OECD releases public consultation document on crypto tax reporting in effort to increase transparency

The Organisation for Economic Co-operation and Development (OECD) has released a public consultation document, Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard. The document responds to a request from the G20 to develop a framework to assist in the automatic exchange of information related to cryptoassets, arising from concerns about the rapid adoption of cryptoassets for both investment purposes and other financial activities, and the likelihood that cryptoassets are not within the scope of many international tax reporting regimes (such as CRS, discussed below).

Generally speaking, the public consultation document, released in March, lays out the proposed Crypto-Asset Reporting Framework (CARF), which is a global cryptoasset reporting and exchange of information regime and proposed amendments to the existing Common Reporting Standards (CRS), first released in 2014, which pertains to the exchange of financial account data between countries.

CARF generally provides for the automatic exchange of tax-relevant information between tax administrations for cryptoasset transactions. Additionally, the framework also addresses assets that are transferred on decentralized platforms where there is no distinct intermediary. The reporting framework outlined would require individuals and entities that provide services exchanging cryptoassets for other cryptoassets or fiat currency as their primary business to increase their know-your-customer (KYC) procedures and subsequently report the transferred values and activity of customers on an annual basis.

With respect to CRS, the proposal aims to extend the scope of CRS to cover digital money products, including both crypto-based and other money products, and central bank digital currencies (which are digital tokens issued by a central bank, the value of which is pegged to the value of that country’s fiat currency). These categories also include indirect investments in cryptoassets through derivatives and other investment entities. The proposed amendments to CRS aim to streamline due diligence procedures to allow the information collected through CRS to be used by a wider audience, in an effort to limit burdens on reporting entities and tax administrations.[1]

What are cryptoassets?

The public consultation document centers around “cryptoassets,” which are broadly defined as a digital representation of value that relies on a cryptographically secured distributed ledger or a “similar technology” to validate and secure transactions.[2] This definition is intended to encompass assets "held and transferred in a decentralized manner without the intervention of traditional financial intermediaries, including stablecoins, derivatives issued in the form of a cryptoasset and certain non-fungible tokens (NFTs)."[3]

This sweeping definition, combined with the reference to “similar technology” in the general definition of cryptoassets, indicates the OECD’s intent to subject to reporting any future assets based on new technology that are not currently contemplated. Despite the broad terms used in defining what assets would be subject to reporting, central bank digital currencies and closed loop assets, which are assets that are redeemable for goods or services within a limited setting, are subject to CRS reporting rather than CARF.[4]

Who would be subject to CARF reporting and what will be reported?

CARF’s reporting obligation would apply to Reporting Crypto-Asset Service Providers. The term “Reporting Crypto-Asset Service Provider” is generally defined as any individual or entity that, as a business, effectuates cryptoasset exchange transactions for or on behalf of customers.[5] The CARF framework specifies that this definition would apply to exchanges, brokers, dealers, and ATMs – but this list is likely not exhaustive. Further, individuals and entities who “make available” a trading platform are also subject to reporting. Individuals or entities will be considered to “make available" a trading platform if it exercises control or influence over the platform or has sufficient knowledge that would allow it to provide the information requested by CARF.[6]

There are multiple transactions subject to reporting under CARF, including crypto-to-crypto, crypto-to-fiat, and certain retail transactions. In addition, some cryptoasset payment processors who process payments for merchants accepting crypto payments would be required to treat the merchant’s customers as its own and report transactions within that scope. Further, the proposal would also allow tax authorities to op-in to receive reporting on the list of external wallet addresses to which cryptoassets were transferred by a cryptoasset service provider, which could increase visibility to these tax authorities of holdings and transfers of cryptoassets outside the scope of the intermediaries subject to reporting.[7]

Public comments

Given the nature of the public consultation document, numerous stakeholders have provided commentary to these proposals.[8] The comments tend to be critical of the broad definition of cryptoassets and “similar technology,” with a view that the proposed definition is incorrectly based on the technology itself rather than its use case. The commentators suggested that the definition be limited to fungible virtual assets and that “similar technology” be further defined to avoid inconsistent treatment.[9]

In addition, other comments suggest that there be a phased approach to implementation, i.e., first, implementing a reporting regime for well-established exchanges and transactions and second, implementing reporting for newer transaction types, such as decentralized platforms, derivatives in the form of crypto contracts, and NFTs.[10]

Comments also aptly point out that, given this is a proposed framework rather than actual legislation, each participating country will need to enact its own legislation to implement the overall framework. In addition, various countries may need to update relevant technology and infrastructure to accommodate such reporting standards.[11] As with any new legislation, there is always a risk that some countries will not implement the proposed framework effectively or there may be variations in the way each country implements, which can cause taxpayer confusion and inefficiency at the tax authority level.

There will be a public consultation hearing on this proposal on May 23, 2022.[12]