Introduction to the Crypto-Asset Reporting Framework

The market for Crypto Assets is growing rapidly. Crypto Assets can be issued, recorded, transferred and stored in a decentralised manner, without the need to rely on traditional financial intermediaries or central administrators. Further, 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. 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.

Although the Common Reporting Standard (“CRS”) is a key tool in ensuring transparency on cross-border financial investments and in fighting offshore tax evasion, certain Crypto-Assets may not fall within the scope of the CRS, which applies to traditional financial assets and fiat currencies held in accounts with financial institutions.

In order to address the tax compliance risks associated with 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 rules and commentary of the CARF have been designed around four key building blocks:

1. the scope of Crypto-Assets to be covered (targets assets that can be held and transferred in a decentralised manner, without the intervention of traditional financial intermediaries, including stablecoins, derivatives issued in the form of a Crypto-Asset and certain non-fungible tokens);
2. the entities and individuals subject to data collection and reporting requirements (namely, entities or individuals that as a business provide services effectuating exchange transactions in relevant Crypto-Assets, for or on behalf of customers);
3. the transactions subject to reporting as well as the information to be reported in respect of such transactions (exchanges between relevant Crypto-Assets and fiat currencies, exchanges between one or more types of relevant Crypto-Assets and certain transfers of relevant Crypto-Assets); and
4. the due diligence procedures to identify Crypto-Asset users and the relevant tax jurisdictions for reporting and exchange purposes (built on the self-certification-based process of the CRS).

Interaction between the Crypto-Asset Reporting Framework and the CRS

As the CARF is a separate and complementary framework, there will be some entities reporting under both the CRS and the CARF. The CARF was designed to report information on Crypto-Assets to address tax compliance risks. Nonetheless, to reduce reporting burdens, particular attention was given to the efficient and frictionless interaction of the CARF with the CRS, as reflected in the following features:

• the definition of Crypto-Assets excludes “Specified Electronic Money Products” and “Central Bank Digital Currencies” from the scope of the CARF, as reporting on these assets is ensured under the CRS;
• as there are certain assets that qualify both as relevant Crypto-Assets under the CARF and as financial assets under the CRS (e.g. shares issued in crypto form), the CRS contains an optional provision to switch-off gross proceeds reporting under the CRS if such information is reported under the CARF;
• indirect investments in relevant Crypto-Assets through traditional financial products, such as derivatives or interests in investment vehicles, are covered by the CRS; and
• to the extent possible and appropriate, the due diligence procedures are consistent with the CRS due diligence rules, to minimise burdens on reporting Crypto-Asset service providers, in particular when they are also subject to CRS obligations as reporting financial institutions.

On 10 November 2023, the UK released a joint statement with a number of other jurisdictions welcoming the introduction of CARF and committing to swiftly transposing the CARF into domestic law and activating exchange agreements in time for exchanges to commence by 2027, subject to national legislative procedures. For a link to the joint statement please click here.

Spring Budget update

As part of the Spring Budget earlier this month (6 March 2024), the government announced it was launching a consultation to seek views on the implementation of the OECD’s CARF. The consultation on CARF will also seek views on a potential extension of the CARF to include reporting on UK resident taxpayers by UK service providers.

For a link to the OECD (2023), International Standards for Automatic Exchange of Information in Tax Matters: Crypto-Asset Reporting Framework and 2023 update to the Common Reporting Standard please click here.