What is the impact of Crypto Assets on financial markets?
Updated
- The market for Crypto-Assets (including cryptocurrencies, as well as cryptography-based tokens) is growing rapidly. This is also affecting tax administrations, which must adapt to the growing role of Crypto-Assets. In particular, several characteristics of Crypto-Assets are likely to pose novel challenges in tax administrations’ efforts to ensure taxpayer compliance.
- Firstly, Crypto-Assets’ reliance on cryptography and distributed ledger technology, in particular blockchain technology, means that they can be issued, recorded, transferred and stored in a decentralised manner, without the need to rely on traditional financial intermediaries or central administrators.
- In addition, the Crypto-Asset market has given rise to a new set of intermediaries and other service providers, such as Crypto-Asset exchanges and wallet providers, which may currently only be subject to limited regulatory oversight. Crypto-Asset exchanges typically facilitate the purchase, sale and exchange of Crypto-Assets for other Crypto-Assets or Fiat Currencies. Wallet providers offer digital “wallets”, which individuals can use to store their Crypto-Assets via authorisation through public and private keys. These services may either be provided in online (i.e. “hot”) wallets, or via service providers offering products allowing individuals to store their Crypto-Assets offline on downloaded (i.e. “cold”) wallets. Both types of products are relevant for tax authorities.
- The Crypto-Asset market, including both the Crypto-Assets offered, as well as the intermediaries and other service providers involved, poses a significant risk that recent gains in global tax transparency will be gradually eroded. In particular, the Crypto-Asset market is characterised by a shift away from traditional financial intermediaries, the typical information providers in third-party tax reporting regimes, such as the Common Reporting Standard (CRS), to a new set of intermediaries and other service providers which only recently became subject to financial regulation and are frequently not yet subject to tax reporting requirements with respect to their users. Furthermore, the ability of individuals to hold Relevant CryptoAssets in wallets unaffiliated with any service provider and transfer such Relevant Crypto-Assets across jurisdictions presents the risk that Relevant Crypto-Assets are used for illicit activities or to evade tax obligations. Overall, the characteristics of the Crypto-Asset sector have reduced tax administrations’ visibility on tax-relevant activities carried out within the sector, increasing the difficulty of verifying whether associated tax liabilities are appropriately reported and assessed.
- The CRS, published by the OECD in 2014, is a key tool in ensuring transparency on cross-border financial investments and in fighting offshore tax evasion. The CRS has improved international tax transparency by requiring committed jurisdictions to obtain information on offshore accounts held with Financial Institutions and automatically exchange that information with the jurisdictions of residence of taxpayers on an annual basis. However, Relevant Crypto-Assets will in most instances not fall within the scope of the CRS, which applies to traditional Financial Assets and Fiat Currencies held in accounts with Financial Institutions. Even where Relevant Crypto-Assets do fall within the definition of Financial Assets for purposes of the definition of Custodial Account, they can be owned either directly by individuals in cold wallets or via Crypto-Asset exchanges that do not have reporting obligations under the CRS (if they are not Financial Institutions) and are therefore unlikely to be reported to tax authorities in a reliable manner.
- Therefore, the current scope of assets, as well as the scope of obliged entities covered by the CRS, do not provide tax administrations with adequate visibility on when taxpayers engage in tax-relevant transactions in, or hold, Relevant Crypto-Assets. Increasing global tax transparency with respect to Crypto-Assets.
- Recognising the importance of addressing the above-mentioned tax compliance risks with respect to Relevant Crypto-Assets, the OECD has developed the Crypto-Asset Reporting Framework (CARF), designed to ensure the collection and automatic exchange of information on transactions in Relevant Crypto-Assets.
- The CARF consists of three distinct components: • Rules and related Commentary that can be transposed into domestic law to collect information from Reporting Crypto-Asset Service Providers with a relevant nexus to the jurisdiction implementing the CARF; • a Multilateral Competent Authority Agreement on Automatic Exchange of Information pursuant to the CARF (CARF MCAA) and related Commentary (or bilateral agreements or arrangements); and • an electronic format (XML schema) to be used by Competent Authorities for purposes of exchanging the CARF information, as well as by Reporting Crypto-Asset Service Providers to report CARF information to tax administrations (as permitted by domestic law).
- It is acknowledged that Crypto-Asset markets, including the types of Crypto-Assets offered, the Entities and individuals active in, and the technology supporting the markets, are evolving rapidly. In this context, the OECD will continue to monitor Crypto-Asset markets and consider whether further technical work to elaborate the rules will be necessary to ensure adequate tax reporting on Relevant Crypto-Assets. It is also anticipated that the OECD will continue developing guidance to support the consistent application of the CARF, including on the definition of Relevant Crypto-Assets and in particular the criteria for adequately determining that a Crypto-Asset can or cannot be used for payment or investment purposes. Furthermore, the OECD stands ready to proceed with future amendments to the CARF, in case this is needed to ensure adequate tax reporting with respect to Relevant Crypto-Assets, as well as sufficient global coverage of the CARF. In this respect, particular attention will be given to the development of decentralised finance.
