Taxpayers have varied feelings about international crypto rules.
Coinbase and Ripple said that global crypto legislation can alleviate compliance concerns, but three service providers are concerned about client privacy.
According to sources at significant corporations, G20-backed crypto tax guidelines could clarify confusing accounting positions for digital assets, a difficulty that Block, Coinbase, MicroStrategy, and Tesla have all experienced as a result of storing and trading substantial quantities of bitcoin.
According to Aaron Jacob, head of solutions at Utah-based crypto tax service TaxBit, worldwide standards will bring regulatory clarity faster, and businesses who can demonstrate continual compliance with national laws would be better shielded against international inquiries as well.
“Last year’s corporate clamour to add bitcoin reserves to balance sheets has slowed to a crawl, at least partly because of complex accounting and more cross-border [tax] disclosures,” he says.
“Even Tesla has a mystery on its cost basis from selling a majority of its multi-billion-dollar bitcoin stake before wider regulations could be introduced,” he adds.
At their October 13 meeting, G20 finance ministers and central bank governors engaged in extensive tax negotiations. The OECD published its final report on its crypto asset reporting framework (CARF), while the Financial Stability Board (FSB) made suggestions to control national regulations.
Regulations on the way
G20 finance ministers are increasing transparency by overhauling their national tax systems in response to the recent OECD and FSB findings.
The OECD's reporting guidelines will apply to nearly any digital representation of value that validates transactions using a distributed ledger. Domestic and international data sharing agreements between G20 countries might allow intermediaries and authorities to begin disclosing as early as 2023.
The CARF includes model legislation that can be translated into domestic frameworks, as well as commentary to aid with administration.
Meanwhile, the FSB research encourages legal bodies to assume responsibility for certain crypto operations, which would weaken the market's decentralised nature.
The FSB makes nine recommendations to standardise national standards, including a CARF-style monitoring mechanism for crypto activities. If a multinational group has many entities in different jurisdictions with crypto assets on their books, the FSB will need to work with local authorities to clarify stakeholder liabilities.
In an interview with Politico, Steven Maijoor, a member of the Dutch central bank's governing board and co-creator of the FSB research, noted that activity in crypto markets are similar to those in traditional financial systems.
“Our recommendations are intended to be flexible so they can be incorporated into the wide variety of regulatory frameworks around the world,” he added.
The FSB has not yet finalised its suggestions, and a public consultation will be held through December 15. The standard-setting organisation hopes to have its regulatory draught completed by July 2023.
The move puts big crypto platforms on high alert, as US officials consider new cryptocurrency guidelines and EU politicians prepare their own digital market legislation.
Companies are willing to comply with laws, according to Brian Lozada, vice president of tax at Ripple in California, but there needs to be clarity on what to regulate so that the crypto ecosystem can prosper.
"The vast majority of people in the crypto business want to play by the rules," he says. "However, we need to be clear about what we are attempting to control."
However, Lawrence Zlatkin, vice president of tax at Coinbase in New York, believes policymakers should postpone enforcing international rules until the OECD and the Financial Stability Board can develop a more comprehensive set of global principles.
"Tax compliance and tax reporting go hand in hand," he argues, "but placing special onerous requirements on cryptocurrency stifles innovation and may hinder widespread acceptance."
“We expect CARF to eventually be implemented globally, except for maybe in the US,” he adds.
Unilateral rules do not go far enough to govern the cross-border character of crypto assets, while overly wide international norms may limit market growth.
Standardizing cross-border regulations is a difficult endeavour because various technical and legal challenges remain. One of the difficulties is determining the scope of crypto assets.
They are defined by the OECD as any store of value that may be kept and transferred decentralisedly, without the use of traditional financial intermediaries.
According to Roger Brown, tax and regulatory counsel of New York-based technology company Chainalysis, a multilateral approach on how to address crypto assets is critical because national laws are insufficient.
“Unlocking crypto’s potential requires understandable rules that reflect the same letter and spirit of the law regulating other major financial markets in the US and the EU,” says Brown.
Recent price volatility in bitcoin and other crypto currencies have devalued huge firms and boosted pressure on G20 finance ministers to create broader international financial system norms.
There is nowhere to hide.
Smaller crypto tax service providers with little regulatory exposure are disappointed that new international standards will eliminate an important aspect of crypto asset management - anonymity.
According to David Deputy, director of strategic developments and developing markets at Vertex in Philadelphia, national policies based on OECD and FSB regulations may have a negative impact on the crypto business.
"Many will strive to innovate around this [OECD] idea, both legally through decentralised governance and technically through privacy technologies that conceal transactions," he argues.
“The guidance, if adopted globally, will end pseudo anonymity of crypto assets as it requires the full range of know-your-customer information for all users in all transactions of value,” he adds.
“It is a major change to require all users to reveal themselves – we all have an interest in ensuring taxes are paid, but apps that collect and store user tax information will be a legal disaster,” he notes.
The OECD's crypto framework is comprised of four components: the scope of crypto assets to be covered, entities subject to data collection and reporting requirements, transactions subject to reporting, and due diligence procedures to identify ultimate beneficial owners.
"The reporting obligation is strict on entities including platform providers and decentralised app owners," Deputy explains, but he points out that strong legal language in previous OECD draughts to allow authorities to find beneficial owners had been dropped, despite the decentralised nature of crypto assets.
Concerns about NFT
Meanwhile, service providers are concerned that the CARF's tax classification of NFTs, which are vulnerable to money laundering schemes and other financial wrongdoing, may impede growth.
An NFT is a blockchain-based digital representation of an artistic work, such as a trading card. While the blockchain ensures proof of digital ownership, the crypto asset grants the holder certain rights of use, but established legal mechanisms to oversee the tax and intellectual property treatment of those assets are lacking in many countries.
“Decentralised organisations that lack an identifiable controlling entity will be a problem to report, and it will need closer legal analysis,” says Deputy.
“I am sure decentralised apps will be fiercely debated too,” he adds.
According to Thomas Vanhee, founder partner of tax consultancy firm Aurifer in Dubai, one of the most contentious issues is what taxes would be levied on the sale of an NFT, as many nations do not provide guidance.
Crypto assets raise a number of cross-border corporate income tax (CIT) concerns. Although classifying NFTs as a service makes sense for VAT purposes, there is no straightforward formula for calculating CIT on residual income. To justify the tax treatment in many cases, a case-by-case review is required.
"The recent OECD and FSB ideas may potentially shift the market away from the current exchange of information systems," Vanhee says.
According to taxpayers, the CARF might make company disclosures unnecessarily complicated. Most SAP ERP systems that gather, store, and send data to business units, partners, and intermediates will require numerous changes to their architecture.
The G20 finance ministers' stance on tax transparency has the potential to close numerous compliance gaps in crypto taxes, but the reporting regime comes with a number of costly alterations.
The G20 presidency of India begins on December 1, and negotiations on crypto asset tax policy are likely to continue in future international gatherings.
At the current G20 finance ministers conference in Washington DC in October, India's finance minister, Nirmala Sitharaman, emphasised the significance of a global tax framework for crypto market operations.
"The global economy faces multiple challenges, and it is our collective responsibility to prevent the risks from aggravating," she said.
“The mandated annual exchange of crypto transactions in a standardised way will give regulators the ability to track and tax transactions,” she added.