OECD Releases New Global Tax Reporting Framework for Crypto Assets

OECD Cypto Reporting Update Overview

On the 10th of October, the Organization for Economic Co-operation and Development (OECD) published updated rules for the Crypto Asset Reporting Framework (CARF). The updated OECD crypto framework includes changes to the original public consultation document published in March 2022. The updates address issues raised by various jurisdictions and industry participants including financial institutions and service providers.

Jurisdictions must now put in place rules and administrative procedures to ensure effective implementation of, and compliance with, the CARF reporting and due diligence procedures. 

Updates have been made to align CARF with existing due diligence and Automatic Exchange of Information (AEoI) rules. Below I have provided some background behind the updated OECD framework and CRS regulations and outlined the due diligence and reporting requirements.

Crypto-Asset Reporting Framework and Common Reporting Standard Background  

The Common Reporting Standard (CRS), a global standard for the automatic exchange of financial account information was first introduced by the OECD in 2014.

Under the CRS regulation financial institutions in participating countries (referred to as participating jurisdictions) are obligated to identify tax residents or reportable accounts and perform CRS reporting on an annual basis to the local authority.

Since CRS's inception over 121 countries have signed up and are committed to complying with the international standard of exchanging information. In 2020 the OECD released the Secretary-General Tax Report to G20 Finance Ministers and Central Bank Governors that focused on strengthening the regulatory crypto framework.

Following this in 2021, the OECD announced at the CFE's 2021 Forum, that there will be an expansion of the crypto reporting obligations under the CRS and inclusion in the Automatic Exchange of Information (AEoI).  

On March 2022, the OECD published a public consultation document on CARF and Amendments to the CRS, allowing for a period for comments until April 22.

The proposal would mean Crypto-Asset Service Providers must collect Self Certification documents from all crypto traders and asset holders Following the draft CARF proposal the OECD proposed a further change that the Self Certification is renewed every 36 months.

Scope of Crypto and Digital Assets to be covered 

The CARF definition of a Crypto-Asset focuses on the use of cryptographically secured distributed ledger technology, and the creation, holding, and transferability of Crypto-Assets. Under this definition, any crypto assets held and transferred in a decentralized manner, without the intervention of traditional financial intermediaries would be included in the scope of tax reporting.  

CRYPTO AND DIGITAL ASSETS INCLUDED: 

• Stablecoins 

• Derivatives issued in the form of a Crypto-Asset  

• Certain non-fungible tokens (NFTs).

Intermediaries and other service providers in the scope of CARF 

CARF proposes that those intermediaries that as a business provides services effectuating Exchange Transactions in Relevant Crypto-Assets, for or on behalf of customers, would be considered Reporting Crypto-Asset Service Providers.

These intermediaries also fall within the scope of obliged entities for FATF purposes (i.e., virtual asset service providers). As such, they are in a position to collect and review the required documentation of their customers.  

INTERMEDIARIES INCLUDED: 

• Crypto exchanges 

• Investment Entities 

• Brokers and dealers in Crypto-Assets  

• Hot and Cold wallet service 

• Operators of Crypto-Asset ATMs 

• Token providers 

Crypto Asset Reporting Requirements 

The CARF framework provides new rules for certification and cross-border reporting. CARF requires the collection of Self Certification forms related to accounts or wallets used for the purchase, sale, transfer, or holding of Crypto-Assets.

Under CARF the above-listed intermediaries and Crypto-Asset Service Providers must collect Self Certification documents from all crypto traders and asset holders. The requirement is to ensure the details below remain valid through a certification process.  

The updated CARF rules no longer include the requirement that the Self Certification documents be renewed every 36 months.  

Self-certification for individuals’ data elements must include: 

a) first and last name. 

b) residence address. 

c) Jurisdiction(s) of residence for tax purposes. 

d) TIN with respect to each Reportable Jurisdiction; 

e) date of birth 

Self-certification for entities’ data elements must include:  

a) legal name. 

b) address. 

c) Jurisdiction(s) of residence for tax purposes. 

d) TIN with respect to each Reportable Jurisdiction. 

e) in case of an Entity Crypto-Asset User other than an Active Entity or an Excluded Person, Controlling Person details equivalent to Individual Self-Certification 

f) if applicable, information as to the criteria it meets to be treated as an Active Entity or Excluded Person 

Similar to CRS all Self-certification data will be subject to Change in Circumstance (CiC) and On-going Monitoring rules. Changes in circumstance may require recertification of self-certification provided.

Ongoing monitoring of change in circumstances is going to be crucial to ensuring that self-certification forms received remain valid. 

Crypto Asset Due Diligence Procedures 

The first step in preparing to implement CARF is to do due diligence on your accounts. Confirm you have good presumption rules where documentation is not present.  

The due diligence procedures should identify Crypto-Asset users and the relevant tax jurisdictions for reporting purposes. CARF contains due diligence procedures to be followed by Reporting Crypto-Asset Service Providers in identifying their Crypto-Asset Users, determining the relevant tax jurisdictions for reporting purposes, and collecting information for reporting.

Collection of documentation will be required to ensure that reporting is done under the correct reporting regime. Documentation will identify which reporting requirements the account falls under and if there are any exemptions to the reporting. 

High-Level Outline of Reporting and Due Diligence Data 

 a) the full name of the type of Relevant Crypto-Asset.  

b) the aggregate gross amount paid the aggregate number of units and the number of Relevant Transactions in respect of acquisitions against Fiat Currency.  

c) the aggregate gross amount received the aggregate number of units and the number of Relevant Transactions in respect of disposals against Fiat Currency.  

d) the aggregate fair market value, the aggregate number of units, and the number of Relevant Transactions in respect of acquisitions against other Relevant Crypto-Assets.  

e) the aggregate fair market value, the aggregate number of units, and the number of Relevant Transactions in respect of disposals against other Relevant Crypto-Assets.  

f) the aggregate fair market value, the aggregate number of units, and the number of Reportable Retail Payment Transactions.  

g) the aggregate fair market value, the aggregate number of units, and the number of Relevant Transactions and subdivided by Transfer type in respect of Transfers by the Reportable User not covered by subparagraphs A(3)(b) and (d).  

h) the aggregate fair market value, the aggregate number of units, and the number of Relevant Transactions, and subdivided by Transfer type in respect of Transfers by the Reportable User not covered by subparagraphs A(3)(c), (e) and (f); and 

i) the aggregate fair market value, as well as the aggregate number of units in respect of Transfers by the Reportable Crypto-Asset User effectuated by the Reporting Crypto-Asset Service Provider to wallet addresses not known by the Reporting Crypto-Asset Service Provider to be associated with a virtual asset service provider or financial institution. 

Risk of Non-Compliance with CARF Regulations: 

If the CARF regulations are implemented by the participating jurisdictions in a similar manner to CRS then it is likely that non-compliance with the CARF regulations could lead to serious commercial, reputational and financial risk for crypto and digital asset companies.

Failure to maintain appropriate documentation on financial accounts, failure to report information or submit filings by the deadlines, or inaccurate reporting on reportable accounts may all result in penal and financial penalties.

These non-compliance penalties are usually drafted and enforced by local tax authorities, therefore are specific to each country. 

Implications of non-compliance can go beyond financial fines and can lead to significant reputational risk. In some cases, tax authorities may publish cases of non-compliance with regulations, leading to naming and shaming in the industry and media.

This objectively may have a longer-lasting impact on a financial institution than any of the financial penalties. 

TAINA’s Automated Compliance Solution for CARF Requirements 

With the growing number of Crypto accounts or wallet holders, automated compliance processes are key to ensuring compliance with the CARF and CRS requirements. Automation can and does minimize the effort of introducing changes as CARF is implemented and evolves.

Additionally, it can manage the differences in requirements by country/jurisdiction. Although CARF represents a general framework for reporting, the jurisdictions can still amend and enhance the requirements for reporting.

The regulatory framework will only grow from this point, therefore having automated systems that adapt and are easy to update is key to robust compliance. 

TAINA is the market-leading, fully automated FATCA and CRS Validation Platform that is revolutionizing the way that financial institutions, crypto, and digital asset companies manage CARF and CRS compliance.

TAINA’s automated compliance platform is being used at scale by the world’s largest and most sophisticated financial institutions to revolutionize their customers’ experience and compliance.  

TAINA’s flexible and lightweight platform validates CRS Self-Certification forms in all formats, saving our clients costs and time, reducing their risk, and radically improving their customer and investor experience. 

We would love to talk to you more about your compliance process and how our award-winning FATCA and CRS Validation platform may help you deal with the proposed CRAF Requirements and crypto tax reporting. 

For more information get in touch or request a demo to see it in action.