Overview
On March 22, 2022, the Organization for Economic Cooperation and Development (OECD) released the Crypto-Asset Reporting Framework (CARF) and Amendments to the Common Reporting Standard (CRS) (OECD Report), a public consultation document related to global tax reporting for cryptocurrency. The OECD Report’s framework, which would require cryptocurrency exchanges and other service providers to report certain cryptocurrency transactions, is open for public comment until April 29th.
The OECD Report proposes to modernize the tax transparency instruments available to tax administrations and capture cryptocurrency in the OECD's tax reporting requirements. The OECD Report describes the scope of the type of assets, intermediaries, and transactions that would be subject to reporting and the information collection requirements.
According to the OECD, the rapid use and adoption of cryptocurrency is posing challenges to global tax administration. As a result, the OECD released this public consultation document as it develops an international framework to provide for the collection and exchange of tax information related to crypto-asset transactions and exchanges.
A Broad Scope of Crypto-Assets Including Stablecoins and NFTs Would Be Subject to Reporting Under the Proposed CARF
The proposed CARF is a new standalone framework for the reporting and exchange of information on "crypto-assets." A "crypto-asset" is defined broadly in the OECD Report as "a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions."1 The OECD Report states that the proposed definition of crypto-asset targets assets that can be "held and transferred in a decentralized manner without the intervention of traditional financial intermediaries, including stablecoins, derivatives issued in the form of a crypto-asset and certain non-fungible tokens (NFTs). Further, the reference to "similar technology" within the definition likely ensures the reporting requirements will cover new assets that emerge in the future.
However, the OECD Report's proposed CARF would exclude closed loop crypto-assets and central bank digital currencies because these assets pose limited tax compliance risks and asks for comments on whether other assets should be excluded.2
The Proposed CARF Would Make Exchanges, Brokers, Dealers, and ATMs Subject to Reporting
Intermediaries that facilitate exchange transactions in crypto-assets as a business service or on behalf of customers would be subject to reporting under the proposed CARF.3 The CARF would not only cover exchanges, but would also cover "intermediaries providing exchange services such as brokers and dealers of crypto-assets and crypto-asset ATMs."4
In addition, individuals or entities that make available a decentralized trading platform would be subject to the CARF.5 For this purpose, an individual or entity is considered to make available a trading platform to the extent it exercises control or influence or has sufficient knowledge to allow it to comply with the due diligence and reporting obligations; for example, if the individual or entity is subject to AML/KYC regulations or has the ability to develop or amend the software or protocol governance.6
Four Types of Transactions Would Be Reported Under the Proposed CARF
The OECD Report's proposed CARF would require information on four types of transactions to be reported:7
- Exchanges between crypto-assets and fiat currencies
- Exchanges between one or more forms of crypto-assets
- Reportable retail payment transactions
- Other transfers of crypto-assetsWith respect to reportable retail payment transactions, the OECD Report would require crypto-asset service providers who process payments on behalf of a merchant accepting crypto-assets as payment for goods or services to also treat the customer of the merchant as its own customer and report the transaction on that basis.8
- The proposed framework would allow tax authorities to opt-in to receive reporting on the list of external wallet addresses to which the reporting crypto-asset service provider transfers crypto-assets for the user.
- The reporting required under the proposed CARF appears to go beyond what is currently required for financial institutions under the CRS, and implementing the necessary procedures to enable reporting on these transactions is likely to be resource-intensive for many crypto-asset service providers. "It could prove burdensome for a relatively new industry where many of the participants are start-up companies," said Lisa Zarlenga, a Steptoe tax partner who advises clients on crypto-related tax issues.
New Due Diligence Requirements Would Be Imposed on Intermediaries
Under OECD Report's proposed CARF, crypto-asset service providers would be required to identify their users, determine their relevant tax jurisdictions for reporting information, and collect the required information.9
The OECD Report's proposed framework states the due diligence reporting requirements are modeled on the current CRS due diligence rules as well as the existing AML/KYC obligations in the Financial Action Task Force (FATF) Recommendations.10
OECD Report Notes CRS Does Not Currently Cover Most Crypto-Assets
The CRS was established in 2014 to require member countries to obtain and exchange information from their financial institutions. The CRS lists the information to be exchanged, financial institutions required to report, the accounts and taxpayers covered, and the due diligence procedures. The United States does not participate in the CRS and instead relies on the Foreign Account Tax Compliance Act (FATCA). The CRS is modeled on FATCA but is considered broader in scope.
The OECD Report acknowledges that most crypto-assets are not currently included in the financial assets covered by the CRS. The OECD Report contains proposed amendments that would extend the current CRS to cover electronic money products and central bank digital currencies.11 The proposed amendments also include changes to the definitions of "financial asset" and "investment entity" in the CRS to ensure that derivatives that reference crypto-assets and are held in custodial accounts and investment entities investing in crypto-assets are covered by the CRS.12
The proposed amendments also make changes to the CRS to prevent duplicative reporting under the proposed CARF.13
President Biden's Fiscal Year 2023 Budget Proposes Additional Digital Asset Reporting for Both US and Non-US Owners
As the OECD seeks to expand reporting on cryptocurrency, President Biden has also proposed to modify FATCA requirements to include additional cryptocurrency reporting.
In this year’s Greenbook, President Biden proposed expanding on the current FATCA reporting requirements for financial institutions and digital asset brokers to facilitate the automatic exchange of information under tax treaties.14 The proposal, if adopted, and combined with existing law, would require a broker to report gross proceeds and such other information as the Secretary of the Treasury may require with respect to sales of digital assets for both US and non-US customers and, in the case of certain passive entities, information concerning their substantial foreign owners. This would allow the United States to share such information on an automatic basis with partner jurisdictions in order to reciprocally receive information on US taxpayers who, directly or through passive entities, engage in digital asset transactions outside the United States pursuant to an international automatic exchange of information framework.
Lisa Zarlenga said, "The CARF parallels in many respects the expanded broker reporting and cash reporting in the Infrastructure Investment and Jobs Act. But those rules only apply to US customers. With respect to foreign customers, the US collects less information than other countries do via CRS." "The Greenbook proposal would more closely align US law with CRS," she added, "but it will be interesting to see if the US goes further and adopts something similar to the CARF."
OECD's Plans Additional Steps for Completing the CARF and Reporting to the G20 in October
The OECD's proposed CARF consists of three "building blocks" to ensure the collection and exchange of cryptocurrency related information.15
- Rules and commentary that can be transposed into domestic law to collect information from resident Crypto-Asset intermediaries;
- A framework of bilateral or multilateral competent authority agreements or arrangements for the automatic exchange of information collected under the framework with jurisdiction(s) of residence of the Crypto-Asset Users, based on relevant tax treaties, tax information exchange agreements, or the Convention on Mutual Administrative Assistance in Tax Matters, and
- Technical solutions to support the exchange of information.The OECD will hold a public consultation meeting at the end of May 2022. Based on the input received, the OECD plans to report on the amended rules during the G20 Summit in Indonesia in October 2022.
- The public consultation document released in March only contains the first building block related to the rules and commentary. Once complete, the OECD will develop the second and third building blocks.16
Endnotes
1 OECD, Public Consultation Document: Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard (March 22- April 29, 2022) at 15, 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.
2 Id. at 6.
3 Id.
4 Id.
5 Id. at 43.
6 Id. at 44.
7 Id. at 6.
8 Id. at 7.
9 Id. at 7.
10 Id.
11 Id. at 55.
12 Id.
13 Id.
14 U.S Department of the Treasury, General Explanations of the Administration’s Fiscal Year 2023 Revenue Proposals at 97-99 (March 2022) available at https://home.treasury.gov/system/files/131/General-Explanations-FY2023.pdf.
[15] OECD, Public Consultation Document: Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard (March 22- April 29, 2022) at 5.
16 Id.
