17 Aug European exchange of information on crypto (DAC8) and digital platforms (DAC7) – What can be expected?
The European Commission’s draft of the so-called DAC8 Directive is expected in the third quarter of 2022. This new directive aims at amending the current Mutual Assistance Directive to facilitate cooperation between tax authorities in Europe in crypto tax matters and enable an exchange of information between crypto service providers and tax authorities and between tax authorities. The main objective seems to be a fair taxation, as it may be suspected that many users and investors of crypto assets file incomplete tax returns.
The new directive has a different purpose than the existing anti-money laundering rules or the forthcoming EU regulation on the regulation of crypto markets (“MiCa“), but there are some similarities and common principles.
Some indications of what the exchange of information will look like are provided by:
- The directive on the automatic exchange of information for digital platforms (DAC7) such as Amazon or AirBnB,
- The new rules on crypto taxation in Austria, and
- The draft MiCa regulation.
In the first two cases, the respective platform operators/exchanges are put under the obligation to forward financial data on their sellers to the tax office and/or to levy a source tax from the sellers.
Austrian flat tax on crypto and classification of crypto assets
The Austrian income tax law provides for a source taxation of crypto profits at domestic exchanges at a flat rate of 27.5%. As from the year 2024, domestic crypto exchanges are obliged to levy a source tax of 27.5 on crypto profits realized by Austrian citizens. This source tax is implemented in parallel with the Europe-wide reporting system for crypto exchanges in 2024 or 2025.
Austria distinguishes between the so-called cryptocurrencies such as Bitcoin and Ether, which are subject to the flat tax and utility tokens and equity tokens/security tokens that are treated differently. Like in the Austrian example, the EU Commission has set out to distinguish between different types of crypto-assets.
The draft MiCa Regulation distinguishes between “value-referenced” tokens, “e-money tokens” (i.e. Stablecoins), “utility tokens” and “other crypto assets” (such as bitcoin), with the first two being subject to increased regulation. The extent to which these or similar classifications will also play a role in the planned reporting obligation is currently unclear.
Digital platforms (DAC7)
Digital platforms will collect information on their sellers, landlords, etc. under the reporting obligation from 1 January 2023. This data will need to be reported until 31 January 2024 to the competent authorities in the Member State in which the platform is established or registered for the purposes of this law. An automatic exchange of all information collected is not foreseen from the start. Data can, however, be passed on by the authorities to other states in the event of a (justified) inquiry, whereby the automatic exchange of information is to be extended from the assessment year 2025 onwards. The Luxembourg draft law on implementation of DAC7 provides that sellers with a turnover of less than EUR 2,000 (and less than 30 transactions) do not have to be reported by the platforms.
What does this mean for crypto traders?
Traders and hodlers in Europe must expect that from 2024 or 2025 account balances and (aggregated) transactions at the relevant exchanges and other service providers will be forwarded to the tax authorities. The reporting obligation of the exchanges will probably be similar to the reporting obligation for digital platforms, although it is still unclear which data will be automatically exchanged between tax administrations.
In most Member States the reported data itself will not be sufficient to compute the tax liability of crypto traders due to, for example, tax exemptions for assets held longer than six or twelve months (six months in Luxembourg). The data collected can therefore only be a starting point for the tax authorities to ask questions, investigate crypto transactions and assess the taxable profit of the taxpayer.
It remains to be seen how the tax offices will deal with a possible flood of information. There will be many cases in which reported crypto profits might not be taxable, because tax exemptions apply. If the latter is the case, the taxpayer cannot be accused of not having declared income.
Taxation of crypto assets in Luxembourg
Luxembourg still has a long way to go until it has a sophisticated and balanced tax regime for crypto assets. Currently there is no distinction between cryptocurrencies, utility tokens and equity tokens like in other countries. Guidance on how to deal with crypto derivatives (futures, options, etc.) is also missing. Our expectation is that the Luxembourg authorities will have to act sooner or later. The introduction of DAC8 could be pivotal in this, so we might see more rules and guidance by 2025 at the latest.
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