EU Commission Tables a Crypto Taxation Proposal: Crypto Providers to Provide Tax Details to Authorities
The European Commission announced plans to require crypto companies to report user holdings to tax authorities on December 8, 2022. This proposal, known as the eighth Directive on Administrative Cooperation (DAC8), aims to prevent taxpayers from evading taxes by keeping their crypto assets offshore. However, it remains unclear how the measures will be enforced on wallet providers or exchanges based outside the European Union.
The EU's executive arm is launching an initiative to increase transparency in the tax system and ensure that residents pay taxes on their crypto-related gains. The initiative will also establish a common minimum level of penalties for cases of serious non-compliance, such as failing to report earnings despite being reminded to do so. Tax authorities would require companies to provide personal information about their users, such as their place of residence and date of birth. In addition, companies would need to report on the amount of crypto that individuals have bought or sold.
One of the proposal statements says, “Transparency on income earned by crypto-asset investors would improve the level playing field with more traditional assets.” The Council goes further to say “While the initiative will bring compliance costs, it may be more favorable to SMEs to have a single set of rules across the EU, rather than a potential patchwork of reporting requirements across the EU.”
It was unclear how the measures would be enforced due to the decentralized nature of the cryptocurrency industry, with entities and actors operating in various jurisdictions and some claiming no base of operations. Additionally, there is a potential risk of user data being collected through the registration of user holdings, which could be used by criminals to identify and target individuals based on their cryptocurrency holdings, particularly if they are stored on centralized exchanges, which are already vulnerable to attacks.
Some stakeholders have expressed concerns that this could affect the European Union's Markets in Crypto Assets Regulation (MiCA), which is the first comprehensive effort to regulate cryptoassets and applies rules from Mifid, Market Abuse, and the Prospectus Regulation to the cryptoasset industry. The new plans proposed by the commission are expected to generate over 2.3 billion Swiss Francs (CHF 2.5 billion) for the national treasury by making it more difficult for individuals to evade taxes on cryptocurrencies. Loopholes by non EU providers could result in lost tax revenue, potentially putting registered EU companies at a disadvantage.