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OECD’s Crypto Asset Reporting Framework could be pivotal for tax

Cryptocurrency and blockchain are here to stay

Raffaele Russo, an international tax and policy expert, explains why the OECD’s Crypto Asset Reporting Framework (CARF) offers a big opportunity for tax progression but it still needs some improvements.

We are potentially at a turning point with regulations being introduced covering taxation and other fields. It would be important for the ecosystem to show maturity and willingness to engage, and for policymakers to approach subjects with balance, an open mind and without prejudice.

The cryptocurrency tax community is mobilising to provide comments on the OECD’s Crypto Asset Reporting Framework (CARF), which was released for comments by the OECD on March 22 2022.

The release of the CARF comes at a time when regulations are being crafted also in other areas. It is a big opportunity for industry and policymakers alike.

In certain ways the situation resembles what happened a few years ago in relation to sharing/gig economy platforms and social media. The difference is possibly that platforms and social media were originally thought of as “savers of the world” and championing the notion of making the world a better place, then later accused of all sorts of wrongdoings in terms of political interference, social impact, tax and labour regulations. Actors of the cryptocurrency world were, in contrast, originally associated with tecno-anarchists, utopians, etc. but they can end up being the “savers of the world” and make the world a better place.

Emerging tax intermediaries

The original Action 1 BEPS Report (Addressing the Tax Challenges of the Digital Economy) identified certain trends that could have had an impact on international tax policy. Among these there were the sharing economy and virtual currencies. Fast forward seven years and the Model Rules for Reporting by Platform Operators with respect to Sellers in the Sharing and Gig Economy and the so-called DAC7 in the EU are being implemented in a number of jurisdictions. And now we have the above-mentioned CARF being discussed in draft form.

Defining moments in the crypto space

There are certain defining moments in the short history of cryptocurrency, which started in 2009 with a paper Satoshi Nakamoto sent to a mailing list, called Bitcoin: A Peer-to-Peer Electronic Cash System.

The book, The Cryptopians: Idealism, Greed, Lies, and the Making of the First Big Cryptocurrency Craze, by Laura Shin, details many of the notable moment. Some of these key moments include:

  • When the first pizza was bought online via bitcoins on May 22 2010;

  • The parity with the US dollar reached by Bitcoin on February 9 2011;

  • The birth of HODL (a slang for holding crypto also in bad times) in 2013;

  • The Mt. Gox bankruptcy in 2014;

  • The launch of Ethereum in July 2015 by Vitalik Buterin and others;

  • The hard forks that took place in subsequent years;

  • The first decentralised autonomous organisation;

  • The initial coin offerings (ICO) boom in 2017-18;

  • The announcement of Libra in 2019;

  • The increased attention of institutional investors in 2020; and

  • The non-fungible tokens craze in 2021.

All eyes are now on regulations

Over the years, cryptocurrency has been steadily moving into the mainstream, as witnessed by a market cap close to $3 trillion at the end of 2021.

Success brings about accountability and regulators around the world have been focusing on the relevant aspects of cryptocurrency for a few years now. For example, The World Bank issued a report on distributed ledger technology (DLT) and blockchain in 2017, while the Financial Conduct Authority’s taskforce issued its final report on cryptoassets in 2018.

Additional reports were released by numerous other organisations offering advice and insight. These included reports from:

Significant policy angles include monetary policy, consumer protection, investors protection, market stability, AML/CFT requirements, accounting principles and tax rules. A balanced policy approach should safeguard public interest while nurturing a new ecosystem and supporting a potentially game-changer technology.

The CARF components

The CARF will be made of three components:

  1. The CARF model rules and commentary for transpositions into domestic law;

  2. The framework of bilateral or multilateral competent authority agreements for exchanging information; and

  3. The relevant IT solutions.

The model rules and commentary have been published for comments. Once the work on this component is completed, the second and third ones will be further developed.

The model rules and commentary have been designed around four key building blocks:

  1. The cryptoassets covered;

  2. The intermediaries in scope;

  3. The information to be reported; and

  4. The due diligence requirements.

The tight deadline for comments indicates that there must be momentum at political level to advance this agenda item on a multilateral level. The US had already moved ahead with the Infrastructure Investment Act of 2021, introducing certain reporting obligations on crypto intermediaries.

A solid reporting framework for tax purposes

The CARF is well written and solid in its content. It relies on concepts and due diligence requirements already agreed upon under the common reporting standard (CRS) and anti-money laundering (AML)/countering financial terrorism (CFT) rules based on the Financial Action Task Force (FATF) Guidelines.

The CARF should reduce the burden on intermediaries. Compliance would be very burdensome if not coordinated with the CRS and AML/CFT rules or, even worse, if each jurisdiction would introduce its own sets of requirements, uncoordinated across borders (as it had started to happen with sharing economy platforms).

At the same time, important IT and other investments will be needed to adapt to the reporting framework and this is extremely expensive. It risks creating a very high barrier for financial infrastructure firms to enter the market, which ultimately will negatively impact consumers. Safe harbours and sandboxes to encourage innovation and support new market entrants could be useful options to consider, as well as tax incentives for the IT investments needed.

Marginal improvements possible

There are, as always, marginal improvements that could be made to the CARF.

These relate chiefly to:

  • The avoidance of overlaps with the CRS for cases that could be subject to both, as well as the alignment of due diligence requirements and information to be reported;

  • he definition of intermediaries in scope, which for some reason makes reference to only a subset of the covered transactions;

  • The additional clarity needed on the cryptoassets in scope, particularly in the case of low-value ones and non-fungible tokens (NFTs), acquired neither for investment nor for payment purposes;

  • The application of the CARF rules to decentralised finance (DeFi) and the identification of the responsible persons;

  • The relationship with AML/CFT rules when these rules do not exist or do not reflect FATF standards; and

  • The identification of the consequences of complying (carrot) or not complying (stick) with the CARF requirements.

Don’t leave the CARF alone

Information reporting is key and will certainly increase the rate of tax compliance.

A report by the US Government Accounting Office references Internal Revenue Service statistics that indicate taxpayer compliance is above 95% when there is third party information reporting, but below 50% when there is not.

In addition, it has the potential to improve customers’ experience and make tax filing and compliance easier. This should allow compliant taxpayers (the great majority of them, we should never forget that) to approach the cryptocurrency world with a different, more trustworthy, perspective.

At the same time, several improvements are possible as mentioned above. Clarifications regarding its exact scope and additions like safe harbours and sandboxes will make the CARF more efficient and effective. This will avoid the compliance costs that prevent new market players from innovating and, at the same time, provide tax administrations with information that is indeed relevant for them.

Also, there are three other topics which are of systemic importance from a tax perspective and that should be addressed together with the CARF.

Defining the tax treatment of cryptoassets

It is fundamental that countries introduce rules or publish detailed guidance regarding the tax treatment of the acquisition, holding and disposal of cryptoassets.

Unfortunately, the appropriate direct and indirect tax treatment is still not clear in several instances.

It would seem logical to clarify the tax treatment of cryptoassets at the same time as introducing information reporting obligations. This should be done via legislation, taking into account developments in other areas to ensure coherence among different fields. This is in line with what was recommended by the OECD itself in the 2020 report, Taxing Virtual Currencies. Times seem to be mature enough.

Consider voluntary disclosure initiatives for the past

As the tax treatment for cryptoassets becomes clear and a reporting framework is in place, consideration could be given to the introduction of voluntary disclosure initiatives in relation to the past.

In a context in which tax rules were not clear and intermediaries were not reporting relevant information, it is rather likely that income or assets may have not been reported (properly).

As with the introduction of the CRS a few years ago, and possibly even more given the much more uncertain tax treatment compared to the case of income from offshore capital, voluntary disclosure initiatives could be an appropriate mechanism to start with a clean sheet. This would also ensure that as many taxpayers as possible become part of the new reporting framework rather than simply looking for (often cold) ways to game the reporting framework. Amounts involved may be substantial, an issue particularly relevant given the conditions of public finances in many jurisdictions.

Evaluate the use of blockchain for information collection and sharing

The cryptocurrency ecosystem is built on blockchain. The underlying technologies offer immense opportunities, and the crypto ecosystem has the merit of having showed already many possible uses beyond virtual currencies.

Leaving aside the geopolitical issues that keep many awake at night these days, the use of a blockchain-based technology appears to be a good fit to allow tax information collection and sharing among tax administrations.

Cryptography and distributed ledgers could be powering the CARF itself, and eventually the CRS, as well as pillar 1 and pillar 2 of the renewed BEPS Project. All these initiatives could definitively benefit from the use of a permissioned blockchain, in which all different actors would contribute to make the infrastructure secure and efficient.

Final thoughts

Cryptocurrency and blockchain are here to stay.

We are potentially at a turning point with regulations being introduced covering taxation and other fields. It would be important for the ecosystem to show maturity and willingness to engage, and for policymakers to approach subjects with balance, an open mind and without prejudice.

This can be the beginning of a new era. Developments in the area Web3 and DeFi show just that, with their challenges and opportunities. The impression is that challenges become bigger when trying to box innovation into existing categories while opportunities become bigger when systemically rethinking the system.

Regarding DeFi and NFTs, it is fundamental that business models are fully understood before regulating them and a constant dialogue between industry and policymakers is key in that respect.

Raffaele Russo, formerly worked at the OECD and at the Italian Ministry of Economy and Finance. He is now a senior fellow at the University of Amsterdam and works as Of Counsel at Chiomenti.

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