On March 22, 2022, the Organization for Economic Cooperation and Development (OECD) released a public consultation document for the development of the Crypto-Asset Reporting Framework (CARF) and Amendments to the Common Reporting Standard (CRS). CARF is the OECD’s new global tax transparency framework which provides for the automatic exchange of tax information on transactions in crypto-assets in a standardized manner and is designed to ensure the collection and exchange of information on transactions in crypto-assets.
According to the OECD, CARF and the amendments to CRS are necessary because while CRS has improved international tax transparency, crypto-assets generally do not fall within the scope of the CRS. Further, in rare instances where some crypto-assets are in scope, reporting still may not be required as assets could be held directly by individuals through ‘cold wallets’ or crypto exchanges that do not currently have reporting obligations under CRS. (Refer to Blockchain and digital asset terminology). The OECD asserts through CARF that the crypto-asset market “poses a significant risk” to global tax transparency and that gains could be eroded without proper safeguards in place.
Framework purpose and rationale
The purpose of CARF is to present a new global tax transparency framework that provides for the automatic exchange of tax information on transactions in crypto assets. It also proposes a set of amendments to CRS, in order to bring new financial assets, products, and intermediaries in scope. Finally, it launches the OECD’s first comprehensive review of CRS since its adoption seven years ago, with the aim of further improving the operation of the CRS, based on the experience gained by governments and business.
The OECD indicated in the CARF draft that it intends to publish three blocks of guidance:
- Current draft rules and commentary that can be transposed into domestic law to collect information from resident crypto-asset intermediaries;
- The pending framework of bilateral or multilateral competent authority agreements or arrangements for the automatic exchange of information collected under the CARF with the jurisdiction(s) of residence of the crypto-asset Users, based on relevant tax treaties, tax information exchange agreements, or the Convention on Mutual Administrative Assistance in Tax Matters; and
- Pending technical solutions, which will also be published later to support the exchange of information.
Overview of rules and commentary
The CARF rules and commentary cover the following four key areas:
What’s in scope?
The scope includes assets created, held, or transferred using cryptographically secured distributed ledger technology or similar technology in a decentralized manner, without the intervention of traditional financial intermediaries. This includes stable coins, derivatives issued in the form of a crypto-asset, and certain non-fungible tokens (NFTs).
While most of the definitions in CARF mirror definitions set forth under the existing CRS regime, there is a notable difference in the definition of “depository institution” and “investment entity”. CARF expands the definition of a depository institution to include “an entity that holds specified electronic money products or central bank digital currencies for the benefit of customers”. The OECD proposes bringing digital money products, including coverage of derivatives referencing crypto-assets and investment entities investing in crypto-assets, in the scope of the existing CRS framework by broadening the definitions of Financial Account, Financial Institution, and Financial Asset to also include ‘Specified Electronic Money Products’, ‘Central Bank Digital Currencies’ and ‘Relevant Crypto Assets'. These new terms are consistent with the terms used in CARF and intend to capture a broad variety of digital assets. Likewise, it adds to the definition of an investment entity an entity whose gross income is primarily attributable to investing, reinvesting or trading in Financial Assets or Relevant Crypto-Assets”.
Who is subject to reporting and what is reportable?
Under CARF, intermediaries subject to reporting include intermediaries that provide services effectuating exchange transactions in relevant crypto-assets, for or on behalf of customers and would be considered Reporting Crypto-Asset Service Providers (RCSPs). It is important to note that this section includes not only exchanges but also other intermediaries providing exchange services such as brokers and dealers in crypto-Assets and operators of crypto-asset ATMs.
There are four types of relevant transactions that are reportable under the CARF:
- Exchanges between Crypto-Assets and Fiat Currencies;
- Exchanges between one or more forms of Crypto-Assets;
- Reportable Retail Payment Transactions; and
- Transfers of Crypto-Assets.
Unlike existing requirements under CRS, CARF requires RCSPs to provide more expansive information about each type of reportable crypto asset. For example, besides reporting the name and type of asset as well as acquisitions and disposals of relevant crypto assets against fiat currency, under the draft framework, RCSPs must also report retail payment transactions and the wallet addresses to which they have effectuated a transfer if the wallet is not associated with another RCSP, individual or entity that they know.
Also, interestingly, the rules will require that the full name of the type of crypto-asset is reported, rather than its ‘ticker’ or the abbreviated symbol that the RCSP uses to identify a specific type of relevant crypto-asset. Finally, while TINs must generally be reported under CARF, the framework contains exceptions that mirror those set forth in other reporting regimes, such as the Foreign Account Tax Compliance Act (FATCA) and US nonresident alien (NRA) reporting requirements. More specifically, TINs are not required if the user’s jurisdiction does not issue a TIN or if domestic law does not require the collection of a TIN.
How are digital assets valued?
The valuation of crypto assets under CARF will vary depending on the reporting category. The rules specify, for example, that in the case of crypto-to-fiat transactions, RCSPs must report the amount paid or received by the user net of transaction fees in the fiat currency in which they were paid or received. However, in instances where amounts are paid or received in multiple fiat currencies, they must be reported in a single currency, converted at the time of each transaction in a manner that is consistently applied by the RCSP.
For crypto-to-crypto transactions, reportable retail payment transactions, and other transfers, in light of the absence of known consideration, CARF only requires RCSPs to report the fair market value of the relevant crypto-assets acquired and disposed or transferred, net of transaction fees. The amounts must be determined and reported in a single currency, valued at the time of each relevant transaction in a manner that is consistently applied by the RCSP. The rules also allow jurisdictions to require reporting in a particular fiat currency, such as its local currency.
Due diligence procedures to identify Crypto-Asset users and the relevant tax jurisdictions for reporting purposes
CARF’s due diligence procedures build on the self-certification-based process of the CRS, as well as existing Anti-Money Laundering (AML) and Know-your-Customer (KYC) obligations enshrined in the 2012 Financial Action Task Force (FATF) Recommendations, including updates in June 2019 with respect to obligations applicable to virtual asset service providers. More specifically, CARF requires RCSPs to collect self-certification forms from users (including those with single or one-off transactions) and to review the forms for reasonableness based on information in its files (including information collected to comply with AML/KYC requirements). The amendments to CRS also allow Financial Institutions to meet due diligence requirements using Government Verification Services (GVS).
CARF also recognizes the concept of "pre-existing accounts", which was introduced under the FATCA regime to provide relief from certain requirements for accounts that existed before the rules were enacted. CARF provides some relief from due diligence requirements for customers and accounts that RCSPs have in place before CARF’s effective date, but CARF still requires RCSPs to obtain valid self-certifications within 12 months after a jurisdiction implements or adopts the rules. To the extent possible and appropriate, the due diligence procedures are consistent with the CRS due diligence rules to minimize burdens on RCSPs.
What does this mean for you?
While crypto has not historically been in scope for CRS, with the newly released plan of the OECD, it has become clear that many banks, exchanges and other financial market participants offering products or services in connection with digital assets could be significantly impacted by this new regime. RSM’s team of Digital Asset and FATCA and CRS reporting specialists in our International Tax Team can assist you with evaluating your structure, products, systems, and controls to identify and address any gaps that may exist in your ability to comply with the proposed rules under CARF and the amendments to CRS.
The comment period for CARF is open through April 29, 2022. RSM tax professionals are closely watching this space and will provide updates as they become available.
- OECD provides public consultation documents on new framework for digital asset reporting, including an amendment to CRS reporting.
- Scope of assets include assets held or transferred on a digital ledger (without the intervention of traditional financial intermediaries), including stable coins and NFTs, among other assets.
- Public commentary will be accepted for OECD framework until April 29, 2022.