Both at European and global levels, new rules are being developed that will require crypto asset service providers to submit tax authorities’ information on their clients’ transactions. Experts from the Lewben tax group focus on the main changes that are underway.
Information on crypto asset transactions
The European Commission has prepared a draft of new rules requiring crypto asset service providers to report to tax authorities on crypto asset transactions (DAC8) carried out by clients resident in the European Union.
The aim is to ensure the taxation of crypto assets both on a European and global scale. The Organisation for Economic Co-operation and Development (OECD) recently unveiled its crypto asset reporting system (CARF) and amendments to the OECD Common Reporting Standard (CRS). While the CARF imposes fewer requirements than DAC8, these rules also aim to ensure that respective information on crypto assets is collected and transmitted for tax purposes.
The DAC8 is due to be submitted to the Council of Europe and the new tax transparency requirements are expected to enter into force in 2026. An international CARF implementation agreement is underway. There is no exact effective date yet: CARF will become operational once the states have transposed its provisions into their national legislation.
Plans to expand the scope of information exchange
‘The new requirements aim to allow the tax authority to access information about crypto asset transactions made by individuals through crypto asset service providers, such as data on the amounts paid by the clients, the units of crypto assets purchased or the number of related transactions,’ says Eglė Burbaitė, Senior Tax Consultant at Lewben.
Burbaitė points out several of the most important things that tax authorities should be informed about in the future.
Tax authorities should be provided with the name, address, country of tax residence, tax payer’s number, and other data of the clients using crypto asset services. There is no requirement to provide information on proxies, agents, guardians, investment advisers, and other intermediaries acting on behalf of or for the benefit of another person.
Information on all crypto assets is to be provided, except that which cannot be used for general payment or investment purposes.
Reporting obligations would include payment tokens (Bitcoin, Ethereum), stablecoins (USDC, Tether, BUSD), equity tokens representing ownership rights in legal entities, debt tokens related to debt instruments, and, in some cases, non-fungible tokens (NFT).
On the other hand, the utility tokens that are spent in close-loop systems in order to provide digital access to applications, services, or resources available only on the network of the issuer of those tokens on the blockchain, should not fall within the scope of the exchange of information requirement, as they cannot be used for general payment or investment purposes.
Crypto asset transactions
The tax authorities should be informed about the exchange of crypto assets for fiat currencies (e.g. EUR, USD), including changes in the form of crypto assets and other related operations, such as:
- crypto asset-fiat currency (e.g. EUR, USD) exchange;
- one-time or multiple changes in the form of crypto assets;
- payment for goods or services in a crypto asset in excess of EUR 50,000 or USD;
- transfer of crypto assets, i.e. where crypto assets are transferred from one crypto wallet to another crypto wallet held by the same owner, regardless of the fact that such a transfer should not invoke any tax consequences.
Reporting requirements would not apply exclusively to advisory activities, the issue of crypto assets, or portfolio management.
Moreover, Burbaitė points out a number of additional requirements that should be implemented by crypto asset service providers (i.e. cryptocurrency exchanges, cryptocurrency brokers, cryptocurrency ATMs, etc.) if their clients are tax residents in the EU.
Obligation of registration
Crypto asset service providers working with clients resident in the EU will in all cases be required to be registered in one of the EU Member States. This obligation will apply even to those crypto asset service providers that are based in third countries. The aim is to ensure that crypto asset service providers cannot evade the reporting obligation by relocating outside the EU.
Client due diligence obligation
With the aim to establish the identity of a client and their tax residence (including the tax residence of the heads of legal entities), crypto-asset service providers should require that their clients fill in self-certification questionnaires before the date of entry into force of the DAC8 rules. This information should be obtained in case of new clients and those with whom the crypto asset service provider had a commercial relationship 12 months prior to the entry into force of the DAC8 rules.
The clients who fail to provide the requested data will not be able to use the services of crypto asset service providers. Should the client fail to provide the requested information even following two reminders (but not until after 60 days have passed), the crypto asset service provider will be obliged to prevent the client from carrying out any crypto-asset transactions.
Crypto asset service providers would be obliged to report on the above-mentioned crypto asset transactions that took place both within and outside the national borders. The reports should be submitted by January 31 of the year following the year to which the transactions relate.
Penalties for violations of requirements
Rokas Košuba, Tax Consultant at Lewben, explains that fines ranging from EUR 20,000 to EUR 500,000 are to be imposed on the crypto asset service providers who fail to report in due time or furnish incomplete or false information. Member States retain the right to impose higher fines and introduce additional sanctions for other violations. If a crypto asset service provider established in a third country provides services to clients in the EU but does not report, its registration may be canceled and its operations in the EU may be banned.
In order to continue providing crypto asset services to their clients without any interruptions, crypto asset service providers should prepare in advance to collect the missing information from their clients. It is likely that a significant amount of data on the country of tax residence has already been obtained as part of meeting the anti-money laundering and terrorist financing requirements. However, there is a need to check whether respective internal processes are functioning properly. Clients must be provided with questionnaires in order to determine their (and in case of legal entities also their managers’) country of tax residence. Moreover, it should be established whether there are ways and means of verifying the information in case of any doubts about the reliability of the data provided.
More transparency alongside more complications
According to Košuba, the above-mentioned rules are only part of the legislative initiatives aimed at regulating crypto assets. As in the case of financial assets, consistent reporting of crypto asset transactions is necessary to ensure that taxpayers properly comply with their tax obligations.
‘Crypto assets are often believed to be used in illegal activities and thus remain untaxed. The introduction of the obligation to inform the tax authorities about crypto asset-related operations will provide additional transparency in terms of crypto assets as a form of investment. On the other hand, the rules have certain loop holes and in some cases result in uncertainties. The problem of untraceable transactions that are performed using decentralized exchanges and self-managed cryptocurrencies remains unsolved. The transactions of this kind do not include any intermediaries acting as third parties capable of obliging to submit reports to respective authorities,’ says Burbaitė, Senior Tax Consultant at Lewben.
It is also noteworthy that the DAC8, which would apply in the EU, leaves room for various interpretations of the definition of reportable crypto assets. As reporting should be limited to crypto assets that cannot be used for general payment or investment purposes, Member States may have different understandings and ways of adhering to this requirement, which could affect the efficiency of collecting information.
There are plans to extend the reporting requirement to all crypto asset service providers, regardless of their size. As a result, small and medium crypto asset service providers will incur significant additional administrative costs in order to ensure compliance with the law, which will make their operations significantly troublesome, predicts Košuba, Tax Consultant at Lewben.