Table of Links Abstract and 1. Introduction Abstract and 1. Introduction Bitcoin and the Blockchain 2.1 The Origins 2.2 Bitcoin in a nutshell 2.3 Basic Concepts Crypto Exchanges Source of Value of crypto assets and Bootstrapping Initial Coin Offerings Airdrops Ethereum 7.1 Proof-of-Stake based consensus in Ethereum 7.2 Smart Contracts 7.3 Tokens 7.4 Non-Fungible Tokens Decentralized Finance and 8.1 MakerDAO 8.2 Uniswap 8.3 Taxable events in DeFi ecosystem 8.4 Maximal Extractable Value (MEV) on Ethereum Decentralized Autonomous Organizations - DAOs 9.1 Legal Entity Status of DAOs 9.2 Taxation issues of DAOs International Cooperation and Exchange of Information 10.1 FATF Standards on VAs and VASPs 10.2 Crypto-Asset Reporting Framework 10.3 Need for Global Public Digital Infrastructure 10.4 The Challenge of Anonymity Enhancing Crypto Assets Conclusion and References Bitcoin and the Blockchain 2.1 The Origins 2.2 Bitcoin in a nutshell 2.3 Basic Concepts Bitcoin and the Blockchain 2.1 The Origins 2.1 The Origins 2.2 Bitcoin in a nutshell 2.2 Bitcoin in a nutshell 2.3 Basic Concepts 2.3 Basic Concepts Crypto Exchanges Crypto Exchanges Crypto Exchanges Source of Value of crypto assets and Bootstrapping Source of Value of crypto assets and Bootstrapping Source of Value of crypto assets and Bootstrapping Initial Coin Offerings Initial Coin Offerings Initial Coin Offerings Airdrops Airdrops Airdrops Ethereum 7.1 Proof-of-Stake based consensus in Ethereum 7.2 Smart Contracts 7.3 Tokens 7.4 Non-Fungible Tokens Ethereum Ethereum 7.1 Proof-of-Stake based consensus in Ethereum 7.1 Proof-of-Stake based consensus in Ethereum 7.2 Smart Contracts 7.2 Smart Contracts 7.3 Tokens 7.3 Tokens 7.4 Non-Fungible Tokens 7.4 Non-Fungible Tokens Decentralized Finance and 8.1 MakerDAO 8.2 Uniswap 8.3 Taxable events in DeFi ecosystem 8.4 Maximal Extractable Value (MEV) on Ethereum Decentralized Finance and 8.1 MakerDAO Decentralized Finance and 8.1 MakerDAO 8.2 Uniswap 8.2 Uniswap 8.3 Taxable events in DeFi ecosystem 8.3 Taxable events in DeFi ecosystem 8.4 Maximal Extractable Value (MEV) on Ethereum 8.4 Maximal Extractable Value (MEV) on Ethereum Decentralized Autonomous Organizations - DAOs 9.1 Legal Entity Status of DAOs 9.2 Taxation issues of DAOs Decentralized Autonomous Organizations - DAOs Decentralized Autonomous Organizations - DAOs 9.1 Legal Entity Status of DAOs 9.1 Legal Entity Status of DAOs 9.2 Taxation issues of DAOs 9.2 Taxation issues of DAOs International Cooperation and Exchange of Information 10.1 FATF Standards on VAs and VASPs 10.2 Crypto-Asset Reporting Framework 10.3 Need for Global Public Digital Infrastructure 10.4 The Challenge of Anonymity Enhancing Crypto Assets International Cooperation and Exchange of Information International Cooperation and Exchange of Information 10.1 FATF Standards on VAs and VASPs 10.1 FATF Standards on VAs and VASPs 10.2 Crypto-Asset Reporting Framework 10.2 Crypto-Asset Reporting Framework 10.3 Need for Global Public Digital Infrastructure 10.3 Need for Global Public Digital Infrastructure 10.4 The Challenge of Anonymity Enhancing Crypto Assets 10.4 The Challenge of Anonymity Enhancing Crypto Assets Conclusion and References Conclusion and References Conclusion and References 10.2 Crypto-Asset Reporting Framework The Crypto Assets Reporting Framework introduced by the OECD addresses the challenges posed by crypto assets in the realm of taxation, specifically addressing the lack of taxpayer information. This framework establishes guidelines and standards for the reporting and automatic exchange of information regarding crypto asset transactions among tax authorities globally. With the rapid proliferation of crypto assets and increase in their market capitalization, the OECD recognized the imperative to ensure transparency and compliance within this evolving landscape. The CARF seeks to enable tax authorities to effectively monitor and regulate crypto asset transactions, to help them combat tax evasion. By establishing clear reporting requirements for crypto asset transactions, the framework aims to enhance tax compliance. Moreover, by facilitating the exchange of information among tax authorities across jurisdictions, it fosters international cooperation in addressing the unique tax challenges posed by crypto assets. Besides providing a framework for multilateral and bilateral agreements for exchange of information, it also provides an XML schema for information exchange. The CARF[160] is similar to the Common Reporting Standard (CRS) developed by the OECD which helps jurisdictions to obtain offshore accounts information through annual automatic exchange of information. It defines the term “Relevant Crypto-Asset” which means “any Crypto-Asset that is not a Central Bank Digital Currency, a Specified Electronic Money Product or any Crypto-Asset for which the Reporting Crypto Asset Service Provider has adequately determined that it cannot be used for payment or investment purposes.” This definition includes crypto assets like NFTs and excludes specific categories of crypto assets like CBDCs. It makes the following three types of transactions reportable to tax authorities: “Relevant Crypto-Asset” “any Crypto-Asset that is not a Central Bank Digital Currency, a Specified Electronic Money Product or any Crypto-Asset for which the • exchanges between Relevant Crypto-Assets and Fiat Currencies; • exchanges between one or more forms of Relevant Crypto-Assets; and • Transfers (including Reportable Retail Payment Transactions) of Relevant Crypto-Assets. The amount and details of units of crypto assets transferred to unhosted wallets are also required to be collected and retained for 5 years. The individuals or entities carrying out transactions related to crypto assets are known as “Reporting Crypto-Asset Service Providers. A Reporting Crypto-Asset Service Provider is defined as ‘any individual or Entity that, as a business, provides a service effectuating Exchange Transactions for or on behalf of customers, including by acting as a counterparty, or as an intermediary, to such Exchange Transactions, or by making available a trading platform.’ ‘any individual or Entity that, as a business, provides a service effectuating Exchange Transactions for or on behalf of customers, including by acting as a counterparty, or as an intermediary, to such Exchange Transactions, or by making available a trading platform.’ The commentary to the CARF clarifies the applicability of the definition to individuals and entities like software developers and decentralised exchanges. It states “An individual or Entity that is making available a platform that solely includes a bulletin board functionality for posting buy, sell or conversion prices of Relevant Crypto-Assets would not be a Reporting Crypto-Asset Service Provider as it would not provide a service allowing users to effectuate Exchange Transactions. For the same reason, an individual or Entity that solely creates or sells software or an application is not a Reporting CryptoAsset Service Provider, as long as it is not using such software or application for the provision of a service effectuating Exchange Transactions for or on behalf of customers.” “An individual or Entity that is making available a platform that solely includes a bulletin board functionality for posting buy, sell or conversion prices of Relevant Crypto-Assets would not be a Reporting Crypto-Asset Service Provider as it would not provide a service allowing users to effectuate Exchange Transactions. For the same reason, an individual or Entity that solely creates or sells software or an application is not a Reporting CryptoAsset Service Provider, as long as it is not using such software or application for the provision of a service effectuating Exchange Transactions for or on behalf of customers.” The Reporting Crypto-Asset Service Provider are required to submit reports on Reportable Users[161] and also undertake due diligence on the customers, both individuals and entities. They are required to report the following information regarding Crypto-Asset Users that are Reportable Users or that have Controlling Persons that are Reportable Persons: Name Address Jurisdiction(s) of Residence Tax Identification Number(s) Date and Place of Birth Name Name Address Address Jurisdiction(s) of Residence Jurisdiction(s) of Residence Tax Identification Number(s) Tax Identification Number(s) Date and Place of Birth Date and Place of Birth The name, address and identifying information of the Reporting Crypto-Asset Service Provider along with details of ‘Relevant Transactions’ need to be provided. Tax Identification Number (TIN) and Place of Birth may not be required to be reported if the domestic law does not require collecting the information or TIN has not been issued by the reportable jurisdiction. The information is to be obtained on a self-certification basis and its reasonableness needs to be confirmed relying on other information collected by the Reporting Crypto-Asset Service Provider, like AML/KYC related information. The CARF is an amendment to CRS and based on a separate legal framework from the CRS, which makes it possible for countries to implement CARF without signing up for CRS (Falcao & Michel, 2023). The definitions of Relevant Crypto-Assets and Reporting Crypto-Asset Service Provider are wider than the corresponding FATF definitions. This can enable tax authorities to obtain tax related information for a wider gamut of crypto assets and from a larger set of exchanges/intermediaries. However, the determination of place of residence of a taxpayer might be a challenge in case of decentralized exchanges which would likely qualify as Reporting Crypto-Asset Service Provider. Although the XML Scheme standardizes the information exchange but absence “of any technically proven means of identifying the VASP that manages the beneficiary wallet exhaustively, precisely, and accurately in all circumstances and from the VA address alone” as acknowledged by FATF, would also be a challenge for CARF as self-declaration based due diligence and blockchain analytics based attribution of crypto asset addresses to natural and legal persons might not provide reliable and accurate information for levy of taxes. Also, the information is provided annually which might lead to flight of assets in tax fraud cases. “of any technically proven means of identifying the VASP that manages the beneficiary wallet exhaustively, precisely, and accurately in all circumstances and from the VA address alone” Author: (1) Arindam Misra. Author: Author: (1) Arindam Misra. This paper is available on arxiv under CC BY 4.0 DEED license. This paper is available on arxiv under CC BY 4.0 DEED license. available on arxiv available on arxiv https://www.oecd.org/tax/exchange-of-tax-information/crypto-asset-reporting-framework-andamendments-to-the-common-reporting-standard.pdf D Section IV: Defined Terms https://www.oecd.org/tax/exchange-of-tax-information/crypto-asset-reporting-framework-andamendments-to-the-common-reporting-standard.pdf https://www.oecd.org/tax/exchange-of-tax-information/crypto-asset-reporting-framework-andamendments-to-the-common-reporting-standard.pdf https://www.oecd.org/tax/exchange-of-tax-information/crypto-asset-reporting-framework-andamendments-to-the-common-reporting-standard.pdf D Section IV: Defined Terms D Section IV: Defined Terms
