Crypto tax compliance and risk mitigation
Recent international developments, such as the EU’s Directive on Administrative Cooperation (DAC8) and the OECD’s Common Reporting Standard for Crypto-Assets (CARF), highlight the heightened focus on transparency and aim to facilitate the automatic exchange of information among jurisdictions. Together with national initiatives and the rapid development of expertise on the part of tax authorities, these frameworks seek to combat tax evasion, promote fairness in taxation, and ensure that states can effectively safeguard their fiscal interests.
Importance of tax compliance
- Global transparency: DAC8 and CARF exemplify the global trend towards increased financial transparency. DAC8 extends reporting obligations to include crypto-assets, reflecting the rapid evolution of digital finance. Similarly, CARF establishes a standardised framework for the exchange of information on crypto-asset transactions, ensuring such activities do not escape regulatory scrutiny. Compliance with these measures is essential for businesses and individuals to align with international legal standards and avoid attention from tax authorities.
- Reputation and trust: Non-compliance with tax obligations can significantly damage an entrepreneur’s reputation, eroding stakeholder trust. In a globalised marketplace, such reputational harm can result in diminished business opportunities and strained relationships with partners and investors.
- Economic implications: Tax compliance contributes to broader economic stability by ensuring governments have the resources necessary to fund public services and infrastructure. It is a fundamental aspect of fostering equitable economic growth and maintaining social cohesion.
Consequences of non-compliance
Failure to adhere to crypto tax compliance obligations can result in severe legal, financial, and reputational consequences:
- Penalties and fines: Tax authorities impose substantial fines and interest charges for non-compliance, which can escalate depending on the severity and duration of the infraction.
- Criminal liability: Alleged tax evasion or failure to comply with reporting requirements may lead to criminal prosecution, potentially resulting in significant sanctions for individuals and organisations.
- Operational disruptions: Investigations and audits triggered by non-compliance can disrupt business operations and generate significant legal and administrative costs.
Preventative measures and the role of legal counsel
To mitigate these risks, businesses and individuals should adopt a proactive approach to crypto tax compliance, including:
- Regular audits: Conducting internal reviews to ensure accurate reporting and adherence to evolving tax laws.
- Training and awareness: Educating employees and stakeholders about tax obligations and the implications of international reporting standards.
- Technological solutions: Leveraging compliance software to track, document, and report transactions in accordance with DAC8, CARF, and other applicable regulations.
Given the complexity of international tax laws and the rapid pace of regulatory change, expert legal advice is indispensable. At CMS, our attorneys and advisors regularly provide support through:
- Tailored guidance on navigating the intricate requirements of DAC8, CARF, and other frameworks.
- Assistance in drafting robust compliance policies and procedures.
- Representation in dealings with tax authorities and during audits or disputes.
Insights on Crypto tax compliance and risk mitigation
Local market knowledge. Global outlook
We provide future-facing legal advice to help your organisation thrive. Combining local market knowledge and a global perspective, and with lawyers in locations worldwide, your organisation benefits from the expertise it needs, even across borders.
About CMS