Ending the Crypto Tax Haven
42 Pages Posted: 28 Nov 2023 Last revised: 28 Mar 2024
Date Written: July 1, 2023
Abstract
There is growing global concern regarding the use of crypto for tax evasion and financial crimes. To address this problem, 56 jurisdictions, including the United States, have recently committed to implement the Crypto-Asset Reporting Framework (CARF). CARF transposes the Common Reporting Standard (CRS)—designed for traditional financial institutions—onto the crypto industry. Under CARF, certain crypto intermediaries are treated like traditional financial institutions: they must identify and report crypto owners who are tax residents of other jurisdictions.
However, CARF is deeply flawed. This Article is the first to systematically analyze alarming loopholes and weaknesses that bad actors may exploit to avoid reporting. First, tax evaders may refrain from using compliant, in-scope intermediaries. The reliance on intermediaries was adopted by CRS for the traditional financial system, but this would have limited success where crypto owners can avoid such intermediaries. Second, as CARF is modeled after CRS, bad actors may circumvent reporting by exploiting loopholes inherited from CRS. Finally, bad actors may exploit vulnerabilities specific to CARF and the crypto industry.
As a result, this new international standard will likely fail to shut down the crypto tax haven. Moreover, compliant actors in the crypto industry will incur substantial costs when implementing this cumbersome standard. This Article proposes ways to address several of CARF’s main shortcomings. It also suggests measures beyond CARF to enhance transparency and put an end to the crypto tax haven.
Keywords: CARF, Crypto-Asset Reporting Framework, Crypto, Crypto Exchanges, Cryptocurrencies, Blockchain, Tax Evasion, Tax Haven, CRS, Transparency, Information Exchange
JEL Classification: K34, K42, G28, H26
Suggested Citation: Suggested Citation