Crypto- assets: New tax transparency rules and exchange of information through DAC8 (European Union)

In recent years, the crypto-asset sector has experienced considerable growth, significantly changing the world of payments and investments. However, it has also suffered from poor regulation at the European level, including from a tax perspective.

The regulation of crypto-assets has, therefore, been a major challenge for European governments, including tax authorities, to create a new international standard for the automatic collection and exchange of information for tax purposes in relation to crypto-asset transactions.

On 17 October 2023, the Council of the EU unanimously formally adopted the amendment to the Directive on Administrative Cooperation (DAC), which is the main framework for other data exchanges of information between tax authorities, by further expanding its scope and creating the DAC8.

In fact, the European Commission had proposed to set up a reporting framework which would require crypto-asset service providers (so-called reportable crypto-asset service providers or RCASPs) to report transactions made by EU clients, in order to help tax authorities to track the trade of crypto-assets and the proceeds gained from them, thereby reducing the risk of fraud and tax evasion.

The directive also suggests a series of minor changes to improve the existing exchange of tax-related information to take into account updates to the OECD's Common Reporting Standard (CRS), and to address inefficiencies or fill potential gaps in the previous DACs.

Below is a summary of the information that must be reported and exchanged between tax authorities on the basis of DAC1 - DAC7:

Table 1 – DAC overview

What are the main reporting obligations?

DAC8 introduces reporting obligations for all crypto-asset service providers (so-called Reportable Crypto-Asset Service Providers or 'RCASPs') regardless of whether or not they are already regulated under the Regulation on Crypto-Asset Markets (MiCA), regardless of their size and regardless of where they have established their residence (EU/non-EU).

Therefore, EU-based RCASPs have to report this data to the Member State that has granted them authorisation under the MiCA Regulation to issue and trade crypto-assets. Crypto-asset operators, which do not fall within the scope of the MiCA because they are located outside the EU, must register in a Member State of their choice and subsequently submit their reports if they serve users residing in an EU Member State.

This registration and reporting obligation is waived if there is an Effective Qualifying Competent Authority Agreement in place between a competent authority of a non-EU jurisdiction and the EU Member State.

The data to be collected by RCASPs in their due diligence and reporting process are summarised in the table below. To enable easy comparability and cross-checking of information, the data should be reported broken down by user and by crypto-asset exchanged by the user.

Table 2 –Reporting requirements

How will the reported information be used?

Information collected on crypto-asset transactions must be reported to the competent authorities by the RCASPs by 31 January of the year following the relevant calendar year.

The RCASPs must only report in one EU Member State; thereafter that EU Member State (recipient) must transmit the reported information to the relevant tax authority of the EU Member State in which the reported user is tax resident.

It is up to each EU Member State to decide 'if' and 'how' they want to use this information for tax purposes on the reported user (personal income tax, corporate tax, VAT, application of customs duties, anti-money laundering and countering the financing of terrorism). Each Member State will decide independently.

Further objectives that DAC8 will introduce

In addition to the above-described automatic exchange of information on RCASPs, on crypto-assets transactions of EU-resident clients, DAC8 will include (minor) changes and/or expand existing exchange of information provisions, such as:

• extension of the scope of the existing automatic exchange rules to advance cross-border rulings for high-net-worth individuals (individuals holding a minimum of EUR 1,500,000 in financial or investable wealth or assets under management) in order to reduce the risks of tax evasion, avoidance and fraud. Member States would exchange information on advance cross-border rulings issued, amended or renewed between 1 January 2020 and 31 December 2025.
• extension of the scope of categories of income and capital subject to the exchange of information rules (already provided for in the DAC1) by adding 'non-custodial dividend income' (income from dividends that are not paid or received in a custodial account).
• clarification that the information exchanged under DAC may also be used for purposes other than tax (e.g. economic sanctions).
• extension of reporting requirements for financial institutions to e-money (tokens) and to central bank digital currencies (CBDCs).
• improvement of the rules on the communication of the tax identification number (TIN) for natural persons and legal entities.

Entry into force of DAC8

 After the formal adoption of DAC8, all EU Member States are expected to implement the Directive into their national law by 31 December 2025 at the latest.

The new reporting obligations on crypto-asset service providers (RCASPs) relating to crypto-assets, e-money and digital currencies will enter into force as of 1 January 2026.

With regard to the other changes in DAC8, there are two exceptions to the timetable, namely:

• The provisions on identification services (for ascertaining identity and tax residence) will apply from January 2025.
• The provisions on the verification of the TIN in respect of the exchange of information relating to employment income, directors' fees and pensions will apply from January 2030. The provisions on the verification of the TIN in all other cases will apply from January 2028.

Penalty regime

In the initial proposal of the DAC8, the European Commission proposed to introduce a harmonised minimum level of penalties for non-compliance; however, the Member States could not agree on the framework of minimum penalties proposed by the Commission. Therefore, sanctions remain at the discretion of the EU Member States, provided they are 'adequately effective, proportionate and dissuasive'.

The information provided in this article is of a purely general nature and is not a substitute for specific advice that may be requested here.