The market cap of crypto-assets was estimated – at the end of 2021
– close to $3 trillion, and 110 million crypto wallet holders are suspected globally[1]. According to the World Economic Forum, as of March 2022 there are 18,142 crypto-currencies and 460 exchanges. Cryptocurrency and blockchain are here to stay and as they continue to move up into mainstream, their economic significance is too big for the taxing authorities world-wide to ignore. Governments are hurrying to design new tax and reporting rules for crypto; also for Israel the involvement of its tax payers in virtual currencies has substantial significance, in more than one way.
Many regulating international organizations are eager to develop policies to control, regulate and tax the trading and ownership of crypto. And this time, again, it is the tax bureau of the OECD who are picking up the glove: the OECD has been preparing for over 2 years to table a proposal for the taxation on crypto and create reporting obligations for virtual transactions. So now, at the end of March, OECD tabled the first part of its plans, and its’ ambition is to have everything in place by the end of 2024.
The crypto’s speedy history
Only a year after Nakamoto’s 2009 paper on Bitcoin, the first pizza was bought with bitcoin in May 2010, followed by Bitcoin reaching parity with the US dollar already in February 2011. After the launch of Ethereum in 2015, after some critical hard forks in subsequent years, after the first decentralised autonomous organisation (“DAO”) saw daylight, after the 2017-2018 initial coin offerings’ boom, and after the 2019 creation of Libra, starting 2020 also institutional investors investment in virtual assets.
Tax authorities and regulators around the world have been thinking how to tackle the many aspects and challenges of digital currencies. In 2018, the Financial Conduct Authority’s taskforce issued it’s a report regarding crypto-assets followed by other reports from numerous organisations among which the European Central Bank, IMF, European Commission, FATF, the US Federal Reserve, and that of the US Financial Stability board landed this year, in February.
Policy makers are wrestling to figure out which are the right monetary policies, how to secure consumer and investor protection, safeguard market stability, stop money laundering, find suitable accounting rules, and, last but not least, force crypto trading in a tight corset of tax legislation and compliance. All of these should actually encourage the new ecosystem and the development of game-changing technologies in fact serves public interest; their take on matters is not per se hostile to crypto and they are aware that the technologies underlying the world of digital assets offer immense alternative applications, far beyond fin-tech alone.
Unlike conventional monetary means, today, crypto does not involve the intervention by traditional financial intermediaries nor a central administrator with visibility on crypto ownership or transactions. A recent research report by the EU claimed that €850 million[2] (US$985 million) in tax could have been collected, on Bitcoin dealings alone (the largest of the virtual currencies) in 2020, when national tax rules would have applied.
Global Tax Ambassador; the OECD
After the OECD’s BEPS tax plans put the dormant OECD organization back on the map in 2015, quire dramatically, it became the ‘legislator of the new international tax order’. So, also this time around OECD’s tax committee will act with the speed of lightening and turn draft crypto tax plans – meant for discussion – into reality in no time, probably also now without stopping a second to breathe or listen. The same happened with the BEPS reports. It is time to get prepared.
OECD’s obligatory standard for exchange of financial information by banks and financial institutions (the CRS), which was published in 2014, seeks to ensure transparency regarding cross-border financial investments to prevent tax evasion. However, crypto-assets are not under the reach of the current CRS rules. And even if they were, crypto can be owned by individuals in cold wallets or in crypto exchanges that are – today – not under any disclosure obligations.
In its’ original 2015 BEPS Action 1 Report, Taxing the Digital Economy, the OECD already mentioned governments wanting a slice from the global virtual currency trading.
In 2020 the G20 ordered that framework for the exchange of crypto information would be designed, driven by their concern that the invisibility of digital assets undermines global tax transparency. Digital assets such as cryptocurrencies, utility tokens and NFTs bypass traditional intermediaries, like banks and brokers, and conventional tax reporting mechanisms. Any reporting solutions would have to be integrated into the existing global exchange of financial information, the Common Reporting Standard (“CRS”). A report from the Accounting Office of the US government – based on statistics from the US tax authorities – shows that taxpayer compliance is above 95% when third party information reporting exists, while it is below 50% when no such rules exist.
After the OECD put together a first detailed inventory of taxation of crypto world wide, Taxing Virtual Currencies, in 2020, its think-tank set out to develop a plan to achieve crypto transparency and propose amendments to the CRS to bring new financial assets and crypto intermediaries under its reach. In the mean-while, the Biden administration already – in March this year – issued an executive order laying out U.S. efforts to regulate the crypto world and its intention to create a US central bank digital currency “CBDC”. OECD wants to prevent a chaos of regulatory policies across the globe by pulling all countries together in a unified framework.
So, in March this year, OECD released already its’ detailed proposal for a Crypto-Asset Reporting Framework (“CARF”) including a set of intended amendments to the global CRS, to embrace crypto. The proposals predict crypto exchange of information bringing ‘digital intermediaries’ under stringent and serious reporting obligations. And OECD wants everything in place by the end of 2024.
CARF
The OECD, EU and US all aim strap the reporting-net around the new generation of digital “middlemen” – digital assets service providers – including crypto exchanges, custodians and crypto wallet providers. Unlike institutions in the conventional financial sector, most digital asset service providers do not yet have systems or process required for the kind of compliance that will be demanded.
The CARF rules are connected to the concepts and due diligence requirements in the current CRS, and the anti-money laundering (AML) and countering financial terrorism (CFT) guidelines; digital currency service providers will have to run know-your-client (KYC) on their customers’, ensure clients are registered with the tax authorities, collect and exchange financial information, ensure data are stored in a compliant manner and classify corporate clients. These are all huge tasks that may require separate compliance departments and dedicated software. There are not a small burden for small intermediaries. Certain voices in the industry claim that still disclosure may not be guaranteed, because anyone with a good lap-top can access decentralized finance applications without a traditional custodian or broker allowing circumvention of the reporting rules by setting up an own Bitcoin node. The CARF is not exhaustively clear which crypto assets are in scope and does not detail which rules apply to decentralised finance (DeFi) and who would be the responsible persons for trading through smart contract transactions, such as a DAO, which have no intermediaries and are accessible by anyone with an internet connection.
Digital service providers may have to comply with OECD’s CRS, EU’s DAC-8 and the US’s FATCA reporting regulations, they will also have to demonstrate that their processes and controls are sufficient, and their directors will be personally responsible for ensuring compliance. In 2021 the Financial Action Task Force (FATF) already ruled that digital asset service providers must obtain a “license” and should be supervised.
The costs of IT solutions and other investments required for service providers will raise a very high barrier for new intermediary businesses wanting to enter the market; and this may actually frustrate market competition.
Tax and reporting of crypto within 2 years
The OECD’s draft of the CARF, predicts that reporting regulations such as the Common Reporting Standard (CRS), the eighth EU Directive on Administrative Cooperation (DAC-8) and the US’s Foreign Account Tax Compliance Act (FATCA) will soon apply to digital asset service providers, if OECD has it its way, by the end of 2024.
The OECD is now internalizing the responses to its plans from the public received at the end of April, and the basis thereof it will finalise the rules and its’ amendments to the CRS. The G20 are expecting that the OECD will report back with a final text by October 2022 at the occasion of the next G20 summit. And – as has been customary – the G20 will probably approve without much ado.
[1] https://www.statista.com/statistics/647374/worldwide-blockchain-wallet-users/
[2] Thiemann, A. (2021), Cryptocurrencies: An empirical View from a Tax Perspective, JRC Working Papers on Taxation and Structural Reforms No 12/2021, European Commission, Joint Research Centre, Seville, JRC126109.
