Did you think you could circumvent tax obligations by investing in cryptocurrencies? The times are about to change.
Starting in 2027, tax authorities will have increased access to information concerning all cryptocurrency-related transactions. This announcement follows the adoption, on November 10, of the CARF (Crypto-Asset Reporting Framework) standard by 47 countries, including France and the United States. The OECD played a key role in initiating this standard, which aims to combat tax evasion and facilitate the exchange of information between countries.
At the same time, the European Union has also taken measures by adopting the DAC8 directive, which focuses its efforts on the European region. These developments mark a significant turning point in the regulation of cryptocurrencies, placing them at the center of global tax compliance concerns.
What is the CARF standard?
The Crypto-Asset Reporting Framework (commonly known as CARF) is a global initiative led by the OECD Global Forum on Transparency and Exchange of Information for Tax Purposes. It aims to promote the automatic exchange of information between countries to combat emerging tax evasion risks related to cryptocurrencies and digital assets.
The rules will require Crypto-Asset Service Providers (CASPs) to collect information about users, including individual tax residences and tax identification numbers, and transmit this information to their national tax authority. Tax authorities will then exchange this information with one another to facilitate tax compliance, assessment, and monitoring.
A little history of crypto
Following the widespread adoption of cryptocurrencies and blockchain technologies, concerns have been raised about their ability to facilitate illicit activities, particularly tax evasion. In a 2022 Impact Assessment, the European Commission stated that the lack of centralized control, pseudonymity, and the digitized nature of cryptocurrencies created increased tax evasion risks. However, industry participants have questioned the validity of these concerns.
The EU impact assessment report then estimated that 12 million accounts could be reportable within the EU, and 100 million accounts worldwide.
A 2022 article in The Washington Post highlighted similar issues in the United States, indicating that in 2014/2015, more than 5 million people traded cryptocurrencies, but fewer than 1,000 taxpayers reported gains on their tax returns.
In July 2023, the International Monetary Fund stated that "rough estimates suggest that a 20% tax on cryptocurrency capital gains would have raised approximately $100 billion worldwide in 2021, given the surge in prices." However, it noted that the market had since contracted, and under normal circumstances, taxes on crypto would likely be "less than $25 billion per year." A more detailed working paper prepared by the IMF stated that "the distinctive feature of crypto, resulting from its anonymity, is naturally perceived as a particularly low probability of detection and therefore as a particularly attractive means of evasion."
In August 2023, a letter sent by Elizabeth Warren, Bernie Sanders, Bob Casey Jr., and Richard Blumenthal to the United States Department of the Treasury and the Internal Revenue Service stated that the tax gap related to the non-disclosure of cryptocurrency transactions in the United States was $1.5 billion in 2024 and $28 billion over "the next 8 years." The U.S. Treasury had previously announced rules requiring cryptocurrency transfers to be reported because of the increased risks of tax evasion.
Response from the OECD Global Forum
At the beginning of 2022, the OECD published a consultation on a set of proposed rules called the Crypto-Asset Reporting Framework, seeking comments from industry participants.
On October 10, 2022, the OECD Global Forum published its final report[10], which sets out the new reporting requirements and amendments covering the reporting of crypto-assets and electronic money. The report also includes broader revisions to the existing Common Reporting Standard (CRS).
This report was subsequently adopted by the OECD in June 2023, and the CRS and CARF together form the International Standards for the Automatic Exchange of Information for Tax Purposes.
As of September 30, 2023, the OECD had not yet confirmed an adoption schedule for CARF, although the 27 EU member states will be required to adopt the rules starting January 1, 2026.
The end of untaxed crypto-assets
In conclusion, the idea that cryptocurrencies offer an impenetrable tax haven is taking a serious hit with the widespread adoption of standards such as CARF by 47 countries, including France and the United States, as well as the EU's DAC8 directive. Starting in 2027, these measures will lead to increased transparency, requiring well-known platforms such as Kraken and Binance to collect detailed tax information and automatically transmit transactions to the tax authorities of residents. Thus, using cryptocurrencies, especially on centralized platforms, no longer guarantees the much-sought-after tax anonymity.
Merritt Group
