The European Union is working on a policy regulation that seeks to bring cryptocurrencies under its tax laws. Crypto companies will be asked to provide transaction information of customers that are EU citizens or residents to their respective tax authorities in Europe.
The European Commission (EC) has put forward a policy that will require crypto companies to report digital asset holdings and transactions of their European customers to tax authorities in respective jurisdictions within the bloc. The proposed guideline is an amendment to Europe’s existing tax laws called the Directive on Administrative Cooperation (DAC), to ensure that the industry stays in-line with its rules for tax fraud and evasion.
The directive requires crypto service providers in Europe and abroad including centralised and decentralised exchanges to report transactions if they have EU residents as clients, and will also apply to crypto assets such as fiat-backed stablecoins, derivatives and non-fungible tokens (NFT). Lawmakers are concerned that tax evaders who would normally use foreign bank accounts to hide funds away from authorities are now turning towards cryptocurrencies to do the same by leveraging its anonymity and lack of regulatory standards. The move is also viewed as a way to better enforce the economic sanctions placed on Russia for its invasion of Ukraine, citing fears that the country could be using cryptocurrencies to avoid the financial blocks.
Under the law, crypto companies will be required to collect and verify personal information of their European customers, including names, dates of birth, addresses and identification numbers, which will then be sent to tax authorities. Information such as the amount spent by the user buying crypto and how much they received selling the assets will also be collected by authorities.
The commission was inspired by global policy forum OCED’s (Organization for Economic Co-operation and Development) framework to bring cryptocurrencies under its Common Reporting Standard (CRS) – a system that shares financial transaction information of users with tax authorities in their respective jurisdictions. OCED is working with G20 countries to develop a global crypto tax reporting system similar to CRS under its Crypto-Asset Reporting Framework (CARF) that will automatically exchange crypto transaction information of taxpayers with authorities on an annual basis.
Policymakers say that by implementing the system to report income earned through crypto investments, EU member states can get an accurate picture of how much they are owed in taxes by residents. The system is expected to generate an additional income of $2.53 billion to the EU every year. According to the European Commission, establishing a common reporting standard will help the entire industry and also level the playing field for crypto assets investors with that of traditional financial assets like equities, stocks and bonds. The initial investment cost for the EU to implement the system will be $300 million, followed by a service cost of $25 million each year.
However, European crypto advocates are concerned the tax regulation will place a heavy burden on firms. Simon Polrot, President of advocacy group European Crypto Initiative, stated the following in an interview given to Decrypt;
“The information requested from the CASPs (Crypto Asset Service Providers) is extremely significant and complex to calculate. The estimated cost for service providers seems underestimated, and the mass of information to be produced and sent will be enormous. Will tax authorities have the means to process this information?”
The crypto-tax framework is in addition to the upcoming Markets in Crypto Assets (MiCA) bill which is expected to be voted into law in February. The landmark bill will establish a regulatory standard for crypto companies offering services across European member states. The tax policy proposal by the European Council is accepting feedback from industry experts and investors for eight weeks, after which it will be presented at the European Parliament and Council to be voted into law.