Tax authorities to target cross border crypto investors
Plans to introduce a crypto-asset reporting framework will see tax authorities exchanging investor details cross-border, explains Dion Seymour, crypto and digital assets technical director at Andersen LLP
On 10 October, the OCED announced that the technical text of the Crypto-Asset Reporting Framework (CARF) would be delivered to the G20. It is important to understand what the framework is and what it will do.
Broadly, CARF requires certain crypto stakeholders to collect information on taxpayers and report this to their local tax office. Readers may assume CARF will broadly follow CRS (Common Reporting Standard) and, as they are both tax transparency agreements, this is understandable.
However, as CRS was never meant to cover the new nature of cryptoassets like Bitcoin, it cannot be said that CARF and CRS are equivalent. The OECD therefore went back to the drawing board and created the framework that we have today from scratch with the assistance of member states
Governments are currently negotiating how many jurisdictions and to what extent they will embrace CARF. This essay is based on the technical content that has been made available to the public and the author’s knowledge after leading HMRC’s response to the creation of CARF in the past. As the implementation negotiations carry on, the reporting obligations could alter.
How will CARF work?
CARF will be an Automatic Exchange of Information (AEOI) agreement, meaning that there is no need for tax administrations to evidence risk or wrongdoing to gather and use this information.
Unlike CRS, the information will not be a year-end snapshot, but rather an aggregate of the transactions over the calendar year. This will require Reporting Crypto Asset Service Providers (RCASPs) to record their customers’ transactions in a way that they are unlikely to be doing now.
This may be a challenge, and depending on the timetable for implementation, which is still to be announced, may require significant IT projects in addition to the costs for providing this information.
The main reporting requirements of CARF will be for transactions where there are:
- 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.
However, CARF is a comprehensive framework, and its impact goes further than these points. It is not in the gift of this article to delve into all complexities of CARF, but some of the wider headline points are:
- RCASPs will have to provide details in what capacity cryptoassets have been received, for example through a loan, airdrop or a hard fork (where they have such knowledge);
- non-fungible tokens (NFTs) used for payment or investment purposes will be in scope. However, where the tokens are used in a ‘closed-loop’ system, these will not be in scope;
- where RCASPs have processed payments on behalf of a merchant, these will also need to be reported. However, this is only for high-value transactions (not your morning coffee);
- carveouts have been created for Central Bank Digital Currencies and certain stablecoins where these will be reported in CRS.
There is often a view that cryptoasset investors have not fully declared their gains, and this may be true. Just as CRS increased HMRC’s visibility of offshore bank accounts, CARF will undoubtedly do the same for cryptoassets.
Worryingly, HMRC’s research found that just over a quarter of those individuals that stated they owned cryptoassets had seen HMRC’s guidance and one in four had not seen any tax guidance.
This means that individuals may have fallen into some common misconceptions such as: crypto-to-crypto is not taxable (it is), a tax charge only occurs when money is taken out of the exchange (also incorrect) and using cryptoassets to purchase goods and services is not taxable (this is a disposal).
The world of crypto assets is becoming ever more visible. Will HMRC know about my crypto? Maybe not today and maybe not tomorrow, but soon, and for the rest of your life.
See also the HMRC Cryptoassets Manual.
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