The Crypto-Asset Reporting Framework On Oct. 10, 2022, the Organisation for Economic Co-operation and Development (OECD) published the final Crypto-Asset Reporting Framework (CARF) along with proposed amendments to the Common Reporting Standard (CRS). CARF was created by the OECD in conjunction with G20 countries as a global transparency framework that requires the automatic reporting and exchange of taxpayer information on crypto-asset transactions between jurisdictions for residents of their countries. If adopted, these changes will alter the reporting landscape for crypto-asset exchanges and brokers as well as anyone that engages in crypto transactions.
The OECD released a draft version of the CARF in March 2022 for public consultation in April 2022. (Refer to our prior alert here). Despite comments from the public that the rules were unduly burdensome, the OECD’s final revised framework does not grant substantial relief to individuals or entities that fall within the scope of the proposed changes. The OECD is expected to continue to develop guidance as the scope of transactions subject to reporting continues to evolve.
While commenters have consistently requested more time to implement the rules, an effective date has not yet been set, but with publication of final guidance, taxpayers with digital assets and intermediaries should consider CARF and the CRS amendments as notice that they should prepare now to be compliant. Delaying design and implementation of procedures and controls to address these rules may lead to significant compliance shortcomings or even penalties.
If approved by the G20, the CARF will facilitate tax information sharing on crypto transactions between the OECD’s member countries, including the U.S. The OECD has indicated that further guidance on the implementation of the CARF is forthcoming, along with a framework of bilateral and multilateral competent authority agreements and technical guidance and solutions for handling the reporting required under CARF. In the meantime, however, there are several key changes from the draft CARF framework and proposed amendments to CRS as published in March 2022 to the final version published in October 2022, including:
- Due Diligence - CRS will now allow financial institutions to meet due-diligence requirements using government verification services (GVS).
- Self-Certifications - The final CARF rules eliminate the requirement for crypto-asset users to confirm information on self-certification forms received from crypto-asset users within 36 months of the date the form is received. The final rules also permit service providers to rely on new account due diligence procedures performed for CRS purposes, and requires Reporting Crypto-Asset Service Providers (RCASPs) to stop effectuating transactions if:
- A pre-existing account holder has not provided a self-certification within 12 months
- A self-certification is not provided when a new account is opened; or
- An updated self-certification is not received within 90 days of a change in circumstances.
- Retail Payment Transactions - Under CARF’s final rules, RCASPs are only required to report retail payment transactions if the RCASP is required to verify the customer under domestic anti-money laundering laws. Also, reporting is limited to high value transactions with a de minimis threshold of $50,000. We anticipate additional guidance from the OECD on reportable retail payment transactions, including guidance on whether information on controlling persons is required to be collected for such transactions.
- Valuation - The final CARF provides guidance on hard-to-value assets. Under the rules, if a hard-to-value asset is exchanged for a crypto-asset that has a value, the RCASP can rely on the second value of new resulting property from the exchange instead of the former hard-to-value property.
- Non-fungible Tokens - The final guidance explicitly states that non-fungible tokens (NFTs) are subject to CARF. Commentary for the revised framework specifies that the term “Crypto-Asset” encompasses both fungible and non-fungible tokens and therefore includes NFTs representing rights to collectibles, games, works of art, physical property or financial documents that can be digitally traded or transferred. Account Details - Additional information related to crypto-assets will be reportable on future CRS reports including fields for whether the account is a preexisting account or a new account, whether a valid self-certification has been obtained, the type of financial account and the role of controlling persons.
- Coordinating Regimes - CRS now clarifies that compliance with the reporting and due diligence requirements of both regimes is required. However, reporting under CARF only will be permitted when the disposal of assets will result in duplicate reporting.
- Controlling Persons - Financial institutions can now rely on Anti-money laundering (AML) and Know Your Customer (KYC) procedures for pre-existing and new entity accounts when determining a controlling person if the procedures are substantially similar to the 2012 FATF recommendations.
New Definitions - There are also several important changes to definitions under the revised amendments to the CRS. Most notably, CRS has an expanded definition of financial assets and investment entities that is intended to ensure that derivatives referencing crypto-assets that are held in custodial accounts and investment entities are subject to CRS reporting requirements.
Wallet Addresses - The requirement to report wallet addresses under CARF is eliminated and replaced with aggregate value and aggregate number of units transferred to non-RCASP wallets.Implementation of CARF will ultimately be left to local jurisdictions. Interestingly, the US still has not adopted CRS and may not adopt CARF.
However, we await further guidance as additional complexities unfold.