What is CARF and how will it exchange information about crypto assets?

The world of finance is constantly changing, and regulators will increase control over transactions to ensure transparency and avoid fraud in the payment of taxes. With the rapid increase in the popularity of cryptocurrencies, digital assets have become a new trend for tax and financial authorities in various countries. In addition to the traditional methods of exchanging CRS information, new standards are coming that favor crypto-assets.

One of these tools is CARF (Crypto-Asset Reporting Framework) – an international initiative, part of the OECD, which is aimed at creating a unified system for exchanging data on cryptocurrency transactions between countries. This is a revolutionary time for financial control, which allows for the possibility of siphoning off pennies, eliminating donations and other financial evils.

This article looks at how CARF operates, its basic principles and new rules to apply to cryptocurrency exchanges and companies that trade in digital assets.

CARF and DAC8: regulation and implementation terms

Fiscal authorities in many countries are faced with the problem of defective information for effective monitoring of income from crypto assets. This clearing allows cryptocurrency traders to easily trade digital assets behind the border, depriving themselves of profits in the withdrawal zone. To address this problem, the Organization for Economic Development and Development (OECD) developed the Crypto-Asset Reporting Framework (CARF), and also made changes to the Global Reporting Standard (CRS).

In the European Union, these new rules will be implemented through the updated Directive 2011/16/EC on the administrative compliance of the supply sector (DAC), which was called DAC8.

DAC8 – upgraded to the official EU legislation, officially adopted by the Council of the European Union on June 17, 2023. The Directive aims to strengthen the visibility and exchange of information regarding cryptoassets, electronic currencies and digital currencies for the purposes of direct lending.

The new provisions of DAC8 cover:

• The directive applies to all crypto-asset service providers that facilitate transactions for EU customers.
• Service providers will be required to report user and transaction data to the relevant tax authorities. This will allow member states to better track crypto-asset revenues.
• DAC8 is aligned with CARF and takes into account the provisions of the Market in Crypto-Assets Regulation (MiCA), which provides a unified approach to crypto-market regulation.

Cryptoasset exchange implementation timeline

EU Member States must transpose DAC8 into national law by 31 December 2025. The new rules will enter into force on 1 January 2026. The first reporting declarations must be submitted by 31 January 2027, and due diligence should be carried out in 2026.

DAC8 will be an important tool to combat tax evasion by ensuring a more transparent crypto-asset market in the EU.

Which countries have already joined CARF?

CARF primarily includes countries that are members of the OECD. CARF standards require member states to create a system for automatic exchange of information on cryptoassets and to report annually.

Countries that have joined CARF (includes over 60 countries):

Europe:

• Austria
• Belgium
• United Kingdom
• Gibraltar
• Greece
• Denmark
• Estonia
• Ireland
• Iceland
• Spain
• Italy
• Cyprus
• Lithuania
• Luxembourg
• Malta
• Netherlands
• Germany
• Norway
• Poland
• Portugal
• Romania
• San Marino
• Slovak Republic
• Slovenia
• Finland
• France
• Croatia
• Czech Republic
• Switzerland

North and South America:

• Bahamas
• Barbados
• Bermuda
• Brazil
• Cayman Islands
• Canada
• Colombia
• Mexico
• Saint Vincent and the Grenadines
• United States

Asia:

• Azerbaijan
• Hong Kong
• Israel
• Indonesia
• Korea
• Malaysia
• Mongolia
• United Arab Emirates
• Singapore
• Thailand
• Turkey
• Japan

Africa:

• Nigeria
• South Africa
• Uganda

Oceania:

• Australia
• New Zealand

Small jurisdictions and territories:

• Guernsey
• Jersey
• Isle of Man
• Seychelles
• Faroe Islands

These countries are committed to ensuring reporting and exchange of information on cryptocurrency transactions in accordance with CARF. Each of them has its own specific deadlines for adapting and implementing CARF standards within their national systems. However, the list is constantly being updated and in total it is planned to cover about 110 countries.

Who will collect information about crypto transactions?

According to the Crypto-Asset Reporting Framework (CARF), the responsibility for collecting and reporting information on cryptocurrency transactions falls on Crypto-Asset Service Providers (CASPs). This includes the following categories of participants:

1. Cryptocurrency Exchanges: Cryptocurrency exchange platforms that facilitate transactions in digital assets, such as buying, selling, and exchanging.
2. Brokers: Intermediaries that facilitate transactions between clients.
3. Wallet Providers: Companies that provide cryptocurrency storage services, including both hardware and software wallets.

All of these services must have access to their users` transaction data, as they provide the infrastructure for exchanging cryptoassets.

In addition, regulators of decentralized exchanges (DEXs) and DeFi protocols must ensure compliance with new reporting requirements, as they facilitate peer-to-peer transactions. This is especially important since decentralized platforms lack traditional intermediaries, making it difficult to monitor transactions.

Similarly, NFT marketplaces that facilitate transactions with non-fungible tokens (NFTs) may be required to provide information on large cryptoasset transactions that pass through their platforms.

Thus, all of these participants in the cryptocurrency ecosystem must participate in the collection and transmission of information, which allows for transparency and the fight against tax evasion.

Which cryptoassets will be monitored?

According to CARF, cryptoassets used for payment or investment purposes will be monitored. This includes:

1. Cryptocurrencies: Such as Bitcoin, Ethereum, and others, which are widely used for transactions and storage of value.
2. Stablecoins: Assets pegged to fiat currency (e.g. USD Coin, Tether) that are used for stable payments.
3. Other tokens: Universal tokens that can be used for exchange, store of value, or as investment tools.
4. NFTs (Non-Fungible Tokens): NFTs that have investment value or can be resold are subject to reporting. For example, NFTs that are used as assets for trading or providing liquidity.
5. DeFi Protocol Assets: Tokens issued on decentralized financial platforms that can be used as a tool for lending, staking, or exchange.
6. Digital assets used in peer-to-peer (P2P) transactions: Any assets that are actively used for direct transactions between users without intermediaries.

At the same time, in accordance with CARF standards, three types of cryptoassets are excluded from mandatory reporting:

1. Cryptoassets not used for payments or investments: For example, NFTs, which are created as collectibles and cannot be resold. These may be unique digital assets that have no investment value or are not intended to be traded on markets.
2. Central Bank Digital Currencies (CBDCs): Currencies such as electronic versions of fiat money issued by central banks are not included in the reporting as they are regulated by separate government mechanisms.
3. Specialized e-money products: These are electronic payment instruments pegged to fiat currency, used for limited purposes (e.g., domestic payment systems) and not intended for trading or investment.

That is, CARF is aimed at monitoring assets that have a high level of liquidity and the ability to influence global financial transactions.

What information about crypto assets will the tax office receive?

Cryptoasset service providers (CASPs) must report the following information to tax authorities annually regarding their users who are subject to reporting or have reportable controlling persons:

1. Identification information:

• Name, address, jurisdiction (residence), tax identification number (TIN), and date and place of birth (for individuals).
• For legal entities (e.g., companies), name, address, jurisdiction, and TIN, as well as information about controlling persons (e.g., directors), if they are subject to reporting.

2. Transaction data:

• Types of crypto assets used in transactions.
• Total amount, number of units and number of transactions for buying/selling crypto assets for fiat currencies.
• Amount and number of crypto transactions involving exchanges between crypto assets.
• Information on transactions with large amounts exceeding a set threshold (e.g. over $50,000) and other significant transactions.
• Information on NFT transactions and other specific crypto transactions.

3. Technical details:

• For each transaction, the currency in which the transaction was carried out is reported (if multiple currencies are involved, they must be converted to one).
• The market value of crypto assets at the time of each transaction to estimate their value in fiat currency.

This information enables tax authorities to track and tax cryptocurrency transactions, increasing transparency and combating tax evasion.

Recommendations for active cryptoasset users

The introduction of the Crypto-Asset Reporting Framework (CARF) and new reporting standards for crypto assets is a significant step towards global transparency in the field of digital finance. Tax authorities will gain access to detailed information about transactions, which will allow them to combat tax evasion and financial crimes. At the same time, these changes will significantly affect crypto-asset market participants, forcing them to adapt to the new requirements. Therefore, while this legislation is in the adaptation phase, we recommend:

• Check if your jurisdiction has adopted CARF and stay up to date with legislative updates. This will help you prepare for the changes and avoid any potential pitfalls.
• When CARF comes into effect, choose platforms that comply with AML/KYC regulations to reduce the risk of funds being blocked or fines for non-compliance with the new standards.
• Consider investing in less regulated assets or jurisdictions if this fits your strategy and legislation.
• Consult with your tax advisors to understand how the new rules will affect your income. This is especially important for users who perform high volume transactions.

It is important to understand that the new rules are aimed at improving transparency, but they require more responsibility from users. A careful approach to managing your crypto assets will help avoid problems with the law and optimize financial activities. While crypto asset users have time, changes are inevitable and significant belt-tightening in the international market is already expected….