The OECD recently published their framework designed to help tax authorities administer tax rules when taxpayers invest in Crypto-Assets outside their country of tax residence. The framework, the “Crypto-Asset Reporting Framework” (“CARF”), generally requires exchanges (and certain other businesses transacting with Crypto-Assets on behalf of customers) to report the following information to the tax authorities with jurisdiction over them:
- Identity of their customers,
- Trading activity, and
- Transfers to personal wallets.
Those tax authorities will then transmit this information to the tax authorities in the countries where the crypto investors are tax resident. For example, Australian tax authorities would transmit to the U.K. tax authorities information on a U.K. taxpayer trading crypto on an exchange in Australia. This treatment aligns with requirements for traditional financial assets, such as stocks and bonds, in similar cross – border investment / trading contexts. See the Common Reporting Standard (to which more than 100 countries subscribe) and FATCA.
CARF, as well as information reporting frameworks for digital assets under development in the United States and other countries (which are additional requirements to CARF), is a reaction to three phenomena: (1) Public reports that many local taxpayers may not be satisfying their tax obligations arising from crypto transactions; (2) A significant portion of the activity involving digital assets is cross-border in nature; and (3) Many taxpayers self custody their crypto or otherwise transact from personal wallets.
There are four main parts of CARF:
- Crypto-Assets 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 for such transactions; and
- The due diligence procedures to identify “Crypto-Asset Users” and “Controlling Persons,” while determining the relevant tax jurisdictions for reporting and information exchange.
Below is a short discussion of each part and thoughts on practical implications.
Crypto-Assets to be covered
CARF applies to “Relevant Crypto-Assets” (“Crypto-Assets”), defined as “a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions.” CARF excludes from the definition certain assets that “pose limited tax compliance risks,” including Central Bank Digital Currencies (CBDCs), “Specified Electronic Money” (“E-Money”), and digital assets that cannot be used for payment or investment purposes.
There is no per se exclusion for non-fungible tokens (NFTs). Similarly, there is no universal carveout for Crypto-Assets frequently referred as “stablecoins,” as they generally do not qualify as E-Money (except in limited circumstances).  Perhaps the price volatility of some stablecoins could be the reason for the absence of a universal carve out.
Entities and individuals subject to data collection and reporting requirements
It is easiest to consider this second part of CARF in two parts.
1. Entities & individuals subject to reporting
CARF imposes data collection and reporting requirements on “Reporting Crypto-Asset Service Providers” (“RCASPs”) with nexus to the jurisdiction implementing CARF. RCASPs are individuals or entities that, as a business, effectuate “Exchange Transactions” for or on behalf of customers. CARF identifies exchanges, brokers, dealers, and ATM operators as examples of such businesses.
Exchange Transactions are defined as (a) an exchange between Crypto-Assets and fiat currencies; and (b) an exchange between one or more forms of Crypto-Assets. Effectuating Exchange Transactions includes (i) acting as a counterparty or intermediary, and (ii) by making available a trading platform. A “trading platform” includes any software program or application that allows users to effectuate (either partially or in their entirety) Exchange Transactions.
There is no broad carve-out for the different types of decentralized exchanges that exist.
Exclusions from RCASP treatment
CARF addresses the types of decentralized exchanges that could be exempt from its reporting requirements. In particular, CARF states that a platform that “solely includes a bulletin board functionality” for posting buy, sell or conversion prices of Relevant Crypto-Assets would not be an RCASP. Similarly, an individual or Entity that “solely creates or sells software or an application” is not an RCASP, as long as it is not using such software or application for the provision of a service effectuating Exchange Transactions for or on behalf of customers. Statements in CARF indicate that this carve-out would not be met where a platform exercises control or sufficient influence over the platform (including maintaining an ongoing relationship) allowing it to comply with the due diligence and reporting obligations with respect to Exchange Transactions concluded on the platform. The Financial Action Task Force (FATF) guidelines would be relevant in determining whether this threshold is met. We also addressed this point in our blog on the U.S. Infrastructure Act.
CARF also carves out from RCASP status persons who carry out a service on a very infrequent basis for non-commercial reasons; do not have “customers”; are solely engaged in validating transactions to be recorded on a distributed ledger; or issue tokens in an initial coin offering.
An RCASP with taxable nexus to a jurisdiction implementing CARF will have reporting obligations. Taxable nexus can arise as a result of tax residency, place of formation, place of management, or place of business (including a branch).
2. Data subject to reporting
There are four types of transactions / transfers that are subject to reporting:
- Exchanges between Crypto-Assets and fiat currencies;
- Exchanges between one or more forms of Crypto-Assets;
- Certain Transfers (as defined) of Crypto-Assets; and
- Reportable Retail Payment Transactions (as defined) of Crypto-Assets.
The first two categories reflect the approach of some countries to tax exchanges of Crypto-Assets for fiat currency, but not to tax exchanges of Crypto-Assets for Crypto-Assets. Separately, CARF addresses whether a Crypto-Assets, such as bitcoin, that is adopted as legal tender in a country, achieves fiat currency status for purposes of another countries’ tax rules. In particular, CARF includes an “issued by” requirement in defining what is fiat currency, rather than focusing on what is legal tender. Thus, bitcoin would not be treated as fiat currency under CARF regardless of legal tender status in any country.
CARF defines a “Transfer” as the movement of a Crypto-Asset to or from an account the RCASP maintains for the Crypto-Asset User where the RCASP is unable to determine (a) that the movement is an Exchange Transaction, or (b) a transfer to another RCASP.
The original draft of CARF included a requirement that RCASPs report wallet addresses associated with Transfers. In response to industry comments, the OECD dropped the wallet address requirement. CARF now explicitly provides that wallet addresses associated with Transfers need not be reported. However, RCASPs are required to collect and retain any external wallet addresses (including other equivalent identifiers) associated with Transfers for a minimum of 5 years.  This is not dissimilar to the application of the Travel Rule in certain countries to transfers involving private wallets.
CARF also requires reporting on Reportable Retail Payment Transactions. These are defined as transfers of Relevant Crypto-Assets in exchange for goods or services for a value exceeding USD 50,000. Here, a merchant (or payment processor) is required to report on the customer of the retailer where it is required to verify the identity of the customer on the basis of domestic anti-money laundering rules. A payment processor affecting payments on behalf of a merchant must also report a Transfer to the retailer.
Transactions that fall below this USD 50,000 threshold may not be wholly exempt from CARF reporting. An example of this occurs where a payment processor handles payment of Crypto-Assets valued at less than USD 50,000 for a retailer. In such an instance, the payment processor would report the transaction as a Transfer of Crypto-Assets to the retailer, rather than to the underlying customer of the retailer (as is the case in transactions that exceed the USD 50,000 threshold). One question is whether a separate information reporting regime could apply to a retailer and a customer that are resident in the same country. Sales tax or VAT implications would also need to be considered.
What is reportable
CARF requires the reporting of identifying information for a taxpayer, as well as information relevant to the application of different countries’ tax regimes.
Concerning transactional data, raw inputs generally include aggregate (a) fair market value of amounts paid or received, and (b) aggregate number of units paid or received. These amounts need to be separated for each type of Crypto-Asset, as well as between Crypto- Asset / Crypto-Asset exchanges, Crypto-Asset / fiat exchanges, Transfers, and Reportable Retail Payments.
Where Transfers arise from transactions such as staking, lending, or airdrops, RCASPs should indicate that fact (when they are aware of it).
The OECD is working on an implementation package that will consist of (a) a framework of bilateral or multilateral competent authority agreements or arrangements for the automatic exchange of information collected under the CARF, (b) IT-solutions to support the exchange of information between tax authorities, and (c) a further elaboration of rules and administrative procedures to ensure effective implementation and compliance with the reporting and due diligence procedures. While referencing precedent from the Common Reporting Standard, some have referenced an 18-month target implementation date for countries. CARF then proposes an additional 12-month period from the effective date of the rules for RCASPs to obtain self – certifications of tax residence from their customers.
Given the quantum of cross-border flows involving Crypto-Assets, the frequency with which Crypto-Assets are self-custodied, and the likely existence of certain decentralized exchanges falling outside of RCASP status, there will be many instances where tax authorities do not have sufficient information to assess whether a taxpayer has met their tax reporting obligations.
That said, the levels of tax compliance will likely increase due to the information that governments will have about a taxpayer’s trading activities. Similarly, the frequency with which tax authorities engage with RCASPs and taxpayers will also likely increase given the expected desire of tax authorities to understand the differences between the information received under CARF and what is reported by some taxpayers on their tax returns.
CARF is another step in the continuing trend in tax and non-tax governmental action that requires customer identification and reporting by intermediaries. CARF is a multilateral framework as opposed to law. As such, countries will need to implement that framework, much like the Common Reporting Standard and FATCA required multilateral action. As countries consider rules, they may draw distinctions between rules that apply to transactions involving domestic taxpayers and those that address foreign tax residents. One can see this distinction in the United States, for example, based on the differences in the provisions of the U.S. Infrastructure Act and President Biden’s legislative proposals relating to digital assets.
The Bitcoin Whitepaper envisioned a peer-to-peer payment system. However, that is not the predominant nature of the crypto-ecosystem today. Intermediaries and other trading venues, both the centralized and decentralized dominate transaction volume globally. Time will tell whether the level of true decentralization and peer-to-peer transactions increase as a result of CARF, the Travel Rule, and other regulatory developments, and what government response that engenders. Regulations tend to evolve as markets do, albeit at a slower pace.
About the authors: Roger Brown is Chainalysis’ Global Head of Tax Strategy. Norman Hannawa is Chainalysis’ Director of Tax Strategy.
 In order to qualify as E-Money, the Crypto Asset has to be a) a digital representation of a single Fiat Currency; b) issued on receipt of funds for the purpose of making payment transactions; c) represented by a claim on the issuer denominated in the same Fiat Currency; d) accepted in payment by a natural or legal person other than the issuer; and e) by virtue of regulatory requirements to which the issuer is subject, redeemable at any time and at par value for the same Fiat Currency upon request of the holder of the product. Most “stablecoins” in their current form do not meet several of these conjunctive requirements.
 Interestingly, this is less than the statutes of limitations in different countries for understatements of tax (including where no intentional misconduct need be established).
 Generally, the information includes the name, jurisdiction of tax residence, tax identification number (if issued in the country of tax residence or required under the RCAPS’s domestic law), birthday and birthplace, Controlling Persons (interpreted consistently with FATF guidelines) of taxpayers that are entities. Due diligence procedures apply to self certifications that RCASPs receive from their customers.
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