Crypto assets, Tax reporting, and AWM: a quick impact assessment

On 22 March 2022, the OECD took a big step forward in developing a transparency framework for digital assets (e.g. cryptocurrencies, non-fungible tokens (“NFTs”), utility tokens) by publishing a consultation document called the Crypto-Asset Reporting Framework (“CARF”) Click here for the consultation. The objective of the proposal is to bring the crypto market in line with transparency regimes applicable to traditional financial instruments, such as the Common Reporting Standard (“CRS”). The window of opportunity to comment on the CARF is rapidly closing: 29 April 2022.

The CARF provides for the collection and exchange of tax information between tax authorities from persons facilitating and participating in the exchange of crypto-assets. The CARF is expected to apply to asset and wealth managers (AWMs) involved in the digital asset value chain. For example, through digital/tokenised funds and investment portfolios containing crypto-currencies. AWMs that invest in digital assets will need to conduct new entity classification exercises and may need to obtain new tax self-certifications from investors.

The CARF framework imposes compliance obligations that are significantly more burdensome when compared to the CRS. For instance, CARF requires reporting on a transactional basis and attempts to obtain the value of transfers amongst digital assets and fiat currencies. It is unclear how this data will be used by tax authorities to monitor compliance. There are few exceptions to scope, however, we understand there are discussions in relation to de-minimis thresholds, low-risk transactions/products and a pre-existing account due diligence rule similar to the CRS. A very unexpected provision requires reporting on transactions using digital assets for goods and services (i.e. buying a car, paying for a coffee, etc.). There is also a requirement to report certain transactions at fair market value which appears to be challenging in the context of NFTs.

A number of considerations for the AWM market:

• When will the CARF come into force?
• How will the CARF affect innovation?
• How will the CARF affect consumer behavior?
• How will it align with EU DAC8 and US information reporting rules?
• Will CARF be aligned with FATCA IGAs?
• Is the CARF ahead of its time?

Next steps for Asset and Wealth Managers

AWMs should consider commenting, either directly or indirectly via industry bodies, on the CARF and CRS consultation by the 29 April 2022 deadline. AWMs should consider the potential implications of CARF on existing and future products in development in relation to digital assets.