The Crypto-Asset Reporting Framework

The rapidly growing use of crypto-assets for a range of investment and financial activities has reduced tax administrations’ visibility on tax-relevant activities and thus increased the difficulty of verifying whether tax liabilities are appropriately reported and assessed. As crypto-assets can be held and exchanged without the intervention of traditional financial intermediaries and without a central administrator having full visibility on transactions carried out, crypto-assets could remain out of the scope of existing international tax transparency initiatives (such as the Common Reporting Standard, or CRS).

At the request of the G20, the OECD has developed the CARF as a framework for the automatic exchange of information on crypto-assets. Under the CARF, crypto-asset service providers would have to:

  1. carry out due diligence procedures with the main purpose of identifying (existing and new) clients in accordance with specific rules; and
  2. report information with respect to all transactions (on an aggregated basis) involving crypto-assets to the local tax authorities, which would then exchange the information with the relevant foreign tax authorities.

Intermediaries in scope

The OECD proposes that those intermediaries that as a business provide services effectuating transactions in certain crypto-assets, for or on behalf of customers, would become subject to a reporting obligation under the CARF, as it is expected that such intermediaries have the best and most comprehensive access to the value of the transactions carried out with crypto-assets.

Given the broad definition chosen by the OECD, the aforementioned would cover not only (decentralised) exchanges, but also other intermediaries providing exchange services such as brokers and dealers in crypto-assets and operators of crypto-asset ATMs.

Scope of crypto-assets to be covered

The CARF covers crypto-assets that can be held and transferred in a decentralised 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). New asset classes that may emerge in the future that rely on similar technologies to crypto-assets are also brought under the scope of the CARF.

Two categories that pose limited tax compliance risks are excluded from the reporting obligation, being (i) crypto-assets that are intended to be redeemed against goods or services within a clearly defined, limited setting (so-called ‘closed-loop crypto-assets’) and (ii) digital fiat currencies issued by a central bank.

Reporting requirements for intermediaries

It is proposed that four types of transactions are reportable under the CARF: (i) exchanges between crypto-assets and fiat currencies, (ii) exchanges between one or more forms of crypto-assets, (iii) transfer of crypto-assets in consideration of goods or services and (iv) transfers of crypto-assets.

Transactions are to be reported on an aggregate basis categorised by type of crypto-asset, while making a distinction between crypto-to-crypto transactions and crypto-to-fiat transactions on the basis of their fair market value.

Next steps

The consultation document contains the draft CARF rules and commentary that can be transposed into domestic law to collect information from resident crypto-asset intermediaries. Once the work on the CARF rules and commentary is completed, a framework of bilateral or multilateral competent authority agreements or arrangements for the automatic exchange of information collected under the CARF is expected to be released, as well as technical solutions to support such exchange of information.

A public consultation meeting will be held at the end of May 2022. The OECD intends to finalise the (commentary to the) CARF on the basis of the input received via the consultation ahead of the G20’s October 2022 meeting.

Although a date per which the proposed CARF rules are expected to enter into effect has yet to be announced, it seems unlikely that any crypto-asset transactions will have to be reported under the CARF rules during the financial year 2022. However, it is conceivable that certain crypto-asset transactions carried out during the financial year 2023 would already be subject to the proposed CARF rules if enacted into domestic law.

We will keep you informed about further developments. With our extensive experience in the field of (fiscal) reporting obligations and crypto-asset transactions, we are perfectly equipped to assist in analysing the impact of the proposed CARF rules in relation to your business. Should you have any questions, please contact a member of our Tax Transparency Team or your trusted Loyens & Loeff adviser.

Although this publication has been compiled with great care, Loyens & Loeff N.V. and all other entities, partnerships, persons and practices trading under the name 'Loyens & Loeff', cannot accept any liability for the consequences of making use of this issue without their cooperation. The information provided is intended as general information and cannot be regarded as advice.