Taxation: CARF standard, crypto-assets soon to be taxed in Europe!

Did you believe you could bypass tax obligations by investing in cryptocurrencies? Times are about to change.

Starting in 2027, tax authorities will have increased access to information regarding all cryptocurrency-related transactions. This announcement follows the adoption, last November 10th, of the Crypto-Asset Reporting Framework (CARF) standard by 47 countries, including France and the United States. The OECD played a key role in initiating this standard to combat tax evasion and facilitate information exchange among states.

Simultaneously, the European Union has also taken action by adopting Directive DAC8, focusing its efforts on the European region. These developments mark a significant turning point in cryptocurrency regulation, placing them at the forefront 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 automatic exchange of information among countries to address emerging risks of tax evasion related to cryptocurrencies and digital assets.

The rules will require Crypto-Asset Service Providers (CASP) 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 to facilitate tax compliance, assessment, and monitoring.

A bit of crypto history

Following the widespread adoption of cryptocurrencies and blockchain technologies, concerns were raised about their potential to facilitate illicit activities, including tax evasion. In a 2022 Impact Assessment, the European Commission stated that the decentralized nature, pseudo-anonymity, and digital nature of cryptocurrencies created increased risks of tax evasion. However, industry players 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 globally.

A 2022 article in The Washington Post highlighted similar issues in the United States, indicating that in 2014/2015, over 5 million people were trading cryptocurrencies, but fewer than 1,000 taxpayers reported gains on their income 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 about $100 billion globally in 2021, given the surge in prices.” However, they noted that the market had since contracted, and under normal circumstances, crypto taxes would likely be “less than $25 billion per year.” A more detailed working paper prepared by the IMF stated that “the distinctive feature of cryptos, resulting from their anonymity, is naturally perceived as a particularly low detection probability 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 U.S. Department of the Treasury and the Internal Revenue Service indicated that the tax gap related to non-disclosure of cryptocurrency transactions in the U.S. 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 due to increased risks of tax evasion.

Response from the OECD Global Forum

In early 2022, the OECD released a consultation on a proposed set of rules called the Crypto-Asset Reporting Framework, seeking feedback from industry stakeholders.

On October 10, 2022, the OECD Global Forum released its final report, outlining the new reporting requirements as well as modifications 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 then adopted by the OECD in June 2023, and the CRS and CDCA together form the International Standards for Automatic Exchange of Financial Account Information.

As of September 30, 2023, the OECD has not confirmed an adoption timeline for the CDCA, although EU’s 27 member states will be required to adopt the rules starting from January 1, 2026.

The end of untaxed crypto-assets

In conclusion, the idea that cryptocurrencies offer an impenetrable tax haven takes a serious hit with the widespread adoption of standards such as CARF by 47 countries, including France and the United States, as well as EU’s Directive DAC8. Starting in 2027, these measures will lead to increased transparency, compelling renowned platforms like Kraken or Binance to collect detailed tax information and automatically transmit transactions to residents’ tax authorities. Thus, the use of cryptocurrencies, especially on centralized platforms, no longer guarantees the sought-after tax anonymity.