48 Countries Pledge to Implement CARF Attitudes of Parties and Future of Transparent Cryptocurrency Tax Framework

48 Nations Commit to Enforce CARF Principles and Establish a Transparent Framework for Cryptocurrency Taxation

Author: TaxDAO

On November 10th, 48 countries, including the United States, Canada, Germany, Japan, and other major countries, pledged to combat related tax evasion through the Cryptocurrency Asset Reporting Framework (CARF). Each country plans to implement this framework by 2027. To achieve global implementation by 2027, strong support from all stakeholders is needed.

Short-term Impact of CARF Implementation

CARF was born out of the rapid development of the cryptocurrency asset market and the attention of various countries to tax cooperation regarding cryptocurrency assets. CARF provides a basis for automatic information exchange between tax authorities of cryptocurrency exchanges, and is a joint effort by contracting parties to strengthen tax compliance and combat tax evasion in the rapidly growing cryptocurrency market.

CARF addresses tax evasion issues related to cryptocurrency through cooperation and information exchange, which is an important step in maintaining financial transparency and combating global tax evasion. Regarding the details of CARF implementation, these issues were further discussed by countries at the 16th plenary meeting of the Global Forum held in Lisbon, Portugal from November 29th to December 1st, 2023: In response to the call for widespread implementation of the CARF framework and the revision of AEOI standards by the G20 in 2022, the Global Forum established a new voluntary group – the CARF Group. Considering the increasing maturity of EOIR and AEOI standards, the Global Forum also agreed to adjust its peer review and monitoring processes to enhance its ability to serve forum members in the future.

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It is worth noting that the list of participating countries covers all 38 member countries of the OECD, and extends to traditional offshore financial havens including British Overseas Territories such as the Cayman Islands and Gibraltar. However, the absence of major markets such as China, Hong Kong, the United Arab Emirates, Russia, Turkey, and India, the non-participation of almost all African countries (except South Africa), and the participation of only two Latin American countries (Chile and Brazil) have weakened the global impact of CARF. The future global cryptocurrency asset tax transparency framework still has a long way to go.

Attitudes of Various Stakeholders

The countries that have committed to implementing CARF do not hold a unified attitude. The veteran financial power, the United Kingdom, holds a high evaluation of CARF. The UK Treasury previously estimated that cryptocurrency tax evasion could reach as high as 55%-95%, and believes that participating in CARF provides a good international environment for regulating cryptocurrency taxes. However, third world countries have mixed attitudes towards CARF. On the side of supporters, the Chilean Minister of Finance stated that CARF will help maintain continuously improving global financial transparency, and the head of audit stated that this automatic information exchange speeds up the audit process and improves audit efficiency, and proposed the need for appropriate handling and protection of consumer financial data. South Africa is the only African country to join CARF, and the relevant officials stated that joining the agreement will help South Africa keep up with the rapid development of the cryptocurrency asset market.

Some countries have not reached a consensus on the implementation of CARF, such as Brazil, which, although a contracting party, has recently debated CARF in the Brazilian Congress multiple times. Opponents believe that implementing CARF will reduce the efficiency of tax litigation and increase administrative costs.

The implementation of CARF indicates the government’s intention to obtain information and expand control over the movement of encrypted assets. However, the attitudes of different countries towards CARF reflect different perspectives. Some commentaries point out that CARF rules should be translated into domestic tax legislation. In order to comply with CARF, many companies’ tax compliance procedures will need to be adjusted in the future, which may temporarily increase operating costs. Compliance with these standards may lead to new requirements, and these costs may be passed on to suppliers and charged to consumers.

The implementation of CARF will also have an impact on exchanges and traders. CARF requires exchanges to report cryptocurrency transactions. On the other hand, during a bull market, billions of dollars flow from the traditional financial system to cryptocurrency exchanges and platforms. Traditional financial institutions want to prevent capital from fleeing to cryptocurrency platforms. Some banks began providing their own internal cryptocurrency trading services in 2021, coincidentally not requiring compliance with the CARF standards in this framework.

The requirement for exchanges and platforms to track cryptocurrency transactions further demonstrates the potential impact of CARF on the development of centralized cryptocurrency exchanges and platforms, which may benefit decentralized alternatives such as Dex.

CARF will also have an impact on traders. The impact on exchanges is transmitted to end traders, as the reported cryptocurrency transactions of exchanges become tax information for countries, thus impacting the tax situation of end cryptocurrency traders.

The Future of Cryptocurrency Tax Transparency Frameworks

Although CARF represents a significant international effort in standardizing cryptocurrency taxation, it is not the only protocol. Other international agreements involving the exchange of tax information on cryptocurrencies are also being promoted.

In October of this year, the EU Council officially adopted DAC8. DAC8 is a set of cryptocurrency tax declaration rules that grant tax authorities jurisdiction to monitor and assess every cryptocurrency transaction within any EU member state. Analysis by CoinBase indicates that the cryptocurrency legal provisions of DAC8 supplement the anti-money laundering rules under the MiCA framework. DAC8 requires all crypto asset service providers based in the EU to report transactions of EU customers, providing support for anti-money laundering and anti-tax evasion. In addition to restricting crypto assets, DAC8 also applies to financial institutions issuing central bank digital currencies (CBDCs).

As an international regulatory framework, CARF and DAC8 will not come into effect automatically. They require member states to enact domestic laws to implement them. Based on past experience, DAC8 within the EU will be implemented soon, but the full implementation of CARF will still take time. The convergence of CARF and DAC8 reflects the efforts made globally in terms of regulating cryptocurrency taxation.

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