After decades of clamping down on tax evasion via offshore centers, the G20 is concerned that cryptocurrencies and other crypto-assets threaten to roll back these recent gains. Hence it briefed the OECD, which today released its crypto-asset reporting framework, providing a template for jurisdictions globally to implement crypto-asset tax compliance reporting.
However, the crypto-asset sector has previously voiced concerns because the definition of a crypto-asset for tax purposes and anti-money laundering purposes are not the same, resulting in a substantial administrative burden.
Banks were one of the main institutions performing a reporting role in the past. Now that role will also fall on cryptocurrency exchanges and other intermediaries such as brokers, dealers and ATM operators.
What is a crypto-asset for tax purposes?
The latest OECD definition of crypto-assets is anything that can be used for payments or investment and transferred in a decentralized manner, including crypto derivatives, stablecoins and non-fungible tokens (NFTs). That covers collectibles, games, art, and property.
What is out of scope is anything that uses cryptography purely for record keeping but doesn’t carry ownership rights. Another exclusion is when there is no secondary market for an item outside of a closed-loop platform, that is out of scope.
Central Bank Digital Currencies are out of scope but have separate reporting requirements.
The OECD conducted consultations and provided a public forum in May (see video). During that event, it acknowledged feedback about the scope of assets to be included. However, most of these concerns persist.
One of the objections was that stablecoins don’t have capital gains and hence should be excluded. However, that overlooks the fact that capital gains is just one type of tax. Stablecoins can be used to pay someone for goods or services, which is taxable as income. Hence the inclusion for reporting purposes.
Another objection was classing non-fungible tokens as in-scope when it is viewed as an emerging asset class.
OECD crypto-assets versus FATF virtual assets
Two of the concerns raised were significant as they create substantial additional administrative burdens. FATF already requires compliance for anti-money laundering (AML) purposes. But the definition included in the OECD document is broader and only considers the FATF definition of virtual assets as a starting point. For tax purposes, it considers any asset that can be used for payment or investment as in scope.
Where a crypto-asst is not a FATF virtual asset, the OECD says that the “Reporting Crypto-Asset Service Provider must determine, for each Crypto-Asset, whether it cannot be used for payment or investment purposes.” Rather than every exchange doing this work, one would hope the sector will collaborate and develop a common list. “NFTs that are traded on a marketplace can be used for payment or investment purposes and are therefore to be considered Relevant Crypto-Assets,” says the report.
Another objection made during the consultation was the difficulty of reporting on illiquid assets.
Apart from defining the assets and reporting entities, the framework also outlines what information has to be reported and the due diligence to be conducted on crypto-asset users.