement for wallet addresses and replace it with reporting on the “aggregate fair market value, as well as the aggregate number of units” transferred to non-RCASP wallets.[15]

In response to comments, the final CARF also provided some clarity on valuing Relevant Crypto-Assets. For example, if difficult-to-value Relevant Crypto-Assets are exchanged for Relevant Crypto-Assets that can be readily valued, the RCASP may rely on the value of the readily valued Crypto-Asset. In addition, if the RCASP does not maintain an applicable reference value, it may rely on (in order): (i) internal accounting book values; (ii) values provided by third-party companies or websites that are reasonable expected to provide a reliable indicator of value; (iii) the most recent valuation of the Relevant Crypto-Asset; or (iv) a reasonable estimate.

The CARF Imposes New Due Diligence Requirements on Intermediaries

Like the proposed CARF, the final CARF requires RCASPs to identify their users, determine their relevant tax jurisdictions for reporting information, and collect the required information.

To avoid duplication with other reporting regimes, the final CARF was modified from the proposed CARF to allow RCASPs that are also financial institutions to rely on their due diligence procedures under the CRS, Foreign Account Tax Compliance Act (FATCA), or other tax reporting standards for purposes of compliance with the CARF.[16]

The proposed CARF’s due-diligence procedures would also have required self-certifications of a Crypto-Asset User’s tax residence and taxpayer identification number (TIN) to be re-certified after 36 months. The final CARF removed this re-certification requirement.

Next Steps

In addition to the rules and commentary released by the OECD, the OECD is still working on an implementation package consisting of a framework of bilateral or multilateral competent authority agreements for the automatic exchange of information collected under the CARF and IT solutions to support the exchange of information.[17] In addition, the OECD stated that it intends to elaborate on the rules and administrative procedures that a jurisdiction must have in place to ensure effective implementation and compliance.[18]

 

[1] OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard, available at https://www.oecd.org/tax/exchange-of-tax-information/crypto-asset-reporting-framework-and-amendments-to-the-common-reporting-standard.pdf.

[2] OECD, Public Consultation Document: Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard (March 22- April 29, 2022), available at https://www.oecd.org/tax/exchange-of-tax-information/public-consultation-document-crypto-asset-reporting-framework-and-amendments-to-the-common-reporting-standard.pdf.; See also OECD, Public comments received on the Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard (Updated May 11, 2022) available at https://www.oecd.org/tax/exchange-of-tax-information/public-comments-received-on-the-crypto-asset-reporting-framework-and-amendments-to-the-common-reporting-standard.htm.

[3] OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 19, Section IV(A)(1).

[4] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 48, ¶12.

[5] OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 19, Section IV(A)(2)-(4).

[6] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 48, ¶12.

[7] Id.

[8] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 11, ¶16.

[9] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 12, ¶18.

[10] [10] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 13, ¶27.

[11] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 51, ¶27.

[12] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 12, ¶20

[13] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 20, Section IV(D)(2); see also OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 19, Section IV(C)(3).

[14] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 12-13, ¶24

[15] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 15, Section II(A)(3)(h).

[16] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 18, Section III(D)(1).

[17] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 7, 10, ¶8.

[18] See OECD, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard at 25, Section V.

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