The European Commission has recently proposed new amendments to the Directive on Administrative Cooperation 8 (DAC-8) to require crypto-asset service providers to provide reports on transactions of clients residing in the EU, including domestic and cross-border transactions. Financial institutions are also obliged to report client transactions on central bank digital currencies. The proposal also expands the scope of the automatic exchange of information on high net-worth individuals (with a minimum €1 million AUM).
According to the EU, “… the emergence of alternative means of payment and investment, such as crypto-assets and e-money, threaten to undermine the progress made on tax transparency in recent years and pose substantial risks for tax evasion.”
The new rules are expected to enter into force by 2026.
Consistency with other EU policies
Hence, several measures are being put in place to deter big-time tax evasion in the digital currency landscape. The proposal (issued December 2022), aligns with previous amendments to the DAC, in such ways:
DAC 2 – automatic exchange of financial account information between EU member states
DAC 3 – automatic exchange of information on advance cross-border tax rulings
DAC 4 – mandatory automatic exchange of information of tax authorities on country-by-country reporting
DAC 5 – access of tax authorities to anti-money laundering information
DAC 6 – mandatory automatic exchange of information in taxation and reportable cross-border arrangements
DAC 7 – administrative cooperation on taxation relating to sellers on digital platforms
The proposal is also consistent with the regulations on Markets in Crypto-Assets (MiCA). MiCA is applicable to all EU member states. Its objectives include the establishment of legal frameworks related to crypto-assets and governing markets that are out of the scope of existing directives, such as NFTs, e-money tokens, asset-referenced tokens, etc.
A report by the European Court of Auditors stated:
Cryptocurrencies are excluded from the scope of information exchange. If a taxpayer holds money in electronic cryptocurrencies, the platform or other electronic provider supplying portfolio services for such customers are not obliged to declare any such amounts or gains acquired to the tax authorities. Therefore, money held in such electronic instruments remains largely untaxed.
The challenges of reporting crypto transactions
While cryptocurrency users are not 100% anonymous, crypto transactions remain difficult to trace, which presents potential taxation problems and loopholes for misuse through tax evasion. One objective of the recent EU proposal is to promote a fair tax system for all stakeholders and make reporting requirements easier in the process.
But that’s only one side of the coin. Cross-border transactions, especially outside the EU, is another concern altogether. “The lack of reporting of income from crypto-asset investments leads to a shortfall of Member States’ tax revenues,” the EU said.
As a response to this problem, the new rule outlines reporting rules for crypto-asset service providers obliged to provide transaction information of clients to tax authorities. The following should also be noted:
- The proposal is applicable to all member states
- Reporting crypto-asset service providers are subject to a standard and similar reporting requirements
- Reports are submitted along with an exchange of information, enabling tax administrators and authorities to access relevant data on income from crypto investments
- Reports are limited to a minimum necessary framework for crypto income reporting
Steps on reporting:
- Crypto-asset service providers must gather and verify information aligned with due diligence processes
- The gathered information will be forwarded to the authorities
- The concerned government agencies will communicate with relevant member states regarding the information
Apart from reporting, the EU Auditors noted “ … more needs to be done in terms of monitoring, ensuring data quality and using the information received.”
Additional reporting burden?
From one perspective, the new DAC amendments may be additional administrative and compliance requirements for crypto-service providers. The EU, however, ensured a simplified reporting process to minimise regulatory burdens. For example, reporting is homogeneous across the EU, instead of multiple rules or standards per member state. Still, penalties for non-compliance will remain under the control of member states. In addition, double reporting is not required.
Read the proposal here.
Watch our DAC 8 discussion here.
More reporting requirements may mean less time focusing on core company competencies. Partnering with a legal compliance solutions provider reduces takes such reporting requirements off the hands of the crypto fund manager or crypto fund investor. If you wish to know more about the EU’s proposal, contact one of our Bolder representatives or email us at email@example.com, so we can walk you through the update and assist you with your compliance needs.