Digital assets such as cryptocurrencies and non-fungible tokens are facing increased scrutiny as the IRS and global tax authorities begin to take action to combat tax avoidance.
January 1st 2023 is the effective date of the new cryptocurrency reporting requirements that were detailed in the US government’s Infrastructure Investment and Jobs Act. Crypto brokers have 13 months from that date to start issuing the IRS Form 1099-B for virtual currency transactions.
And that’s just one chapter of this story.
In another sign of the growing scrutiny on digital assets, the Organisation for Economic Co-operation and Development in October released the Crypto-Asset Reporting Framework. The OECD has over 100 jurisdictions that have committed to exchanging information with each other under Common Reporting Standard regulations. The adoption of CARF regulations by participating jurisdictions would require digital asset and cryptocurrency service providers to report on their clients similarly to the existing CRS regulations.
Digital assets are now within the scope of CRS regulations because such assets give users a level of anonymity that could be leveraged for tax evasion. This is possible because digital assets are by nature decentralised. Instead of being processed through traditional banks or brokers, who would typically handle due diligence and reporting, digital asset transactions are simply recorded on a blockchain without such processes occurring.
This has posed problems for regulators and governments because transfers of value from one user to another may have tax consequences; however, such transfers are not currently visible.
But now that regulatory change is impacting digital assets, senior decision makers at crypto companies will need to do things a bit differently to ensure that regulators have the visibility they want and need.
Be aware of these important changes
New regulations on digital assets and crypto companies are evolving quickly. Stay on top of, understand and prepare for these changes. Failure to maintain valid documentation on digital asset accounts and report required information may result in non-compliance and penalties.
Emerging regulatory changes mean that your company will need to perform tax due diligence on account holders, withhold taxes, and meet the other reporting obligations of taxing authorities. This was not previously required, and it represents significant new responsibilities.
For example, under the OECD’s CARF, ‘middlemen’ such as crypto asset service providers are required to assume reporting duties. Such reporting will likely require your organisation to assume additional due diligence to certify crypto account holders and make other changes.
Act with urgency to address new rules
The critical window of opportunity to prepare for these important changes and ensure compliance with the various regulatory regimes is open now. But there is a lot to do, and the period for implementing a solution to help you address the new regulations will pass quickly.
If you haven’t yet implemented a solution to comply with these regulations, do so as soon as possible. Experience with similar regulations in traditional financial services has demonstrated that changing processes to address new regulations always takes longer than people think.
Don’t wait. Holding off on deploying the right solution will only create additional pain.
Implement the right solution and processes
Addressing regulatory changes is always challenging. Avoid trying to contend with these new regulatory changes using manual solutions. That approach is painful and will block your ability to scale as your customer base grows. It will slow the speed of customer onboarding, and remediating and renewing existing documentation will hinder customers’ ability to trade.
Use a solution that can perform expanded due diligence, track cost basis and perform reporting at scale. Automating tax form validation will lighten your burden and allow you to scale.
Perform health checks on your products, policies and operations. Make sure that these efforts include updating your company’s onboarding policies and procedures and training your staff.
Use automation to gain competitive advantage
Implementing an automated solution will give you a competitive advantage on several fronts.
It will help eliminate regulatory and operational risks, streamline your operational processes, and provide your business with cost savings. And, perhaps even most importantly, it will enable you to do rapid customer onboarding and deliver a beautiful, seamless customer experience.
With the right solution, you can do real-time online validation. This is far superior to onboarding institutions using manual workarounds or inferior solutions. Rapid onboarding is critical for crypto companies since customers often give up half-way into lengthy onboarding.
Understand that regulatory change is here to stay
Inconsistent definitions of terms such as virtual currency and the lack of coordination among government agencies and taxing jurisdictions on definitions and laws that apply to virtual currency will create challenges. But regulatory change for digital assets and players is imminent.
And the regulatory landscape will only grow more complex as IRS regulations take effect and jurisdictions implement CARF and amended CRS rules. The number of in-scope accounts is expected to explode as a result of these changes. So, performing due diligence manually while trying to maintain a positive customer experience will become nearly impossible.
The time is now for crypto decision makers to employ automated, robust and scalable solutions to prepare for upcoming regulatory changes and be ready for future ones.
Maria Scott is a former tax lawyer and the CEO of TAINA, which featured on our RegTech 50 ranking in 2022