On October 10, 2022, the Organisation for Economic Co-operation and Development (OECD) released a new tax reporting framework for crypto. The Crypto-Asset Reporting Framework (CARF) was created at the direction of the G20 because the “current scope of assets, as well as the scope of obliged entities, covered by the Common Reporting Standard (CRS) do not provide tax administrations with adequate visibility on when taxpayers engage in tax-relevant transactions in, or hold, relevant crypto assets.” 

Therefore, the CARF won’t mandate countries change how they tax crypto-assets. Instead, it’s aimed at boosting information sharing between government’s on user’s assets and transaction activity.  

In April, the OECD released a draft version of the CARF for public consultation. In the Chamber’s response, we provided five recommendations to improve the CARF and provide parity for crypto entities to those traditional entities under the CRS. Please see below for an update on our recommendations and if, or not, they were incorporated by the final version of the CARF. 

1. We recommend aligning the CARF’s reporting for digital assets with existing reporting requirements under the CRS. As currently drafted, the CARF would create an unlevel playing field between digital assets and traditional financial assets by requiring additional reporting for digital assets beyond the current CRS requirements, and beyond what is necessary to achieve tax transparency goals.
   
   • We also recommend limiting the scope of Relevant Crypto-Assets to more closely align with traditional financial assets that are covered by the CRS and eliminate assets that are difficult to value or have no investment value. We believe the easiest way to achieve this would be to limit the scope of Relevant Crypto-Assets to digital assets that are fungible and actively traded on an established market.
   • We recommend that the CARF limit the collection of on-chain wallet addresses. The CARF’s reporting of wallet addresses creates legitimate privacy concerns and is unnecessary since a wallet address is not the functional equivalent of a bank account. 
   • To the extent additional information is deemed necessary for digital assets, we recommend that digital assets that could otherwise fall within the definition of Financial Assets for CRS purposes (e.g., securities tokens, stablecoins, and derivatives) be reportable solely under CRS.
   • Similarly, we recommend that the anti-duplication rule proposed in the CRS amendments (i.e., where the disposal of Financial Assets is reported under CARF, no reporting is necessary under CRS) be reversed, so that reporting under CRS obviates the need to report under CARF.
   • We recommend the OECD further study nonfungible tokens (“NFTs”) before applying the CARF’s reporting requirements to them. NFTs are quickly evolving into use cases that go well beyond traditional financial or investment assets.

Unfortunately, the CARF does little to reduce the burden of reporting.  Financial institutions are still subject to both regimes, and the information required by the CARF is still much greater than the CRS.

However, the CARF adds two significant limitations for Reporting Crypto-Asset Service providers (RCASP) reporting of retail payment transactions consistent with the Chamber’s recommendations: (1) reporting on the customer is required only if the RCASP is required to verify the customer under domestic anti-money laundering laws; and (2) there is a substantial de minimis threshold of $50,000.

Moreover, the CARF eliminated the requirement to report wallet addresses consistent with our recommendations, replacing it with aggregate value and aggregate number of units transferred to non-RCASP wallets.

On NFTs, the CARF explicitly states that NFTs may be considered an investment and payment tool and are thus subject to the CARF. 

2. We recommend adopting an effective date that is at least 4 years after the approval of the relevant legislation to allow crypto-asset service providers (CASPs) sufficient time to implement the CARF. Most new reporting regimes have taken that long to implement, even for mature industries. 
   
   • The OECD should also consider phasing in the CARF for all intermediaries, along the lines of our recommendation for small businesses.

An effective date has not been agreed upon ahead of the G20 presentation and there was no mention of a phased-in approach.

3. We recommend establishing a simplified reporting regime for small businesses (i.e., businesses that are less than $10 million in gross receipts). For example, small businesses could begin by reporting their AML/KYC information to tax authorities in the first year and phase in the same information required by CRS.
   
   • Penalties should not be imposed for good faith compliance for at least the first five years of reporting. 

The Chamber’s recommendation for a simplified, “sandbox” reporting regime for smaller businesses or start-ups was not adopted.

4. We recommend that the OECD further study the potential application of the CARF to decentralized trading platforms prior to the publication of any special rules for such platforms, particularly as this area of technological innovation is in its nascent stages. Decentralized exchanges make up a small percentage of the overall cryptocurrency market and we do not believe that excluding decentralized exchanges from the scope of the CARF at this stage would lead to reduced tax transparency because the vast majority of known transactions take place with the involvement of a centralized exchange.

The CARF states that a “trading platform” includes any software program or application that allows users to effectuate (either partially or in their entirety) exchange transactions.” According to CARF, decentralized platforms will still be considered RCASPs if they exercise “control or sufficient influence.” The definition of “control or sufficient influence” is to be assessed in a manner consistent with the 2019 FATF recommendations  (Pg. 27, Paragraph 67). 

5. We recommend that the OECD encourage governments and tax authorities to consider a voluntary disclosure regime in order to reduce potential adverse consequences that may arise from the additional light that the CARF may shed on prior tax reporting practices

The OECD did not accept the Chamber’s recommendation for a voluntary disclosure regime. 

What’s next?  If approved by the G20, the CARF will facilitate tax information sharing on crypto transactions between the OECD’s 38 member countries, including the U.S.  However, it may be awhile before the new framework is put to action. G-20 countries may have additional suggestions to the OECD and it typically takes several years for implementation across jurisdictions to come to fruition. 

In the meantime, the Chamber of Digital Commerce will continue to offer support and resources to the OECD and the U.S. as they work through the CARF. Additionally, we will continue to offer suggestions to improve standards to ensure they offer parity and consistency for the crypto industry.