Half a year after DAC8 was approved, how is the progress of EU crypto tax transparency?

Half a year after DAC8 was approved, how is the progress of EU crypto tax transparency?

In order to adapt to the constantly changing financial environment, in December 2022, the European Commission proposed establishing a reporting framework that would require cryptocurrency service providers to report transactions of EU customers. In May 2023, EU finance ministers reached a political agreement, and in October of the same year, EU member states formally adopted Directive 2011/16/EU on administrative cooperation in the field of taxation, commonly known as DAC8, which introduced comprehensive tax transparency rules for cryptocurrencies and expanded cooperation between member state tax authorities.

According to the regulations, EU member states must convert the main DAC8 rules into national law by December 31, 2025, and the new regulations will come into effect on January 1, 2026. However, there are two exceptions: the rules related to identity verification should be converted into national law by January 1, 2024, and come into effect on January 1, 2025. The rules related to TIN verification should be converted into national law by December 31, 2027, and come into effect on January 1, 2028.

Main Contents of DAC8

DAC8 requires cryptocurrency companies to report information about their customers, allowing tax authorities to share personal data on cryptocurrency holdings, meaning that all cryptocurrency service providers located within the EU, regardless of their size, must report transactions of customers residing in the EU. The amendment primarily concerns the reporting and automatic exchange of certain income from cryptocurrency transactions, as well as providing pre-tax rulings for high net worth individuals. The directive enhances the existing legislative framework by expanding the scope of registration and reporting obligations and improving overall administrative cooperation between tax authorities, aiming to increase the EU member states' ability to detect and combat tax fraud, tax evasion, and tax avoidance by preventing the use of cryptocurrencies to hide assets overseas.

DAC8 Latest Developments

A few EU countries have already domesticated the DAC8 Act. According to reports, the Spanish Ministry of Finance is conducting legislative reforms to the General Tax Law to allow the Spanish Tax Agency to identify and take over the cryptocurrency assets held by taxpayers with overdue debts. Spanish residents holding any cryptocurrency on non-Spanish platforms must report to the tax authorities by the end of this month, but only individuals with cryptocurrency assets worth more than 50,000 euros (approximately $54,000) on their balance sheets are required to report their foreign assets. On March 25, 2024, the Czech Republic government announced the draft bill to amend the International Tax Cooperation and Other Related Act, furthering the domestication process of the DAC8 Act. The bill requires cryptocurrency service providers to automatically exchange information on cryptocurrency asset transactions, including pre-tax determinations for high net worth individuals or DAC8. On March 21, 2024, the Slovakian Ministry of Finance will launch a consultation on the DAC8 bill, initiating the inclusion of DAC8 in domestic law. However, there are currently very few countries that have implemented similar legislation. Before the bill is implemented, cryptocurrency institutions still have time to reform internally to meet DAC8 requirements, and investors must prepare for the impact of DAC8.

How is DAC8 related to cryptocurrencies?

DAC8 expands the scope of automatic information exchange to cryptocurrencies and electronic currencies, applicable to financial institutions involved in electronic currencies and central bank digital currencies (CBDC). Cryptocurrency service providers should collect information annually and report it to the tax authorities of the member states where they reside, are authorized or registered, including information on the cryptocurrency service provider itself, reportable users, and reportable cryptocurrency transactions. In addition, tax authorities will share the local report information with the tax authorities of the user's place of residence through the EU Common Communication Network.

DAC8 amends the definitions of "depositary institutions" and "depositary accounts" to include the concept of electronic currencies within the CRS framework and to include entities holding electronic currencies, products or central bank digital currencies as reportable financial institutions under CRS.

DAC8 expands the scope of information to be reported. Under DAC2/CRS, reporting requirements have been expanded to include reporting on the role of the reportable person as a controller or beneficial owner. Financial institutions will need to collect or assess relevant information about their clients. Additionally, new classified financial institutions will be required to collect and review their clients' self-certification from the effective date of the change:① Whether the account is a joint account, including the number of joint account holders② Account type③ Whether the account is an existing account or a new account.

DAC8 also introduces information exchange related to cross-border tax pre-arrangements for high net worth individuals (i.e. individuals whose transactions exceed €1.5 million) after January 1, 2026. Member State competent authorities should automatically exchange the following categories of cross-border pre-arrangement information for 2026 January 1 or later:

·Cross-border pre-arrangements or a series of transactions with an amount exceeding €1.5 million, and the amount is mentioned in the arrangement involving tax matters involving one or more natural persons.

·Pre-cross-border arrangements determining the tax residence of a natural person in a Member State.

DAC8 expands the scope of existing tax-related information exchange rules, including provisions on automatic exchange of information on non-custodial dividends and similar income, supplementing the existing provisions of DAC. DAC8 also expanded the scope of application of DAC in value-added tax, other indirect taxes, customs duties, anti-money laundering measures, and helping to combat financing of terrorism. In addition, DAC8 proposed the possibility of using exchanged information without the consent of member states, provided that the information was sent by member states based on the purposes covered by Article 215 of the Treaty on the Functioning of the European Union, and shared with the competent authority responsible for restrictive measures to prevent violations of sanctions.

DAC8 strengthened the reporting and communication of TIN. The Commission will provide tools for member states to allow for automatic electronic verification of the taxpayer identification numbers provided by reporting entities or taxpayers, so that information can be exchanged automatically. At the same time, member states will strive to ensure that reporting entities are able to obtain electronic confirmation of the validity of taxpayer identification codes within the scope of DAC1, DAC2, DAC3, DAC4, DAC6, DAC7 and DAC8.

DAC8 is a consensus reached by EU member states to build a more comprehensive and transparent tax system, marking a significant step forward in the EU's efforts to regulate rapidly developing cryptocurrencies. While it will take some time, as member states gradually domesticate DAC8 laws, DAC8 will also be formally applied in the practice of cryptocurrency regulation.