March was a busy month for crypto clarification, with both the Organization for Economic Cooperation and Development and the Biden administration issuing plans for guidance.
The OECD released a public consultation document outlining a proposed global tax transparency framework for crypto assets. The proposal would require crypto exchanges to share details on transactions with foreign tax authorities, and outlines suggested amendments to the Common Reporting Standard, intended to address some of the transparency challenges that have been faced in the global crypto market. This comes as individual countries push for their own crypto tax reform, including the U.S. Treasury Department.
“You have to step back to 2017, when the OECD adopted a CRS that provided for the exchange of information between members,” said Charles Kolstad, a partner in the private client and tax group at law firm Withers Bergman LLP.
“Under the CRS, countries that adopted the standard would automatically report and receive tax-related information,” said Kolstad. “That framework didn’t specifically deal with virtual assets and service providers, so there were ongoing talks to deal with the issue. The new global tax transparency framework is the result. The Crypto Asset Reporting Framework, released in late March as a public consultation document, would supplement CRS.”
CARF would provide for reporting and automatic exchange of tax information on crypto-assets between administrations, and would require intermediaries to identify their customers and their tax jurisdictions, and report their aggregate transaction values on an annual basis.
“The thrust of the OECD framework is that they believe there is significant tax evasion occurring because of perceived anonymity in the cryptocurrency area, so they want and expanding group of people to be covered by CRS,” Kolstad explained. “What’s important is that there is one country noticeably absent — the U.S. Because the U.S. is not part of the CRS network, it won’t automatically get information about people operating outside the country. Having said that, it’s likely that the U.S. will seek to get the same information from FATCA that the OECD will be getting.”
FATCA — the Foreign Account Tax Compliance Act — which was passed as part of the HIRE Act, requires foreign financial institutions and certain other non-financial foreign entities to report on the foreign assets held by their U.S. account holders or be subject to withholding on withholdable payments. The HIRE Act also contained legislation requiring U.S. persons to report their foreign financial accounts, depending on the value.
The OECD has asked for public comments on the proposal, Kolstad indicated. “Despite the comments likely to be made, the OECD will not be particularly interested in relaxing the rules for categories of players in the crypto space. We anticipate they will adopt the rules pretty much as they are drafted, and then it’s up to the 97 countries that have adopted CRS to implement legislation in their own countries.”
Action in the U.S.
Days prior to the OECD action, the Biden administration released an executive order containing a government-wide outline for digital assets, focusing on cryptocurrency.
“The soaring size of the crypto market, the increasing participation of American investors and the growing number of countries planning to digitize their sovereign currencies indicate the guidance is a welcome and timely development,” remarked Joyce Beebe, a fellow in public finance at Rice University’s Baker Institute.
“How the federal government treats cryptocurrency depends on whom you ask,” she noted. “Since 2014, the IRS has viewed cryptocurrency as property instead of currency for federal income tax purposes. However, this does not mean tax reporting for cryptocurrencies is clear or easy; taxpayers have filed multiple lawsuits regarding crypto gains reporting, and tax basis variations across different dates mean record-keeping could be onerous. At the same time, the IRS has targeted cryptocurrency exchanges in pursuit of noncompliant investors, recovering millions in underpaid taxes.”
Other government agencies have their own take on crypto currency.
“The Securities and Exchange Commission believes cryptocurrencies are securities and are therefore subject to its oversight. It has brought several cases to court regarding entities that failed to follow SEC registration and disclosure rules, and has also fined multiple operators, including a $50 million penalty in February 2022 against BlockFi, which offered investors interest for lending cryptocurrencies.”
The Commodity Futures Trading Commission, meanwhile, views cryptocurrencies as commodities. It has taken actions against unregistered crypto-trading platforms for failing to comply with the Commodity Exchange Act.
And the Financial Crimes Enforcement Network, or FinCEN, with its primary mission to safeguard the financial system from illicit use and combat money laundering, has a different view from the IRS, the SEC, or the CFTC.
“In published guidance, the agency indicated that cryptocurrency is a form of currency under FinCEN regulations,” Beebe explained. “Specifically, it states that cryptocurrency is a medium of exchange that operates like a currency in some environments, but does not have all the attributes of a real currency. For example, it does not have legal tender status — typically held by coin and paper money — in any jurisdiction.”
And recently, the Department of Labor warned fiduciaries about their duty of prudence in using any digital assets — cryptocurrency, tokens, or other derivations — as investments for 401(k) plans, remarked tax attorney Barbara Weltman, author of “J.K. Lasser’s Small Business Taxes 2022.”
“It cautions plan fiduciaries to exercise ‘extreme care’ before they consider adding a cryptocurrency option to a 401(k) plan’s investment menu for plan participants,” she said. “These investments are highly speculative and are difficult to value in many instances,” she said. “What’s more, participants may lack knowledge about how they work.”
Likewise, states have their own position on issues surrounding the crypto space. Washington State is the first to announce plans for guidance on nonfungible tokens, or NFTs. Washington’s view is that these digital assets stored on the blockchain are subject to the state’s sales and business taxes. Its Department of Revenue will issue an “excise tax advisory,” with guidance on how to approach taxability of NFTs.
“Washington’s position on NFT’s is exactly what I thought they would say, and several other states will take the same position,” said Scott Peterson, vice president of U.S. tax policy and government relations at Avalara. “NFTs are not that complicated, at least conceptually. What NFTs represent can make them sales-tax complicated. Bundled transactions are always complicated from a sales tax standpoint. This isn’t the first time someone bundled multiple products into a single transaction — states have good rules around the common examples, such as software bundled with hardware. In other cases, states rely on some form of ‘essence of the transaction’ or other phrase to get to what the consumer is buying.”
“Although the cryptocurrency universe continues to evolve and the potential for new offerings is limitless, these different perspectives across federal agencies highlight potential inconsistencies and room for a united approach,” said Beebe.
The administration’s executive order includes six major areas: consumer and investor protection, financial stability, illicit finance, U.S. leadership in the global financial system and economic competitiveness, financial inclusion, and responsible innovation.
“The development of a dollar-based central-bank digital currency, a digital form of the U.S. dollar, is not officially listed as one of the six priority areas,” Beebe noted. “However, over 100 countries have been exploring the concept of a CBDC. The executive order elevates the sense of its significance and asks agencies to evaluate the technological infrastructure and design a strategic plan related to a CBDC.”
Is there a CBDC in our future? The possibility exists.
“In January 2022, the Federal Reserve issued a study about the benefits and risks of a CBDC,” Beebe observed. “The study does not provide any policy recommendation — instead, it aims to foster discussions with stakeholders and invites public comments,” she said. “It indicated that it will not issue a CBDC unless it has support from Congress and the executive branch. In addition, the Federal Reserve stated that even if a CBDC is issued, it will complement, rather than replace, paper currency. The CBDC and paper currency would coexist.”
Despite underlying security and privacy concerns, the executive order acknowledges cryptocurrency as a potentially viable form of payment, according to Beebe.
“Instead of banning these transactions, the policy focus is on ensuring equal and secure access for all,” she said. “It directs a series of studies and research to continue exploring issues associated with digital assets. Meaningful policy recommendations will be revealed over the course of the year, when the agencies finalize their studies and provide specific policy proposals. November’s midterm elections may influence the timing of implementing any suggested policies.”