Crypto Exchanges Are to Report to Tax Authorities about Customers: How to Prepare

Starting next year, new Crypto Asset Reporting Framework (CARF) standards, which also covers crypto assets, will be added to the already common methods of exchanging CRS (Standard for the Automatic Exchange of Financial Account Information for Tax Purposes) information. These concern their monitoring, declaration and taxation. Volodymyr Harkusha, auditor, senior partner of K.A.C. Group, explains hat you should be attentive about.

What Is CARF?

Crypto Asset Reporting Framework (CARF) is part of the International Standards for the Automatic Exchange of Information in Tax Matters. It emerged against the backdrop of the rapid spread of the use of crypto assets for various investment and financial purposes, and provides for the automatic exchange of tax information about them.

Unlike traditional financial products, crypto assets can be transferred and stored without the intervention of conventional financial intermediaries, such as banks, and without any central administrator having full information about the transactions made, or the existence of crypto assets.

The already mentioned Global Forum on Transparency and Exchange of Tax Information created a special “CARF Group” to develop methodological materials back in 2023. The main goal of the CARF rules is to create a unified system for exchanging data on crypto currency transactions between countries.

This system is intended to prevent crypto currency users from trading digital assets without control and avoiding taxation. CARF rules apply to all crypto asset service providers that conduct transactions for customers.

Service providers will be required to share user and transaction data with their tax authorities. This will allow countries joining CARF to better track both crypto asset revenues and all analytical information on specific transactions. Currently, 48 countries are already planning to implement this global OECD tax transparency system, with the planned number of signatories being 110.

How Will this Work in the European Union?

In the EU, the CARF rules will be implemented through the updated Directive 2011/16/EC on Administrative Cooperation in the Field of Raxation of Crypto Assets (DAC), its new version being DAC8.

It is stated that by the end of this year, EU Member States will adapt DAC8 to national legislation and the new rules will come into effect from January 1, 2026. The deadline for submitting the first declarations is January 31, 2027.

Under CARF rules, the responsibility for collecting and transmitting information about crypto currency transactions rests with Crypto Asset Service Providers (CASPs). These include: cryptocurrency exchanges, crypto currency exchange platforms, stock brokers, crypto wallet providers, and companies that provide crypto currency storage services.

All of these services must have access to their customers’ transaction data, as they provide the infrastructure for exchanging crypto assets. Crypto asset service providers will monitor existing cryptocurrencies, stablecoins, various tokens, and other digital assets.

All data about an individual will be provided to the tax authorities, including information about their tax residency (for legal entities, in addition to general information, also data about controlling persons), as well as detailed data about transactions:

● the type of crypto assets used in transactions;

● total amount, number of units and number of transactions for buying and selling crypto currencies for currency;

● amount and number of crypto currency transactions regarding the exchange between crypto assets;

● market value of crypto assets at the time of each transaction to estimate their value in currency.

Will Monitoring affect Ukrainian Crypto Asset Owners?

Ukraine is not yet among the first 48 countries that have already volunteered to implement CARF. However, we have a draft Law “On Amendments to Certain Legislative Acts of Ukraine to Ensure Compliance with Acts of European Union Law and the Relevant Criteria Established by the European Payments Council, with a View to Ukraine’s Accession to the Single Euro Payments Area (SEPA)”, approved by the government in April of this year.

The draft law provides for the creation of a nationwide register of bank accounts, safes and electronic wallets of individuals. The registers will be administered by the State Tax Service, and all financial market participants (National Bank, banks, non-bank payment service providers, electronic money issuers) will be obliged to transmit the relevant information.

This information will be available to the State Financial Monitoring Service, National Anti-Corruption Bureau, Economic Security Bureau, National Agency on Corruption Prevention, and the executive service. A separate section of the draft law is devoted to the provision of such information under international agreements.

That is, in this case we see the counter-courses of legislative innovations of Ukraine and international structures. Of course, there are many questions; for example, what protocol will be used to exchange information? To process the mass of such specific information, considerable funds are required for software, salaries of specialists, etc. Numerous regulations are needed to regulate the taxation of a completely new type of assets, retraining of tax officials. All of this requires time, money and a large number of subjective aspects; just a simple application in “Diya” cannot solve the matter.

How to Prepare for Changes?

In any case, owners and active users of crypto assets should prepare for the implementation of CARF both in Ukraine and abroad. First of all, you need to form your own “history” of wealth in crypto assets. Choose platforms that comply with AML/KYC rules (i.e. have complete information about you as a client and have conducted preliminary financial monitoring) to reduce the risks of blocking funds or fines for non-compliance with the new standards.

A certain number of Ukrainian citizens are staying abroad and earning a pittance on crypto currency. They have different tax statuses in the countries where they are staying, perhaps have multiple tax residency, and this will affect them more quickly.

There is still time to decide where to pay taxes. It may also be worth diversifying your investments into less regulated assets, especially if you are dealing with significant amounts. In this case, it is worth seeking advice from digital asset specialists, lawyers and tax advisors to avoid potential legal issues and optimize your financial activities for the future.

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