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International Head of Regulatory & Compliance Solutions, TMF Group
19 November 2021
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5 minutes

DAC8: Creating a clearer picture around cryptocurrencies

As cryptocurrencies and other digital assets become more prominent in the financial landscape, the EU has introduced DAC8 to increase transparency and combat potential tax fraud. Organisations active in this sector now need to ensure they are ready for this new regulation.

Cryptocurrencies and decentralised finance (DeFi), a blockchain-based form of finance that bypasses central financial intermediaries, have been making headlines around the world.

Whether it’s the price of Bitcoin surging to a record high of $63,000 or El Salvador adopting the cryptocurrency as legal tender, there seems to be a new story each day. It’s estimated that the crypto market is now worth some $2 trillion.

As cryptocurrencies and digital assets move towards the mainstream in the post-pandemic world, there are pressing questions around the application of taxes, with concerns that the absence of a clear taxation framework for such assets fuels risk, market volatility and unfair tax competition between different jurisdictions.

A need for more robust regulation

There have been efforts at both the global and European Union (EU) level to better monitor transactions involving cryptoassets, and to implement anti-money laundering (AML) screening.

For example, in 2015 and then again in 2019, the Financial Action Task Force (FATF) updated its guidance for a risk-based approach to virtual assets (VAS) and virtual asset service providers (VASPs) by amending its Recommendation #15 and introducing the definitions for VAS and VASPs into its glossary. The FATF, which published a new update in March 2021, has suggested adopting a similar approach to the one applied to traditional finance, such as the mandating of KYC/AML laws.

At the EU level, the fifth anti-money laundering Directive (AMLD V) doesn’t actually refer to virtual assets directly, but only to virtual currencies, adopting a narrower definition which is due to be revisited. The proposal for an EU Regulation on Markets in Cryptoassets (MiCA), published at the end of September 2020, does already include a definition of cryptoassets, which are described as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.”

The real issue at present is that EU member states apply different rules, or indeed no rules at all, when it comes to cryptoassets and paying taxes or disclosing ownership. This results in a risk of under-reporting of taxable income, leading to revenue losses. Worried about this, and the lack of transparency and risk of money laundering, the EU Commission has decided to take firmer action.

Laying the foundations for DAC8

On 10 March 2021, the EU Commission launched a public consultation aimed at strengthening the rules on administrative cooperation and expanding the exchange of information regarding e-money and cryptoassets.

The findings from this public consultation, which is now closed, will feed a new update to the Directive on Administrative Cooperation (DAC). DAC8, as it’s known, will be much broader than current EU regulation and will provide the financial authorities with new options for taking action against tax fraud and tax evasion, with observers expecting it to be implemented within the next 12 to 18 months.

The consultation was required because regulating such a constantly changing environment necessitates a thorough mapping of stakeholders to understand exactly who is involved, what kind of activities are carried out, and how the member states are currently qualifying cryptoassets to apply the relevant tax provisions.

The consultation delved deeply into the crypto ecosystem and collected important information including the types of cryptoasset service providers used, where such providers are registered or licensed, the amount of the investment, and the tax residency of the cryptoasset service provider.

Interestingly, it also covered the reporting obligations on cryptoasset service providers. According to the current status quo, some EU countries have already imposed, or are planning to impose, reporting obligations on cryptoasset service providers. However, as pointed out in the consultation, different national approaches might lead to extra administrative burdens for cryptoasset and e-money service providers.

The EU Commission therefore asked the interested parties whether they think that cryptoasset service providers should be subject to reporting obligations, whether the same reporting obligations for tax purposes should be adopted throughout the EU, what would be the main challenges faced by the providers, and whether all entities should be subject to the same set of reporting rules - or whether some exemptions should also be introduced.

Ultimately, the goal is to limit the possibilities to take advantage of potential loopholes while at the same time avoiding potential harm to innovation by imposing too heavy a burden on newly-created or small businesses in terms of compliance.

What will the future hold?

Cryptoassets have become a global phenomenon. As such, strengthening cooperation at both the international and EU level will certainly help to avoid the under-reporting and non-reporting of income.

DAC8 will need to ensure a comprehensive and coordinated approach that encompasses all the involved actors, whose role in facilitating cryptoasset exchange has already been considered pivotal in the AMLD V and MiCA proposals. The use of public consultations, for DAC8 but also for the update of the FATF guidance, reveals a growing awareness by legislators and regulators that they need to engage with the stakeholders in this evolving ecosystem in order to apply the appropriate level of regulation.

As mentioned, it’s expected that DAC8 will now be implemented within the next 12 to 18 months. It will affect cryptoasset owners, both corporations and individuals, as well as cryptoasset creators and distributors.

It will mean a raft of additional regulatory requirements; an administrative burden covering KYC and reporting requirements for cryptoasset creators and distributors, plus a disclosure obligation for cryptoasset owners. It’s therefore imperative that any individual or company involved in this burgeoning industry checks their upcoming obligations under DAC8, and then prepares to implement a robust process to collate and report the required data.

Partnering with TMF Group

We are actively monitoring the cryptocurrency and DeFi industry and keeping a close eye on evolving regulatory developments, so that we can help you to stay ahead of the curve and keep surprises to a minimum.

Our combination of global reach, local knowledge and multi-disciplinary expertise is your answer to the complex demands of cross-border compliance.

We can help you to conduct an initial assessment to see how DAC8 will impact your business, make an action plan, and then support your reporting. To find out more, get in touch today.

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