EU to ramp up fight against crypto tax evasion with more surveillance and penalties for non-compliance

EU member states have reached an agreement on new financial reporting requirements. The update to the DAC regulation will increase surveillance of crypto platforms and introduce minimum penalties for non-compliance.

EU crypto tax DAC8

EU member states have unanimously agreed to proceed with the update to the Directive on Administrative Cooperation (DAC), named acronymically DAC8. The proposed regulations will enable EU institutions to increase surveillance over the crypto market and impose minimum penalties for non-compliance. The update will be adopted by the Economic and Financial Affairs Council (ECOFIN) next week. The news was delivered on Twitter by Benjamin Angel, the director of the Direct Taxation, Tax Coordination, Economic Analysis and Evaluation office at the European Commission (EC).

The EC proposed the amendments to DAC on December 8, last year. The update provides a series of changes to the existing framework, with a focus on reporting and exchange of information on crypto assets for direct tax purposes. The declared aim is to close loopholes and improve the enforcement of the regulations concerning tax evasion, tax avoidance, and tax fraud.

Key anti-tax avoidance measures contained in DAC8

Key measures to enhance detecting and countering tax misdemeanors and crime include:

- extending reporting requirements for all reporting crypto-asset service providers, irrespective of their size or location, to cover both domestic and cross-border transactions, as well as non-fungible tokens (NFTs) in specific cases;

- obliging financial institutions to report on electronic money and central bank digital currencies;

- extending the scope of the automatic exchange of advance cross-border rulings for high net-worth individuals, i.e., persons holding a minimum wealth of €1.000.000 excluding their main residence;

- establishing a minimum penalty for the most severe non-compliance incidents, such as ignoring reporting obligations despite repetitive reminders.

How will DAC8 affect businesses? More reporting, minimum penalties

The EC assures that DAC8 will have a limited impact on small and medium businesses. This, however, might not be the case. In fact, the new regulations will effectively increase surveillance of crypto platforms since the reporting requirements affect crypto businesses regardless of size or location. The update will also “expand the reporting and exchange of information between tax authorities within the EU to cover income or revenue generated by users residing in the EU while operating with crypto-assets.”

Read also: EU adopts new wealth confiscation measures, including crypto

The reporting obligations have been harmonized across the EU. With DAC8, they’ll only become more rigorous. As regards the proposed penalties, the update takes the regulations to the next level. Currently, sanctions vary across member states which results in different standards, with some countries being more tolerant of non-compliance. The amendment aims to standardize compliance measures by introducing a minimum level of financial responsibility for those who fail to meet the obligations.

How does DAC8 fit in with MiCA, CARF, and CRS?

On April 20, the European Parliament finally approved the agreed text of the Markets in crypto-assets (MiCA) regulation. The law standardizes the provision of crypto services across the EU, including the issuance of cryptocurrencies and stablecoins, with the declared aim of ensuring financial stability, consumer protection, and market integrity in the crypto industry.

MiCA has already been criticized for a one-size-fits-all approach that neglects unique features of the decentralized systems and may hamper innovation, bringing up compliance costs for DeFi and DEX platforms, and infringing on privacy with extended requirements to collect sensitive personal data.

However, as comprehensive as it is, MiCA doesn’t include provisions enabling tax authorities to collect and exchange tax-related information concerning cryptocurrency income. DAC8 fills in that gap, being aligned with the legal definitions laid out in MiCA.

The update is also consistent with two other sets of financial reporting regulations: the Crypto-Asset Reporting Framework (CARF), a new global tax transparency framework recently approved by the OECD, and the proposed amendments to the Common Reporting Standard (CRS), the G20-requested and OECD-approved single global standard for the collection, reporting, and exchange of financial account information.