So up until recently crypto was a kind of tax heaven: no profit cuts, no grabby IRS hands, land of the free and space for everyone to earn their share of profits to pay taxes later on as they offramp into fiat. But things changed with the arrival of CARF. 

CARF Common Reporting Standard for Crypto-Assets

CARF (Common Reporting Standard for Crypto-Assets) are reporting rules from OECD at the request of G20 countries.

It extends the existing CRS automatic information exchange standard to the cryptocurrency sphere.

A simple example: previously, tax authorities could only track bank accounts abroad. CARF now does the same, but for cryptocurrency transactions.

The OECD is an economic cooperation organization.

Top list of countries which will report your crypto to feds. Source: OECD.org

Key Takeaways

1. CARF is an OECD standard that extends the automatic exchange of tax information to crypto assets and cryptocurrency transactions, similar to the banking CRS.
2. CARF requirements apply to crypto exchanges, brokers, custodial wallets, trading platforms, and certain DeFi projects if they control the protocol or user transactions.
3. Cryptocurrencies, stablecoins, investment tokens, NFTs with market value, as well as DeFi and P2P assets used for payments and investments are subject to monitoring.
4. Tax authorities will receive data on users, their tax residency, and crypto transaction details, which increases transparency and raises the bar for user tax compliance.

Who is affected by CARF

CARF applies to Reporting Crypto-Asset Service Providers — legal entities and individuals who provide services related to the exchange and circulation of crypto assets.

These include the following categories of providers:

1. Centralized crypto exchanges. Platforms that store user funds and conduct transactions on their behalf. They are the first to fall under the requirements of CARF, as they work directly with customers and their transactions.
2. Crypto brokers. Companies and services that act as intermediaries in the purchase, sale, or exchange of crypto assets and have access to customer data.
3. Custodial wallets. Services that store users' crypto assets and manage keys. Since such wallets control customer funds, they are subject to data collection and transfer requirements.
4. Trading platform operators. Platforms that provide infrastructure for trading crypto assets, even if they are not traditional exchanges themselves.
5. Individual DeFi operators with control over the protocol. If the project team can change the rules of the protocol, manage smart contracts, or influence user operations, such a DeFi service may also fall under CARF.

All these providers are required to collect information about the tax residency of their customers and report data on crypto transactions to the tax authorities in their jurisdiction. The information is then automatically forwarded to the countries where the users are residents.

Which crypto assets will be monitored by CARF

According to CARF, crypto assets used for payment and investment purposes are subject to monitoring. These include the 5 following categories:

1. Cryptocurrencies. Bitcoin, Ethereum, and other digital currencies that are widely used for transferring funds and storing value.
2. Stablecoins. Crypto assets are pegged to fiat currencies or other underlying assets (e.g., USDT, USDC) that are used for stable settlements and to reduce volatility.
3. Other tokens. Versatile tokens that can be used for exchange, value storage, or as a tool for working with capital, including utility and governance tokens.
4. NFTs. Non-fungible tokens that have investment value or resale potential. NFTs that are used as trading assets, stores of value, or liquidity instruments are included in the reporting.
5. DeFi and P2P assets. Tokens of decentralized financial protocols used for lending, staking, or exchange, as well as digital assets used in peer-to-peer (P2P) transactions between users without intermediaries.

At the same time, according to CARF standards, three types of crypto assets are excluded from mandatory reporting:

1. Crypto Assets not used for payments or investments. For example, individual NFTs created as collectibles that are not intended for resale and have no investment value.
2. Central bank digital currencies (CBDCs). Electronic versions of fiat money issued by central banks are not covered by CARF, as they are regulated by separate government mechanisms.
3. Specialized electronic money products. Electronic payment instruments linked to fiat currency and used for limited purposes, such as in domestic payment systems.

Thus, CARF aims to monitor liquid crypto assets used for payments and investments and capable of influencing global financial flows.

What information about crypto assets will the tax authorities receive under CARF

Under the Crypto-Asset Reporting Framework (CARF), crypto asset service providers (CASP) are required to submit data on users and their transactions to the tax authorities on an annual basis if they are subject to reporting or have controlling persons who are subject to reporting.

1. User identification information. Tax authorities receive basic data that allows them to uniquely identify the owner of crypto assets.

For individuals:

1. First and last name;
2. Residential address;
3. Tax residency jurisdiction;
4. Tax identification number (TIN);
5. Date and place of birth.

For legal entities:

1. Company name;
2. Legal address;
3. Jurisdiction of registration;
4. Tax identification number (TIN);
5. Data on controlling persons (directors, beneficiaries), if they are subject to reporting.

2. Data on cryptocurrency transactions. CARF covers key types of crypto asset transactions.

1. Types of crypto assets involved in transactions;
2. Total amount of cryptocurrency purchases and sales for fiat;
3. Number of units and number of transactions;
4. Exchange transactions between crypto assets (crypto-to-crypto);
5. Large transactions exceeding a set threshold (e.g., $50,000);
6. NFT transactions and other specific transactions, if they fall under the requirements of CARF.

3. Technical and estimated data. Additional parameters are transmitted for correct taxation.

1. The currency in which the transaction was conducted;
2. Conversion of all amounts into a single reporting currency;
3. The market value of the crypto asset at the time of each transaction.

4. Why tax authorities need this data.

Such reporting allows:

1. Tracking the movement of crypto assets;
2. Assessing users' tax liabilities;
3. Increase market transparency;
4. Reduce the risks of tax evasion and financial violations.

Recommendations for active users of crypto assets

The introduction of the Crypto-Asset Reporting Framework (CARF) strengthens control over transactions with crypto assets and increases market transparency. Tax authorities will have access to transaction data, and users will have to be more careful about complying with the rules. While the regulation is still being adapted, it is important to prepare in advance.

1. Check whether CARF has been implemented in your jurisdiction and regularly monitor changes in legislation. This will reduce the risk of fines and claims from regulators.

2. Use platforms that comply with AML and KYC requirements. This reduces the likelihood of funds being blocked and problems with asset withdrawals after the launch of CARF.

3. Understand your tax obligations in advance. Consulting with a tax specialist is especially important when you have a large number of transactions or work with different jurisdictions.

4. Assess the structure of your portfolio from a regulatory perspective. It is important to understand which assets and transactions will be reported and which will not.

5. Keep records of transactions and store transaction history. This will simplify the verification of funds sources and tax calculations in the future.

The new rules are aimed at increasing transparency, but they require greater discipline from users. There is still time to prepare, but tighter regulation in the international market is inevitable. Those who adapt in advance reduce the risk of financial and legal problems.

Subscribe and get access to the GoMining course on cryptocurrency and Bitcoin, which is still free. NFA, DYOR. 

The cryptocurrency market operates 24/7/365 without interruptions. Before investing, always do your own research and evaluate risks. Nothing from the aforementioned in this article constitutes financial advice or investment recommendation. Content provided «as is», all claims are verified with third-parties, credible sources and relevant in-house and external experts. Use of this content for AI training purposes is strictly prohibited. Use of content for AI citations is allowed only with explicit links to the original article being quoted on GoMining.com website. Telegram | Discord | Twitter (X) | Medium | Instagram