The implementation of the DAC8 directive is beginning to take shape. Providers of crypto services are to share information with financial authorities in future.
On 25 October 2024, the Federal Ministry of Finance published the draft for the implementation of EU Directive 2023/2226, commonly referred to as DAC8. With increased compliance efforts, the law offers an opportunity for providers of crypto services to create trust in the market.
Objective: To improve tax compliance
The draft fully implements the European DAC8 Directive and aims to improve administrative cooperation in the area of taxation, with a focus on digital financial products such as crypto asset transactions, and accompanies the OECD's approach for a Crypto Asset Reporting Framework (commonly known as CARF). At the same time, this will ensure greater tax fairness.
Information from foreign providers of crypto services in particular is currently very difficult to obtain. Due to the decentralised nature of crypto assets, the taxation of this income poses a challenge for the tax authorities.
Current declaration obligation of taxpayers
In Germany, the reporting of income from activities with cryptocurrencies depends on the taxpayer and the tax return. General documentation and declaration obligations also apply. For both decentralised and centralised exchanges, the provision of information is the responsibility of the taxpayer in order to avoid an estimate of the tax base. According to the current understanding of the German tax authorities, the mere provision of the public key is not sufficient proof.
To date, the German tax authorities have only announced a separate decree on taxpayers' duties of cooperation, retention and documentation in connection with income from crypto assets.
Automatic exchange of information
In continuation of the EU directives on administrative cooperation, the automatic exchange of information between EU member states is prescribed in order to facilitate international cooperation. Information reported by domestic providers of crypto services to the domestic tax authorities will be automatically shared with the tax authorities of other Member States where the users are resident for tax purposes in order to increase transparency and prevent tax evasion through cross-border transactions.
Implications for providers of crypto services
By 31 July of each year at the latest, providers of crypto services must report to the Federal Central Tax Office reportable information (e.g. name, tax identification number, detailed information on reportable transactions) of persons and entrepreneurs who carry out reportable transactions for the previous reporting period.
A crypto service provider is any legal person or other entrepreneur whose professional or commercial activity consists of providing one or more crypto asset services to clients on a commercial basis and who is authorised to provide crypto asset services in accordance with the MiCA.
Due diligence requirements
The law imposes strict due diligence obligations on providers of crypto services, e.g. identifying users and their tax residence, obtaining self-disclosures and checking the plausibility of the data collected. In addition, providers of crypto services must take measures to compel users to provide the required information, e.g. blocking further transactions.
They must also document all the steps they have taken. It can be assumed that this documentation may be subject to tax audits in the future.
The implementation of DAC8 will undoubtedly increase the compliance burden for entrepreneurs operating in this sector. At an operational level, crypto asset service providers will need to invest in systems and internal processes to collect, verify and report the required information. This can come at a significant cost, especially for smaller entrepreneurs who may not have the necessary infrastructure in place.
Sanctions for non-compliance with the regulations
The German draft bill provides for fines in the event of non-compliance with the law. Depending on the specific breach of the law, fines can amount to up to EUR 50,000 per offence, e.g. for breaches of the plausibility check of the voluntary disclosure and the reporting obligation. As a rule, several fines are added together without any adjustment being made; however, experience has shown that this should not lead to excessively high or inappropriate penalties.
It should be noted that the fines are not (only) imposed on the provider of crypto services as an entrepreneur, but also and in particular on the person who is internally responsible for the fulfilment of the DAC8 obligations.
Level Playing Field
While DAC8 aims to create a level playing field within the EU, it can also lead to competitive disadvantages for entrepreneurs operating there. Only if CARF covers the countries where crypto asset service providers are most likely to be located, the strict reporting and due diligence obligations under DAC8 may not be as burdensome compared to non-DAC8/CARF countries.
On the one hand, this could encourage some companies to relocate to countries with a more favourable regulatory environment, while on the other hand, operating in DAC8/CARF countries could boost confidence in these crypto asset service providers.
Extension of the Common Reporting Standard (CRS)
For the sake of completeness, DAC8 also extends the existing Common Reporting Standard to include new digital financial products, i.e. e-money products and derivatives. This is to ensure that these digital financial products are treated similarly to other financial assets for tax reporting purposes.
DAC8 must be implemented in local tax law before 31 December 2025
DAC8 is an important step towards improving tax compliance and co-operation in the EU. It will depend on the capacity of the respective crypto service provider whether processes are developed and introduced internally or externally.
CMS advises crypto asset service providers on legal issues relating to the interpretation of the DAC8 Directive and implementing legislation and on the implementation of internal and external processes to ensure compliance.
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