CRYPTO INVESTORS TAX ALERT
Rough estimates suggest that a 20 percent tax on capital gains from crypto would have raised about $100 billion worldwide amid soaring prices in 2021. That is approximately 4 percent of global corporate income tax revenues and material enough for global tax authorities to notice.
There are also important fairness issues at stake. Though their anonymity makes it difficult to be sure exactly who holds crypto, there are signs that ownership is heavily concentrated among the relatively wealthy—even though holding crypto is strikingly common among people with low incomes too. Available surveys indicate that about 10,000 people hold one quarter of all Bitcoin, highlighting the concentration of crypto wealth in the hands of a few.
Crypto assets that can be used as instruments of payment have proliferated into more than 10,000 variants since the 2009 debut of Bitcoin, the first and still the largest cryptocurrency. The bewildering speed with which they have developed and the (somewhat) anonymity they can provide have left tax systems playing catch-up… until now!
A dangerous misconception exists that the inherent anonymity of crypto makes it possible for tax evaders to take advantage of it. While transactions made using cryptocurrencies are recorded on a public ledger and the identities of the users remain (somewhat) anonymous, the OECD has developed a cross-border reporting framework to provide for a standardised exchange of information on transactions in crypto-assets. The Crypto-Asset Reporting Framework (CARF) was developed in light of the rapid growth of the crypto-asset market and provides for the reporting of information on transactions in crypto-assets in a standardised manner, with a view to automatically exchanging such information with the jurisdictions of residence of taxpayers on an annual basis. The final version of the OECD CARF and the 2023 update to the Common Reporting Standard were finalised in June 2023.
By way of brief background, the Common Reporting Standard (CRS) was designed to promote tax transparency with respect to financial accounts held abroad. Since the CRS was adopted in 2014, over seven years have passed in which over 100 jurisdictions have implemented the CRS, and financial markets have continued to evolve, giving rise to new investment and payment practises.
SAVVA & ASSOCIATES COMMENTARY
The recent developments should not surprise anybody, as the writing has been on the wall for a number of years now (in fact, since 2014). It was only a matter of time before the scope of CRS extended to crypto assets, and that time is now.
The CARF provides for the automatic exchange of tax-relevant information on crypto-assets and was developed to address the rapid growth of the crypto-asset market and to ensure that recent gains in global transparency are not gradually eroded. Unfortunately, crypto and tax evasion have become somewhat synonymous over the years; hence, the recent developments should not surprise crypto investors globally.
In many European countries, for example, cryptocurrencies are treated as assets, and any gains or profits made from their sale or disposal are subject to capital gains tax. The tax rate and holding period required for qualifying as long-term gains may vary between countries. Too often we are approached by clients with dangerous misconceptions about how their home country taxes crypto gains—for example, German tax residents with the incorrect understanding that all crypto held for more than one year is exempt from tax in Germany, not taking into account profits from staking, interest, etc. The list of examples of such misconceptions is long and is not limited to clients who are EU tax residents.
Savva & Associates is among the few international tax advisory firms (based in Cyprus) with the necessary experience to advise clients with crypto-based wealth on how to meet their tax obligations. We have worked with some of the leading and most well-known crypto investors, founders, and developers, providing solutions to meet global tax obligations and reporting. We work alongside leading tax and fiduciary providers across the world to coordinate the establishment and ongoing administration of multi-jurisdiction tax optimisation structures designed to align taxpayers with their global tax obligations and reporting.