Crypto Reporting System Falls Short of Tax Compliance Goals
A new reporting system for cryptocurrency exchanges is now live in over 70 jurisdictions worldwide. The system, known as CARF, requires exchanges to report on certain transactions and holdings of their users, but it has some significant limitations.
The reports do not contain any information about the counterparty or merchant involved in a transaction, only that value was moved from one account to another. This makes it difficult for tax authorities to determine whether a particular transaction is taxable or not.
A study by Meling, Mogstad and Vestre found that even when exchanges were already sharing data with the tax authority, 79% of Norwegians still failed to declare their cryptocurrency holdings in 2021. The study also found that reminder letters sent by the tax authority increased compliance rates by 17.1 percentage points.
The European Commission estimates that CARF will raise between €1 and €2.4 billion per year, but HMRC expects negligible revenue from it. This discrepancy highlights the challenge of using reporting systems to increase tax compliance, particularly when the information provided is limited.