Standards needed to chase crypto-assets across borders

wWith the spread of alternative investments such as crypto-assets and the consequent increase in crypto-crime, it can be expected that the tax authorities will consequently strengthen the control over transactions involving such assets. The very concept of crypto-assets is, like the underlying technology, constantly evolving. At present, this includes assets that can be held and transferred in a decentralized manner without involving traditional financial intermediaries.

Ashima Obhan
Senior partner
Obhan & Associates

However, cross-border cryptocurrency transactions are particularly difficult to track, as international regulators are slowly discovering. Conventional financial transactions are tracked using the Common Reporting Standard (CRS), established by the Organization for Economic Co-operation and Development (OECD), and under which large amounts of data are collected and stored. This includes information such as the identity of the account holders and the balance and earnings posted or credited to the accounts. This data is passed on to participating tax administrations for jurisdiction-specific compliance and enforcement, as required. However, because crypto-assets can lock out traditional financial intermediaries and evade authorities, tax administrations are unable to adequately monitor transactions involving crypto-assets. Recognizing this, the OECD amended the CRS and created the Supplemental Crypto-Asset Reporting Framework (CARF) to address new emerging crypto-asset issues. As with the CRS, the CARF contains model laws that can be adopted by individual jurisdictions with accompanying commentary to help implement them. CARF provides for the identification of the crypto-assets that will be hedged; the entities and persons who will be the subject of data collection and communication; reportable transactions and information to be reported; and due diligence procedures to identify users of crypto-assets and the persons they control. It also determines the relevant tax jurisdictions for reporting and trading. Currently, CARF expects trading between relevant crypto-assets and fiat currencies; relevant crypto-asset exchanges and relevant crypto-asset transfers will be subject to reporting.

Aparna Amnerkar, Obhan & Associates
Aparna Amnerkar
Obhan & Associates

With the introduction of the CARF, the CRS has also undergone significant changes. Most importantly, CRS now includes new digital financial products within its scope, recognizing that they are a credible alternative to conventional financial holdings currently subject to CRS reporting. Reporting results under the CRS have been improved. The changes aim to ensure that the information channels between the CRS and the CARF work efficiently and are not duplicated, whilst maintaining an adequate degree of operational flexibility for both frameworks.

India does not yet regulate crypto-assets, although the 2022-23 budget has announced a new regime for taxing earnings and income from virtual digital assets (VDA). Such VDAs include cryptocurrencies, non-fungible tokens, and the like. The proposed tax rate is 30 percent plus surcharges and local taxes

on the transfer of any VDA under the Income Tax Act 1961 (Act). However, the law has yet to be introduced. The definition of VDA includes neither distributed ledger technology (DLT) in general nor blockchain in particular. The law also requires the person responsible for paying any consideration to withhold one per cent of the consideration at source as income tax, should a resident make such a transfer.

CARF is still open for discussion, but India is already a signatory to the CRS. With the country taking over the presidency of the G20 sometime next year, the taxation of cryptocurrencies is expected to be hotly debated by regulators and diplomats here. It is fully up for debate whether India will choose to align with the OECD proposal on cryptocurrency transaction reporting or develop its own standards.

The CARF is a useful mechanism for government agencies, exchanges and individuals to mutually report crypto-asset transactions in a standardized manner and to realize efficient cooperation and enforcement on a global scale. It could also encourage jurisdictions to consider more urgently how to regulate crypto-assets and how to help create a level playing field for taxation in the sector.

Ashima Obhan is a senior partner and Aparna Amnerkar is an associate of Obhan & Associates.

Obhan & Associates

Obhan & Associates

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New Delhi 110017, India

Contact details:
Ashima Obhan
T: +91-9811043532
E: [email protected]

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