The OECD's Crypto-Asset Reporting Framework

The OECD has published the final version of its Crypto-Asset Reporting Framework and 2023 update to the Common Reporting Standard (CRS) developed in response to a mandate from the G20. The Crypto-Asset Reporting Framework (CARF) was developed in the light of the rapid growth of the crypto-asset market and provides for the reporting of information on transactions in crypto-assets in a standardised manner, with a view to automatically exchanging such information with the jurisdictions of residence of taxpayers on an annual basis.

Background

The CRS consists of a global framework for reporting and automatically exchanging information relating to financial accounts and was adopted in 2014. In contrast, the recent growth in the use of crypto-assets has led to concerns that tax authorities do not have sufficient information relating to similar transactions that take place in crypto-assets which can be used for a wide range of investment and financial purposes. Unlike traditional financial products, crypto-assets can be transferred and held without the intervention of traditional financial intermediaries, such as banks, and without any central administrator having full visibility on either the transactions carried out or on crypto-asset holdings. The crypto-asset market has also given rise to new and unregulated intermediaries and service providers, such as crypto-asset exchanges and wallet providers.

The OECD was therefore mandated to develop a complementary compliance framework to address this issue. As a result, the CARF rules contain similar model rules and commentary to the CRS, which can be enacted in domestic legislation.

The CARF

In the same vein as the CRS, the CARF is intended to achieve transparency for transactions in crypto-assets by the annual, automatic exchange of crypto-asset transaction information among the participating jurisdictions whose tax residents hold or engage in crypto-asset transactions.

The CARF consists of Model rules and commentary which set out:

• the scope of crypto-assets to be covered;
• the entities and individuals subject to data collection and reporting requirements;
• the transactions subject to reporting, as well as the information to be reported in respect of such transactions; and
• the due diligence procedures to identify “crypto-asset users” and to determine the relevant tax jurisdictions for reporting and exchange purposes.

In addition, CARF also contains a Multilateral Competent Authority Agreement on automatic exchange of information pursuant to the CARF. The XML schema to support automatic exchange will be published separately.

For the purposes of the CARF, crypto-assets will cover any digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions, including stablecoins, derivatives issued in the form of a crypto-asset and certain non-fungible tokens (NFTs). The definition includes a reference to “similar technology” to ensure it can include new technological developments that emerge in the future and that operate in a functionally similar manner to crypto-assets and raise similar tax risks.

The definition of Relevant Crypto-Assets (i.e. crypto-assets that give rise to reporting obligations) excludes from reporting requirements certain categories of crypto-assets that pose limited tax compliance risks. In particular, crypto-assets which cannot be used for payment or investment purposes are excluded. In addition, Central Bank Digital Currency and Specified Electronic Money Products are also excluded as these are to be reported under the expanded CRS.

The obligation to report under CARF will apply to any entities or individuals that, as a business, provide services effectuating exchange transactions in crypto-assets for or on behalf of customers with a relevant nexus to the jurisdiction implementing the CARF. The definition would cover not only exchanges, but also other intermediaries and other service providers providing exchange services such as brokers and dealers in Relevant Crypto-Assets.

With respect to the reporting nexus, entities will be subject to the rules when they are (i) tax resident in, (ii) both incorporated in, or organised under the laws of, and have legal personality or are subject to tax reporting requirements in, (iii) managed from, (iv) having a regular place of business in, or (v) effectuating relevant transactions through a branch based in, a jurisdiction adopting the rules. The CARF also contains rules to avoid duplicating reporting obligations where an entity has nexus with more than one jurisdiction by creating a hierarchy of nexus rules.

The following three types of transactions are Relevant Transactions that are reportable under the CARF:

• exchanges between crypto-assets and fiat currencies;
• exchanges between one or more forms of crypto-assets; and
• transfers of crypto-assets (including Reportable Retail Payment Transactions where an intermediary processes payments on behalf of a merchant accepting crypto-assets in payment for goods or services exceeding €50000).

Transactions will be reported on an aggregate basis by type of crypto-asset. In order to enhance the usability of the data for tax administrations, the reporting on exchange transactions is to be distinguished between crypto-asset-to-crypto-asset and crypto-asset-to-fiat currency transactions. Reporting obligations will also categorise transfers by transfer type (e.g. airdrops, income derived from staking or a loan).

Since taxpayers’ holdings and transfers of crypto-assets outside the scope of reporting are also relevant to tax authorities, the CARF requires reporting of the number of units and the total value of transfers of crypto-assets effected by a reporting entity on behalf of a crypto-asset user to wallets not associated with a virtual asset service provider or a financial institution. In cases where this information gives rise to compliance concerns, tax administrations may then request more detailed information on the wallet addresses associated with a crypto-asset holder through existing exchange of information channels.

The CARF contains the due diligence procedures to be followed by reporting entities in identifying their crypto-asset users, determining the relevant tax jurisdictions for reporting purposes and collecting relevant information needed to comply with the reporting requirements under the CARF.

Amending the CRS

The amendments to the CRS will bring within its scope certain electronic money products and Central Bank Digital Currencies.
In addition, in the light of the CARF, changes will also be made to ensure that indirect investments in crypto-assets through derivatives and investment vehicles are covered by the CRS.

As well as these changes, the OECD is also taking the opportunity to introduce a set of further miscellaneous amendments with a view to improving the quality and usability of CRS reporting.

Implementation

The CARF model also contains a Multilateral Competent Authority Agreement (MCAA). The CARF MCAA provides for the automatic exchange of information collected under the CARF with jurisdiction(s) or residence of Crypto-Asset Users and is based on Article 6 of the Convention on
Mutual Administrative Assistance in Tax Matters. As an alternative to the CARF MCAA, jurisdictions can also establish automatic exchange relationships through bilateral competent authority agreements based on bilateral double tax treaties or tax information exchange agreements that permit the automatic exchange of information, or the Convention on Mutual Administrative Assistance in Tax Matters.

The EU Commission proposed the introduction of crypto-asset reporting rules in December 2022 as an amendment to the existing Directive on Administrative Co-operation (DAC8). In May 2023, the Economic and Financial Affairs Council reached agreement on a general approach to the rules, consistent with the OECD CARF, with a proposed date for introduction of January 2026. The legislative proposal requires unanimous support and is currently in the process of consideration by the EU Parliament.