The Crypto-asset reporting framework (CARF) is a newly set up framework by the Organisation for Economic Co-operation and Development (OECD). Its aim is to harmonise the global approach towards crypto reporting and bring about an automated process for information sharing relating to crypto transactions between countries. The framework aims to combat tax fraud, evasion and avoidance.
Many are interested to know if the CARF has transaction reporting obligations? In short, yes, there are requirements to report crypto and digital asset transactions. However, this is required under a separate regime to what is required under the global trade reporting regimes.
Summary
The CARF requires crypto-asset service providers to obtain certain tax related information from users and report to their relevant tax authority who in turn, will also share such information with other global tax authorities to achieve tax compliance amongst those who hold crypto (Reporting CASPs).
The CARF has provisions that deal with the reporting of crypto-assets, a new threshold for retail transactions, reporting requirements of Reporting CASPs, valuation guidance and privacy in relation to holding of crypto and digital-assets. In terms of the crypto-assets reportable, these include derivatives that are issued in the form of crypto-assets such as bitcoin futures. However, TRAction is of the view that crypto contracts for difference (CFD), i.e. derivatives where the underlier is a crypto-asset, do not fit the criteria for reportability.
There is no implementation date for CARF as this is dependent on each country that is signatory to the CARF and when it transposes the CARF provisions into its own domestic laws. There have been a significant number of nations who have recently become signatory to the CARF framework.
At the front of the line is the EU with its approach towards implementation. The EU has adopted the CARF via amendments to its taxation regulations. The amendments will align with Markets in Crypto-assets Regulation (MiCA) and be known as DAC8 (detailed below). The US’ adoption of CARF is unclear at this stage. The UK signed the November 2023 Joint Statement showing intent to deliver the CARF in time for exchanges in 2027.
What is CARF?
CARF intends to encourage automatic exchange of information between nations in combatting emerging risks such as tax evasion from transactions in cryptocurrency and digital assets. It is a global initiative which has been led by the OECD’s Global Forum on Transparency and Exchange of Information for Tax Purposes.
CARF requires Reporting CASPs to obtain certain information from users e.g. tax residences and identification numbers. Such information will then be reported by the Reporting CASP to their own domestic tax authority, who will then pass on that information amongst other tax authorities to assist in tax compliance and monitoring on a global scale.
Main CARF Highlights
- Frequency of reporting and where/to whom do you report to?
- Frequency – For each relevant calendar year or other appropriate reporting period.
- Where/to whom – Participating jurisdictions’ relevant competent authorities i.e. taxation body or administration.
- Reporting of crypto-assets – the CARF defines crypto-asset as a ‘digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions’. This includes Ether, Bitcoin and is also intended to reach stable coins, derivatives issued in the form of crypto-assets and some non-fungible tokens (NFTs). ‘Digital representation of value’ is discussed below.
- Derivatives issued in the form of crypto-assets are regulated under CARF: The CARF provisions further explain that from the definition of a crypto-asset, ‘a “digital representation of value” means that a Crypto-Asset must represent a right to value, and that the ownership of, or right to, such value can be traded or transferred to other individuals or Entities in a digital manner’. This is the part that clarifies that derivatives with crypto-assets as the underlier will also be in scope of the CARF. For example, a crypto-asset includes a cryptographic token representing a claim or right against another, right to property or other absolute or relative rights if it is able to be digitally exchanged for either a fiat currency or other crypto-asset. This includes security tokens or derivative contracts or a right to buy/sell an asset, including a financial asset and a crypto-asset, with a fixed date, price or other economic term. Clearly there are some derivatives that are in-scope (e.g. bitcoin futures or perpetual futures) however, TRAction’s interpretation is that CFDs where the underlier is a crypto-asset would not fit the criteria to be in-scope for CARF reporting. We recommend you seek your own legal advice in determining if your derivatives are subject to CARF.
- New de minimis threshold – USD50,000 for retail transaction reporting and such reporting is only necessary if the reporting entity, under AML regulations, has to perform customer verification.
- Reporting CASPs have to report – a Reporting CASP is an entity or individual who “provides a service effectuating exchange transactions [described above] for or on behalf of customers, including by acting as a counterparty, or as an intermediary, to exchange transactions, or by making available a trading platform.” Exchanges, brokers, crypto-asset dealers, crypto-asset ATMs operators also fall into this definition. A decentralised finance (DeFi) exchange or protocol is caught under the definition of Reporting CASP if such a party uses control or has sufficient influence over the platform.
- Guidance on valuation – of hard-to-value assets.
- Privacy – Tax authorities are to be given information relating to the fair market value of the assets and unit quantity that have been transferred to other wallets. (Previously, it was considered that tax authorities received actual wallet addresses as part of data collection but this resulted in industry outcry and therefore was not incorporated in the final rules.)
- Implementation Date: No date is actually provided under CARF. It simply requires that a relevant jurisdiction (that will be signatory to the CARF) is to have in place rules and administrative procedures to allow for effective implementation and compliance with the reporting and due diligence procedures under CARF.
Structure of CARF
CARF consists of 3 components:
- Rules and associated Commentary – these can be transposed into domestic law for the collection of information from Reporting CASPs with a relevant nexus to the jurisdiction implementing the CARF. The rules deal with the below areas:
- crypto-assets in scope;
- entities and individuals in scope for data collection and reporting rules;
- transactions in scope, including specific information to be reported for such transaction for example:
– exchanges between crypto-assets and fiat currencies;
– exchanges between 1 or more crypto-assets; and
– Transfers of crypto-assets; and - due diligence procedures identifying Crypto-Asset Users and ‘controlling persons’ and to work out the relevant tax jurisdictions for reporting and exchange purposes.
- Documentation for execution and implementation – These are done through a Multilateral Competent Authority Agreement (incorporating the CARF) or alternatively, bilateral agreements or bilateral treaties between countries via their competent authorities; and
- an XML schema – for competent authorities to use to exchange information and for Reporting CASPs to use to report CARF information to taxation bodies.
History of the Global Development of Reporting of Cryptos and Digital Assets
Given the increasing popularity of cryptocurrency and blockchain, there has been a universal concern that such transactions could facilitate illicit activity – tax evasion being one of the concerns. In 2022, the European Commission confirmed in an Impact Statement, they were of this view due to the centralised mode, pseudo-anonymity and digitalised nature of crypto. The impact statement estimated in the EU, there may have been 12 million accounts reportable and 100 million accounts on a global level. In 2022, in the US, similarly, there were also estimates according to The Washington Post of less than 1000 taxpayers including their crypto gains in their tax returns for the 2014-2015 year, even though over 5 million people were trading crypto. The IMF, in 2023, also similarly agreed on crypto being appealing in terms of tax evasion.
In early 2022, the OECD published a consultation for the CARF and then a final report on 10 October 2022, setting out the reporting requirements dealing with the reporting of crypto-assets and e-money including updates to the existing common reporting standard (CRS). Note that in response to the consultation, CARF had certain provisions revised as it was criticized for being too broad eg. the ‘covered assets’ definition, how decentralized finance (DeFi) platforms would be treated and who would need to do reporting under CARF.
Both the CRS and CARF work in conjunction and form the International Standards for Automatic Exchange of Information on Tax Matters. The final report was adopted in June 2023 by the OECD but has not yet confirmed the implementation timeline for CARF despite the EU confirming it would adopt the rules starting from 1 January 2026 via the amendment to the Directive on Administrative Co-operation in the field of Taxation (2011/16).
As of 17 January 2025, 49 jurisdictions have signed up to CARF and 52 jurisdictions have signed up to CRS.
EU & US Position on CARF
As mentioned above EU Rules, align with MiCA or in other words the newly proposed ‘DAC8’. The DAC8 Proposal will cover crypto-asset service providers regulated under MiCA and also those that are unregulated. DAC8 will also cover reporting of information of crypto-asset operators in addition to Reporting CASPs.
Note that the US does not participate in the CRS as it relies on its own FATCA regime (which unilaterally collects data). As of 1 January 2025, however, the US Treasury’s and the IRS’ published rules for the US’s own tax reporting of crypto has already taken effect. These rules suggest that the US can participate in CARF and so it is not yet confirmed which path the US Will take.
DAC8 Proposal
The DAC8 Proposal covers the reporting and exchange of information on crypto-assets directly relating to taxation. It aims to assist EU Member States to detect and counter tax fraud, evasion and avoidance given the below:
- All Reporting CASPS are required to report crypto-transactions of clients living in the EU – despite the size or location of the Reporting CASPs.
- The proposal is for both domestic and cross-border transactions and NFTs in some instances.
- Financial institutions are required to report on central bank digital currencies (CBDCs) and e-money. Note that in comparison, this is excluded from CARF but in scope of the CRS.
- The automatic exchange of advance cross-border rulings for high net-worth individuals will be extended in scope to persons that have a minimum of 1 million euros in financial or investable wealth, or in assets under management (excluding their main residence).
- Minimum level of penalties are to be established for extremely serious non-compliant conduct e.g. a complete disregard for reporting even.
Note the DAC8 will be constructed so that the scope of the rules are global and that EU service providers will not be able to deviate from the requirements to report for example, by leaving the EU.
What next?
Consider the following:
- if your jurisdiction has signed up to CARF and CRS.
- if your firm or clients trade crypto or digital-assets and which regime they would be subject to.
- If yes to the above questions, whether you are familiar with the provisions of CARF, CRS and MiCA/DAC8. Do you need updates to your compliance procedures, infrastructure, resourcing etc. and if the firm is adequately equipped to deal with such regulatory impact.
How can TRAction assist?
If you need assistance reporting your crypto and digital assets trading or not sure if these regulations impact your firm and your trade reporting, please get in touch with us.
