LibraryKYC hubKYC NewsCrypto industry aims to exempt NFTs and DeFi from tax reporting rules

Crypto industry aims to exempt NFTs and DeFi from tax reporting rules

Authorities are attempting to calculate whether digital assets are riskier when it comes to assessing tax compliance, and thus deserving of further scrutiny.

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July 13, 2022

At the latest meeting of the Organization for Economic Co-operation and Development (OECD) in Paris at the end of May, representatives from the crypto industry pushed back at attempts to make them report details of non-fungible tokens (NFTs), decentralized finance (DeFi) transactions, and retail payments to tax authorities. 

However, international tax standard-setters still wish to extend existing bank sector rules in an attempt to stop crypto from being used to stash assets out of sight of the taxman. On top of this, regulators want to apply rules that go further than the existing rules that apply to banking and the money laundering norms currently being applied to crypto.

But, experts from within the crypto industry argue that current requirements are a lot harder to meet when it comes to digital assets such as NFTs. This is because, unlike a physical asset, the value of an NFT isn’t known at any given time. Plus, these experts also continue to highlight the fact that other non-digital assets, such as paintings, are not covered by existing rules.   

What and when should details be reported?

Money laundering rules set by the Financial Action Task Force require crypto wallet holders to carry out identity checks if a crypto asset is intended for payment or as a means of investment.

However, tax officials continue to stress that this rule cannot be applied to the entire range of crypto assets that is currently available. As a result, an alternative has been proposed whereby only crypto assets that are actively traded on an established market are considered as part of this rule.

In practice, this may involve looking at whether the prices offered and accepted are easily accessible and published. It would also require all trades on major exchanges to be disclosed. 

At present, the OECD believes that applying existing anti-money laundering rules is impractical because a judgment call must be made when determining how an asset is used. This, in turn, would put wallet providers in an impossible quandary when deciding whether or not they have to report a transaction. For example, determining whether an NFT has been purchased for investment or aesthetic appeal would constitute a judgment call.

What will regulators do?

Regulators continue to grapple with exactly how a reporting system might work. This includes details on the exact level of trading at which someone would have to disclose their assets to the authorities.

As part of this, authorities are attempting to calculate whether digital assets are riskier when it comes to assessing tax compliance, and thus deserving of further scrutiny. 

It currently appears likely that regulators will place reporting requirements on NFTs and DeFi transactions despite concerns regarding ‘overregulation’.

In fact, in a move that would be incredibly stringent, some tax specialists have argued that as well as implementing tax reporting requirements, so-called ‘nexus rules’ should also be implemented. These rules mean that an exchange legally established in a tax haven that serves European customers would still have to play by European norms.

On top of this, other key figures in the industry have even raised the idea of creating blacklists of places with weak crypto rules, analogous to the list of uncooperative tax and money-laundering jurisdictions kept by the EU.

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