The Crypto Asset Reporting Framework – Don’t be caught out

Since the inception of Bitcoin in 2008, taxpayer compliance for those trading in cryptocurrencies has been somewhat questionable, partly due to the rather slow reaction of the global tax authorities to introduce a suitable reporting framework.

The market capitalisation of digital assets such as Bitcoin, Ethereum, Solana and BNB grew from $200 billion in early 2020 to over $3 trillion by the end of 2021 and now sits at $2.5 trillion. The growth in terms of popularity and the complex nature of the asset class has piqued the interest of regulators within the EU and beyond.

The concerns around crypto activity have centred around its use to facilitate tax evasion and money laundering. To try and circumvent this, the G20 countries approached the OECD to develop a framework for the exchange of information, like that implemented under the CRS in 2017 (Common Reporting Standard). 

Whilst there has been sporadic cooperation from third parties in providing information to HMRC, this has been limited to the mainstream Centralised Exchanges (CEX) such as Coinbase and Binance. The basic information received has then led to HMRC issuing ‘nudge’ letters to holders of cryptocurrency with an open invitation to ‘review’ their affairs and if necessary, bring them up to date.   

Despite receiving some information from the larger exchanges, many of the smaller trading platforms and Decentralised Exchanges (DEX) have not been forthcoming. This is set to change with the introduction of the ‘Crypto Asset Reporting Framework’ or ‘CARF’, which is touted as crypto’s version of the CRS. The UK Government signed up to  

The OECD CARF places responsibilities on Reporting Cryptoasset Service Providers (RCASPs) to furnish tax authorities with details of crypto transactions. To date, 48 countries have signed up to the CARF and regulations are to be implemented in each of those jurisdictions to ensure compliance. 

The UK Government published their draft version of the regulations (The Cryptoasset Service Providers (Due Diligence and Reporting Requirements) Regulations 2025) on Budget Day (30 October 2024) and have opened a consultation until 10 January 2025. These will be finalised in 2025 and come into force on 1 January 2026. 

What does this mean for Crypto platforms?

There will be a requirement for Crypto-Asset Service Providers (CASPs) to collect information specified within the CARF on UK and non-UK customers on a calendar year basis and a report submitted by 31 May following the calendar year end. The first report will be for the year to 31 December 2026 and will be due for submission by 31 May 2027. 

The CARF, as a global framework, will operate along broadly the same lines in each of the 48 jurisdictions that have agreed to participate.  

The OECD definition of a CASP is one that provides a service ‘effectuating Exchange Transactions’ as an intermediary. As well as catching the larger trading platforms, those controlling Decentralised Exchanges may be required to report. The report will be made in electronic format, and the customer notified by 31 May following the year end that their information has been passed to the relevant tax authorities in their country of residence.  

There are multiple categories of penalties set out in the draft legislation, with these likely to be in line with those set out in ‘The Platform Operators (Due Diligence & Reporting Requirements) Regulations 2023’. For example, the penalty for late reports is £5,000, with daily penalties of £600 if the failure continues. Other penalties relate to not undertaking due diligence on customers with £100 per individual customer for which there has been a failure. 

The types of transaction reportable are: 

• An exchange between a crypto-asset and fiat currency 
• Exchanges between crypto assets 
• A transfer of crypto assets (including those to cold wallets) 
• Crypto assets used as payment for good and services exceeding $50,000 

What does this mean for VAT?

HMRC’s VAT policy in relation to Crypto is evolving and this is also the case for the tax authorities in most countries with VAT systems around the world. 

Most major VAT jurisdictions seem to be moving towards a position where transactions involving payment tokens (or cryptocurrencies) such as Bitcoin and Ether are treated like fiat currencies and are VAT exempt, but those involving NFT’s (or utility tokens) are Electronically Supplied Services (ESS) which are taxable. But the distinction between the two, and therefore the VAT treatment, is often unclear; there are tokens which have both uses and others where the use evolves over time.  

CASPs dealing in transactions involving utility tokens many need to register for VAT in multiple jurisdictions, as many countries treat B2C supplies of ESS as made where the customer belongs. Where such sales are made in the EU, a business can register in a single member state in respect of all of its EU sales. 

CASPs dealing in transactions involving both cryptocurrencies and utility tokens are likely to be partly exempt, meaning they cannot recover all of their input tax. It is possible to agree Partial Exemption Special Method (PESM) with HMRC in order to optimise recovery.  

What does this mean for individual users?

There will be little opportunity to avoid paying tax on gains made through trading cryptocurrencies. 

It is anticipated that there will be a significant increase in enforcement with an uptick in nudge letters and statutory enquiries due to the increased information received on crypto transactions. 

We would recommend that individuals trading cryptocurrency review their past activity thoroughly, which could mean the banking of losses, as well as gains. If there is an underpayment of tax, HMRC may charge significant penalties. 

If you would like to discuss bringing your crypto tax affairs up to date, please contact Dan Mundroina or Ross Smith. Should you require assistance as a CASP, please contact Nick Dawe or Michael Hartley.