Crypto Asset Reporting Framework 2023 – OECD CRS Framework Explained

Unlocking the Future: CARF Bridges the Gap in Crypto Asset Regulation.

15 Sep 2023 | 7 min read

Table of Contents

Key Pointers:

CARF expands the CRS framework to encompass a broad spectrum of crypto-assets.
The framework introduced strengthens the accuracy of reported information and reduces the risk of tax evasion.
The OECD has proposed amendments to the CRS framework alongside CARF, further expanding its coverage to include digital financial products, derivatives related to crypto-assets, and other relevant updates.

Introduction

The OECD unveiled the Crypto-Asset Reporting Framework (CARF) and introduced proposed adjustments to the Common Reporting Standard (CRS) on October 10, 2022. This significant development was presented to the G20 and underwent review by Finance Ministers and Central Bank Governors.

This release by the OECD marks the establishment of a fresh tax transparency framework that is aimed at enhancing the reporting and automated exchange of information regarding crypto-assets. Furthermore, it broadens the scope of the CRS to encompass digital assets, aligning it with current market trends and fortifying its operational efficiency.

This groundbreaking initiative requires groups to determine which entities and transactions fall within its scope, ascertain the additional user information needed, and assess the suitability of existing IT systems for compiling and reporting requisite data.

Building on prior consultations concerning crypto transaction reporting, the OECD released a publication titled “Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard” on October 10, 2022 itself. This publication contains the regulations and commentary of CARF, along with the proposed CRS amendments ratified by the OECD in August of the same year.

Understanding the CARF

The existing CRS framework primarily focuses on cross-border financial investments and offshore assets held by financial institutions, primarily involving conventional financial assets and currencies. Crypto assets often fall outside this framework’s scope. Even when crypto-assets could technically qualify as financial assets, they often escape reporting since individuals typically own them through cold wallets or on crypto-asset exchanges, which are not classified as financial institutions and thus do not have CRS reporting obligations.

To address this gap, the OECD introduced CARF. In summary, CARF is a regulatory framework designed to enhance transparency and reporting in the world of crypto-assets, ensuring that tax authorities have access to essential information to prevent tax evasion and illicit activities in this rapidly evolving financial landscape. The data to be collected under CARF largely mirrors that of the current CRS framework in many aspects, but it also incorporates additional requirements. Additionally, mechanisms will be implemented to prevent duplication between CARF and CRS, reducing the tax compliance burden.

To break it down, CARF mandates the reporting of various types of crypto-asset transactions, including:

Exchanges between crypto-assets and traditional fiat currencies (e.g., USD, EUR).
Exchanges between different types of crypto-assets.
Transfers of crypto-assets in exchange for goods or services, subject to specific thresholds.
Transfers of crypto-assets, even if the consideration paid or received is unknown.

These transactions are reported in aggregate, categorized by the type of crypto-asset, and distinguish between outward and inward transactions.

The CARF was introduced by the Organization for Economic Cooperation and Development (OECD) to address the growing need for transparency and regulation in the world of crypto and crypto assets. The primary purpose of CARF is to establish a standardized framework for reporting and exchanging information about crypto-assets for tax and regulatory purposes. It aims to ensure that governments have access to essential information about crypto-asset transactions to prevent tax evasion and illicit activities.

Common Reporting Standard Amendments

The Common Reporting Standard (CRS) is an international framework designed to facilitate the automatic exchange of financial account information between different countries’ tax authorities. Its primary goal is to combat tax evasion and ensure tax compliance on a global scale. Amendments to the CRS are periodically made to enhance its effectiveness and adapt to evolving financial practices.

To meet the increased reporting demands introduced by the revised CRS, an additional document known as the CRS MCAA Addendum has been created. This Addendum serves as an enhanced legal framework for enabling participating jurisdictions to share CRS information within the CRS MCAA (Multilateral Competent Authority Agreement).

Below, we have outlined some common amendments and changes that have been proposed or implemented:

Expansion of Reportable Accounts:

The first amendments to the CRS include updates to the definition of “reportable accounts” of reporting financial institutions to cover a wider range of financial products and services. This may include additional categories of accounts or financial instruments that financial institutions must report. This also includes the derivatives referencing Crypto-Assets and Investment Entities who are investing in Crypto-Assets. In order to maintain consistency among all referenced derivatives to help, the Reporting Financial Institutions must apply the same due diligence and reporting procedures to the derivatives referencing different types of assets.

Enhanced Due Diligence Requirements:

To improve the accuracy of reported information, amendments may introduce more strict due diligence requirements for financial institutions. This could involve:

- more thorough customer identification
- customer verification procedures
- changes in Account Holder Identification information
- reporting of joint accounts, including the disclosure of the number of joint holders and their respective tax residencies.

Updates to Self-Certification Procedures:

CRS amendments may provide clarity on self-certification procedures and the timing of obtaining self-certification forms for pre-existing accounts.

Expansion of Investment Entity Definitions:

CRS amendments may broaden the definition of “investment entities” to include those engaged in activities related to crypto-assets or other previously uncovered financial activities.

Incorporation of Frequently Asked Questions (FAQs):

CRS amendments may integrate frequently asked questions and additional guidance published by the Organization for Economic Cooperation and Development (OECD) to provide further clarification and interpretation of the CRS rules.

Introduction of Non-Reporting Categories:

Some amendments may introduce non-reporting categories for specific entities or accounts, particularly for non-profit entities that meet certain criteria and are subject to verification procedures.

It’s important to note that CRS amendments are typically driven by the OECD and adopted by participating countries. Financial institutions operating in multiple jurisdictions need to stay informed about these amendments and ensure compliance with the latest reporting standards to avoid penalties and maintain transparency in cross-border financial transactions.

Learn More: How do You Report Crypto Tax in India

Future Implications

The OECD is actively working on the CARF implementation package, which will include;

IT solutions to facilitate information exchange
further clarification of CARF rules and administration
a framework for bilateral or multilateral competent authority agreements for the automatic exchange of CARF-collected information.

In-scope reporting financial institutions and intermediaries in Hong Kong should closely monitor these developments. Following the synthesis paper that has been released upon the discussion in the G20 meeting regarding the same, the world is eagerly waiting for a regulatory framework for the crypto asset space.

Crypto-asset exchanges, brokers, dealers, and wallet providers, in particular, should assess the potential impact of CARF’s due diligence and reporting requirements on their business models, including evaluating the adequacy of their IT systems. Other financial institutions should also review their CRS policies and procedures to identify gaps with the amended framework and plan for customer outreach accordingly.

Additional Read: Tips to Save Tax on Crypto Gains in India

Conclusion

Overall, the introduction of the Crypto-Asset Reporting Framework (CARF) marks a significant milestone in the ongoing effort to bring transparency and regulatory oversight to the rapidly evolving world of crypto-assets. CARF, unveiled by the Organization for Economic Cooperation and Development (OECD), is a response to the unique challenges posed by crypto-assets, including crypto, utility tokens, and non-fungible tokens (NFTs). These digital assets have gained immense popularity for their ability to be transferred and held without traditional financial intermediaries, making them susceptible to misuse and tax evasion.

CARF’s primary objective is to establish a standardized framework for reporting and exchanging information about crypto-asset transactions for tax and regulatory purposes. It seeks to bridge the gap between the existing Common Reporting Standard (CRS) framework, which primarily covers traditional financial assets and the burgeoning world of crypto-assets.

FAQs

Which organization developed crypto asset reporting framework?

The organization that developed the crypto asset reporting framework is Organization for Economic Co-operation and Development, also known as OECD.

Will crypto asset reporting framework bring clarity for investors?

Yes, with the dos and don'ts specified along with the procedures they are stating to be implicated cumulatively ensures to bring about a clear picture on the crypto space for the investors.

Who are the primary focus of the crypto asset reporting framework?

The primary focus of the crypto asset reporting framework are the crypto-asset exchanges, brokers, dealers, and wallet providers.