Regulating Crypto-Assets – Playing Catch-Up

Crypto-Assets have been around for over a decade and, as of March 2022, there were 18,142 crypto-currencies and 460 crypto-exchanges (World Economic Forum). However, its only recently that significant efforts have been made to update the existing regulations governing Crypto-Assets, indicating an evolution of the existing exchange of information regimes. Background The Common Reporting Standard (“CRS”) was published in 2014 by the Organisation for Economic Co-operation and Development (“OECD”) with an aim to improve transparency between cross-border financial investments through the exchange of information. It is seen as a critical tool in protecting the global tax systems integrity from tax evasion. Applying this existing regulatory framework to Crypto-Assets is challenging for many reasons. Firstly, the CRS applies to traditional financial assets and fiat currencies meaning that, in many instances, Crypto-Assets do not fall within the scope of the CRS. Even where Crypto-Assets may fall within the definition of ‘financial assets’, they can be owned either directly by individuals in cold wallets or via Crypto-Asset exchanges which do not have the same reporting requirements under the CRS. This is an issue because they are unlikely to report these transactions to tax authorities. It has been discussed in the Crypto-Asset Reporting Framework below that: “… Overall, the characteristics of the Crypto-Asset sector have reduced tax administrations’ visibility on tax-relevant activities carried out within the sector, increasing the difficulty of verifying whether associated tax liabilities are appropriately report and assessed”. Action from the OECD In response, the OECD has developed the “Crypto-Asset Reporting Framework” (“CARF”); a new global tax transparency framework for the automatic exchange of information on Crypto-Assets. CARF provides for the collection and exchange of relevant information between tax administrations, with respect to persons engaging in certain transactions in Crypto-Assets. The OECD produced a public consultation document regarding their proposed changes which can be found here. The rules and commentary of the CARF have been designed around four key building blocks:

1. The scope of Crypto-Assets to be covered;
2. The intermediaries subject to data collection and reporting requirements;
3. The transactions subject to reporting as well as the information to be reported in respect of such transaction; and
4. The due diligence procedure to identify Crypto-Asset users and the relevant tax jurisdictions for reporting purposes.

These are briefly discussed below.

1. The Scope of Crypto-Assets Covered

A Crypto-Asset is defined broadly in the CARF as “a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions”. This definition has included reference to ‘similar technology’ to ensure that it includes any new assets that emerge which are functionally similar to the Crypto-Assets. The aim of this definition is: “…to ensure that all assets are covered under the new tax reporting framework also fall within the scope of the FATF Recommendations, ensuring intermediaries’ due diligence can building on existing AML/KYC obligations.”

2. Intermediaries subject to Scope

In terms of intermediaries subject to data collection and reporting requirements, it has been proposed that it should include businesses providing 'exchange services', for or on behalf of customers. It is proposed that this definition would include brokers and dealers in Crypto-Assets.

3. Transactions that need Reporting

The following transactions would need to be reported under CARF:

1. Exchanges between Crypto-Assets and Fiat Currencies;
2. Exchanges between one or more forms of Crypto-Assets;
3. Reportable Retail Payment Transactions; and
4. Transfer of Crypto-Assets.

These transactions would need to be reported on an aggregate basis by the type of Crypto-Asset and would need to be distinguished as an outward or inward transaction. It has also been stated in the Public Consultation Document that “In order to enhance the usability of the data for tax administrations, the reporting on Exchange Transactions is to be distinguished between Crypto-to-Crypto and Crypto-Asset-to-fiat transactions…”.

4. Due diligence

Within CARF, there are due diligence procedures for Reporting Crypto-Asset Services Providers to identity Crypto-Asset users which includes locating the relevant tax jurisdictions for reporting. These due diligence requirements are thought to help determine the identity and tax residence of the individuals and entity Crypto-Asset users (and the natural persons of entity users). Conclusion Although the public comments on these proposals were required to be submitted by 29 April 2022, it remains to be seen when/if these proposals come in. Comments made on these proposals can be found here. How can PD Tax help? We can assist you in meeting your CRS reporting obligations by:

• Assessing the impact of CRS on your business and support you with meeting your CRS reporting obligations; and
• We can complete a 'health check' on your compliance with the requirements and advise on appropriate disclosures to tax authorities.

Disclaimer: This article is for general information only and is not intended to constitute individual advice. It is recommended that you seek independent tax advice before determining the tax due on any Crypto-Assets. Related Articles  https://www.stratostax.co.uk/insights/cryptoassets-hmrcs-nudge-campaign-directed-at-crypto-investors/ https://www.stratostax.co.uk/insights/computer-age-taxation-of-cryptocurrencies/