Key takeaways

  • The EU’s DAC8 directive integrates CASPs into the tax reporting system by aligning with the OECD’s CARF framework. This ensures greater transparency in crypto transactions under the CRS.
  • CASPs serving EU clients must register with an EU member state, including non-EU providers. Noncompliance results in ESMA blacklisting, enforcing stricter regulatory oversight.
  • CASPs are required to report crypto-fiat exchanges, crypto-to-crypto trades, significant retail payments and transfers. Transaction details, including asset values and transaction types, are to be reported in official currencies.
  • DAC8 will start requiring reports for tax years beginning Jan. 1, 2026, but the deadline for the first round of reporting (for the 2026 tax year) will indeed be Jan. 31, 2027.

The Council of the European Union, the collective body of EU27 finance ministers, adopted the revised Directive on Administrative Cooperation (DAC) 8 on May 16, 2023, with the goal of including crypto asset service providers (CASPs) into the tax reporting system. This directive is intended to bring crypto assets under the Common Reporting Standard (CRS), the current tax transparency framework, and to improve the scope and quality of its data. 

The CRS is based on the Crypto-Asset Reporting Framework (CARF) of the Organisation for Economic Co-operation and Development (OECD). The CARF was approved by the G20 in August 2022 and published in October 2022. While including clauses for various forms of financial reporting, like non-custodial dividends and specific cross-border decisions, DAC8 also includes provisions for crypto exchanges and wallet providers.

These guidelines acknowledge that the emergence of unregulated crypto assets may thwart global tax transparency. CARF and DAC8 require digital market intermediaries in the United Kingdom and other countries participating in the CARF to perform due diligence on customers, aggregate data on transactions and transfers, and share it with tax authorities. 

DAC8 will make it mandatory to file reports for tax years beginning in 2026. But you won’t have to file the first report until Jan. 31, 2027. To successfully navigate these developments, UK investors will need to comprehend how CARF will affect crypto reporting requirements and compliance.

OECD member countries

This article discusses various aspects of CARF and DAC8, including registration requirements of CASPs, steps taken for the implementation of CARF in the European Union, and who collects and reports relevant information. It also informs about the steps to be taken by service providers regarding DAC8 rules. 

What is CARF?

The OECD Global Forum on Transparency and Exchange of Information for Tax Purposes has initiated the CARF to facilitate the automatic exchange of information among countries to deal with tax evasion associated with crypto assets. The framework is designed to promote global tax transparency.

The CARF requires CASPs to collect tax residency information and other relevant data like account balances and transaction records. The CASPs report this information to the respective domestic tax authority. Subsequently, tax authorities exchange this information to ensure tax compliance, assessment and monitoring.

The CARF aims to address the difficulties tax administrators face in tracking taxpayer information and ensuring compliance in the expanding crypto asset market. Two major challenges tax administrators face are:

  • Digital assets can be issued, recorded, transferred and stored in a decentralized manner, bypassing traditional financial intermediaries and central authorities.
  • Intermediaries like crypto exchanges and wallet providers may operate under limited regulatory scrutiny.

Did you know? As of Sept. 4, 2024, the total market value of all existing cryptocurrencies stands at approximately $2.02 trillion, according to CoinMarketCap. Bitcoin holds a dominant position, accounting for roughly $1.14 trillion of this overall value.

Registration requirements for CASPs

CASPs outside the EU that offer services to EU customers must register with an EU member state. This requirement applies to both EU and non-EU CASPs that serve EU customers. These CASPs must register and report their activities to a single EU member state. This approach is similar to the one used in DAC7.

EU-regulated CASPs will be listed on a publicly accessible register maintained by the European Securities and Markets Authority (ESMA). This list will identify authorized CASPs operating within the EU. ESMA maintains a register of compliant CASPs. This means that non-compliant CASPs may face penalties or be subject to enforcement actions. 

Steps taken within the EU for implementation of the CARF

Within the EU, specific steps have been taken to ensure consistent implementation across member states. Here is a breakdown of the process:

  1. Transposition: The CARF is transposed into EU law through Directive 2011/16/EU, known as the DAC8. This directive amends the existing EU directive on administrative cooperation in tax matters.
  2. Domestic implementation: Each EU member state incorporates DAC8 into its own national laws. It ensures that the EU member states follow the same set of rules regarding crypto asset information exchange.
  3. Boosting existing frameworks: DAC8 complements existing EU regulations for the crypto market. These include the Markets in Crypto-Assets (MiCA) framework and the Transfer of Funds Regulation (TFR).
  4. Scope: Currently, DAC8 focuses on the CASPs that serve individuals or legal entity clients residing within the EU. This means CASPs operating outside the EU are only relevant to DAC8 if they have EU-resident clients.
  5. Alignment with MiCA: DAC8 aims for consistency with MiCA in its definitions of “crypto asset” and “crypto asset service provider.” MiCA sets the regulatory rules for crypto activities, and DAC8 focuses on tax transparency and reporting.

Did you know? The capital gains tax rate is tiered. For individuals with an annual net income of up to 50,270 British pounds, the rate is 10%. However, for those earning more, the rate increases to 20%. Additionally, investors enjoy an annual tax-free allowance of 6,000 pounds on capital gains.

What do CASPs need to report?

Broadly, CASPs need to report the following types of transactions:

  • Exchanges between crypto assets and fiat currency: This refers to transactions where you buy or sell digital assets using fiat currencies like the United States dollar, euro or pound.
  • Exchanges between one or more types of crypto assets: This involves swapping one cryptocurrency for another, such as exchanging Bitcoin (BTC) for Ether (ETH).
  • Reportable retail payment transactions: This includes retail payments made using cryptocurrencies, but only those exceeding the $50,000 threshold.
  • Transfers of crypto assets: This covers the movement of cryptocurrencies from one wallet or exchange to another.

The value of a cryptocurrency asset at purchase and the gross proceeds value at disposal should be shown in the reporting data in an official currency. For crypto-to-crypto transactions, both the value of the sold asset and the acquired asset must be reported in official currency. Furthermore, reports should differentiate between incoming and outgoing transactions and identify the relevant transfer type, such as forks and airdrops.

Components of the CARF

The CARF comprises three primary components:

  • Rules: These provide a framework for collecting information from the CASPs that operate within a specific jurisdiction. This framework focuses on four key areas:
    • Scope of crypto assets: Defining the types of digital assets that the CARF covers.
    • Entities and individuals: Identifying the organizations and individuals subject to data collection and reporting requirements.
    • Reportable transactions and information: Specifying the types of transactions that must be reported and the details to be included in those reports.
    • Due diligence procedures: Outlining the procedures the CASPs must follow to identify their customers and determine their tax residency for reporting purposes.
  • Multilateral Competent Authority Agreement (MCAA): This agreement establishes the framework for the automatic exchange of information between tax authorities participating in the CARF. It outlines the procedures for sharing information, resolving disputes and ensuring confidentiality.
  • Electronic format (XML schema): Both tax authorities and the CASPs use this standardized format to exchange CARF information electronically. It ensures efficient and secure data transmission.

The customer due diligence procedures expand upon the self-certification approach used in the CRS and incorporate existing Anti-Money Laundering/Know Your Customer (AML/KYC) obligations outlined in the 2012 Financial Action Task Force (FATF) recommendations. 

The alignment between the CARF and the CRS aims to reduce the compliance burden for CASPs, particularly those already subject to the CRS. Like the CRS, the CARF allows for a phased approach in conducting due diligence procedures on existing customers.

Did you know? In Germany, long-term cryptocurrency holders benefit from tax advantages. Investors who hold their crypto tokens for a minimum of one year are exempt from capital gains tax upon sale. For those who have staked their crypto, the tax exemption period is extended to 10 years.

Who collects and reports CARF information?

The CARF requires the following entities to collect and report this information:

  • CASPs: These are entities that provide services related to crypto assets. Examples include cryptocurrency exchanges, wallet providers and certain lending platforms.
  • Exchanges, custodians and wallet providers: The CARF mandates the collection of information and reporting for intermediaries such as exchanges, custodians and wallet providers. Decentralized protocol developers or entities are required to comply if they perform specific roles akin to traditional intermediaries. 
  • NFT marketplaces: These are platforms that facilitate the buying and selling of non-fungible tokens (NFTs).

What is DAC8?

DAC8 updates the existing EU Directive on Administrative Cooperation (DAC). It broadens the scope of registration and reporting obligations for service providers that facilitate cryptocurrency transactions for EU customers. It introduces new rules for reporting and exchanging information on crypto assets for direct tax purposes. The DAC8 aligns with the OECD’s CARF and integrates its amendments to the CRS.

The directive utilizes the definitions of MiCA for service providers and crypto assets. MiCA outlines the conditions for accessing the EU crypto asset market and Anti-Money Laundering regulations.

Member states are required to incorporate the provisions of DAC8 into their national laws by Dec. 31, 2025.

Timeline of the DAC8

Three-step approach for DAC8 rules

Like DAC7, DAC8 rules will be based on a three-step process:

  • Step 1: Identify reportable users — Service providers must conduct due diligence procedures to identify users who trade or exchange crypto assets through their platform. Such reportable users will be identified through self-certification.
  • Step 2: Collect and report information — Service providers must collect and report information on reportable users to the relevant tax authority by Jan. 31 of the following year. Before collecting and reporting personal information, service providers must inform individuals about this process, ensuring compliance with the GDPR regulations.
  • Step 3: Exchange information — The tax authority of the member state that receives information from the service provider must automatically exchange this information with other relevant tax authorities through an electronic system.

US participation in the CRS

The US has historically relied on its own tax information gathering system, the Foreign Account Tax Compliance Act (FATCA), rather than participating in the OECD’s CRS.

In August 2023, the US Treasury and Internal Revenue Service proposed cryptocurrency tax information reporting rules, effective Jan. 1, 2025. However, the US participation in crypto reporting is not through CRS but via FATCA and the newly proposed cryptocurrency reporting rules. 

While these rules would help the US engage in international data sharing, it would be through FATCA’s existing mechanisms. 

Furthermore, the US rules have extraterritorial reach, applying to non-US exchanges that serve US citizens. This means that even without formal US participation in CARF, the practical outcome may resemble the current CRS/FATCA model, where information is shared between countries.