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Some of Europe's brightest legal minds look at the tax issues across Europe which could impact multinational businesses.

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Cryptoasset reporting: collecting data on the data economy

With cryptoassets hitting the news again recently, financial regulators and tax authorities are moving to place a tighter rein on the sector. In October 2023, the UK government confirmed its plans to regulate a much broader swathe of cryptoasset activities by folding them into the regulatory framework for financial services established by FSMA (my colleagues wrote about this here) and in November 2023, the UK was among 48 countries and jurisdictions who pledged to implement the OECD Crypto-Asset Reporting Framework (the CARF).

The CARF sets out rules and commentary around the automatic and standardised exchange of tax information on transactions in cryptoassets, and the reporting obligations that will underpin that exchange, which signatory jurisdictions can transpose into domestic law.  These are of course highly detailed but broadly the CARF:

  • identifies cryptoassets by reference to the use of cryptographically secured distributed ledger technology, but excludes from the scope of reporting three perceived low-risk categories:  cryptoassets that cannot be used for payment or investment purposes (this is fact-specific - the fact that an NFT is marketed as a collectible does not mean it cannot be used as payment; while exchanging tokens for specified goods within a closed-loop system such as a loyalty program might not constitute payment), digital fiat currencies issued by a central bank (Central Bank Digital Currencies), and cryptoassets that represent a single fiat currency and meet certain requirements, including as to redeemability (Specified Electronic Money Products),
  • provides that due diligence and reporting obligations will apply not only to cryptoasset exchanges but other intermediaries and service providers, in each case if they have sufficient nexus with an implementing jurisdiction (which is broader than just tax residence),
  • identifies three types of reportable transaction: exchanges between relevant cryptoasses and fiat currencies, exchanges between one or more forms of relevant cryptoassets, and transfers of relevant cryptoassets (including transfers outside the reporting framework and transfers to retailers accepting the cryptoassets as payment for goods or services),
  • requires service providers, among other things, to determine and report the fair market value of relevant cryptoassets, and sets out guidance for valuation, and
  • already identifies areas where evolution of technology will require more detailed supplementary rules or amendments, including retail and decentralised finance.

Alongside the CARF, proposed amendments to the Common Reporting Standard (CRS) would act to bring within the scope of the CRS new assets that may represent alternatives to traditional financial products, including Central Bank Digital Currencies and certain Specified Electronic Money Products (which would be outside the scope of the CARF), and to deal with overlap between the two regimes. Other amendments include disregarding residence tiebreaker rules and clarifying that where legal and beneficial ownership is split, both “bare owner” and “usufructuary” may be considered joint Account Holders or Controlling Persons for due diligence and reporting purposes.

A joint statement sets out the 48 signatory countries and jurisdictions’ intention to implement the CARF in time to commence exchanges by 2027 - work is ongoing to produce an “implementation package”, including a framework of bilateral or multilateral exchange agreements. But is this a case of shutting the stable door after the horse has bolted?

While it is undeniable that the initial surge has died off, with many of the more faddish bubbles having burst, estimates suggest that the crypto user base in the UK could still expand to roughly a third of the population by 2027, and it appears that this may be one area of focus for HMRC's compliance activity: HMRC recently launched a campaign encouraging taxpayers to make voluntary disclosures of unpaid tax on cryptoassets.

I, personally, hope that we're past the era of speculative frenzy and now start to see some more interesting use-cases coming to the fore.  Of course, then we'll need to work out how those are taxed - but that's a question for 2024.

This post was authored by Victoria Hine.

"To keep pace with the rapid development and growth of the crypto-asset market and to ensure that recent gains in global tax transparency will not be gradually eroded, we welcome [...] The widespread, consistent and timely implementation of the CARF"

Tags

cryptoassets, crs, carf, slaughterandmay