EUROPEAN COMMISSION Brussels, 8.12.2022 SWD(2022) 401 final COMMISSION STAFF WORKING DOCUMENT



IMPACT ASSESSMENT REPORT

Initiative to strengthen existing rules and expand the exchange of information framework in the field of taxation so as to include crypto-assets Accompanying the document Proposal for a Council Directive amending Directive 2011/16/EU on administrative cooperation in the field of taxation {COM(2022) 707 final} - {SEC(2022) 438 final} - {SWD(2022) 400 final} - {SWD(2022) 402 final}



Table of Contents 1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT 2. PROBLEM DEFINITION 2.1 What are the problems? 2.2 What are the problem drivers? 2.3 How will the problem evolve in the absence of an EU policy initiative? 3. WHY SHOULD THE EU ACT? 3.1 Legal basis 3.2 Subsidiarity: Necessity of EU action 3.3 Proportionality: The added value of EU action 4. OBJECTIVES: WHAT IS TO BE ACHIEVED? 4.1 General objectives 4.2 Specific objectives 5. WHAT ARE THE AVAILABLE POLICY OPTIONS? 5.1 Baseline scenario (Option 0) 5.2 Recommendation for the implementation of a global standard (Option 1) 5.3 EU legislative initiative – Six options regarding the type of reporting and the impact of having a threshold for SME- (Options 2-7) 5.4 Options discarded at an early stage

6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? 6.1 Overview of options 6.2. Economic impacts 6.2.1. Benefits 6.2.2. Costs 6.2.2.1 Impact on CASPs 6.2.2.2 Impact on tax administrations and Commission 6.2.3. Impact on sector’s competitiveness and SMEs 6.2.4. Social and environmental impacts 7. HOW DO THE OPTIONS COMPARE? 8. PREFERRED OPTION 9. HOW WILL ACTUAL IMPACTS BE MONITORED AND EVALUATED? 9.1 Indicators for monitoring and evaluation 9.2. Monitoring and reporting ANNEX 1: PROCEDURAL INFORMATION ANNEX 2: STAKEHOLDER CONSULTATION ANNEX 3: WHO IS AFFECTED AND HOW? ANNEX 4: ANALYTICAL METHODS ANNEX 5: IT SOLUTION ANNEX 6: STRENGTHENING OF ADMINISTRATIVE COOPERATION BETWEEN TAX AUTHORITIES

ANNEX 7: OVERVIEW OF DIFFERING PENALTIES APPLIED BY MEMBER STATES ANNEX 8: BIBLIOGRAPHY



Glossary Term or acronym Meaning or definition AML(D) Anti-money laundering (Directive). The European Commission has presented a package of legislative proposals to strengthen these rules in July 2021. Asset-referenced token A type of crypto-asset that purports to maintain a stable value by referring to the value of several fiat currencies that are legal tender, one or several commodities or one or several crypto-assets, or a combination of such assets. Binance Binance is a CASP founded in 2017 and registered in the Cayman Islands. It is often considered as one of the largest exchange in the world in terms of daily trading volume of crypto-assets. Bitcoin Bitcoin (₿) is a type of crypto-asset. It is a decentralized virtual currency, without a central bank or single administrator that can be sent from user to user on the peer-to-peer bitcoin network without the need for intermediaries. Transactions are verified by network nodes through cryptography and recorded in a public distributed ledger called a blockchain. Blockchain A form of distributed ledger in which details of transactions are held in the ledger in the form of blocks of information. A block of new information is attached into the chain of pre-existing blocks via a computerised process by which transactions are validated. CBDC Central bank digital currency. A CBDC may be defined as a digital asset that only the central bank may issue or destroy, that is traded at par against banknotes and reserves, that is available 24/7, that may be used in peer-to-peer transactions and that circulates on digital media that are at least partially different from existing media. Cold wallet A wallet that is not connected to the internet. Cold wallets may include paper wallets (where the public and private keys are recorded on a piece of paper) and hardware wallets (where a USB stick or similar device is used as the storage medium). Crypto-asset A digital representation of value or rights, which may be transferred and stored electronically, using distributed ledger technology or similar technology. Crypto-asset service Any of the services and activities relating to any crypto-asset: the custody and administration of crypto-assets on behalf of third parties; the operation of a trading platform for crypto-assets; the exchange of crypto-assets for fiat currency that is legal tender; the exchange of crypto-assets for other crypto-assets; the execution of orders for crypto-assets on behalf of third parties; placing of crypto-assets; the reception and transmission of orders for crypto-assets on behalf of third parties; providing advice on crypto-assets. Crypto-asset service provider or CASP Any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis. Cryptocurrency See "Virtual currency" Cryptography The conversion of data into private code using encryption algorithms, typically for transmission over a public network. Custodian wallet provider An entity that provides services to safeguard private cryptographic keys on behalf of its customers, to hold, store and transfer virtual assets. Directive on administrative cooperation or DAC Directive on administrative cooperation in the field of direct taxation. Rules and procedures under which the Member States shall cooperate with each other with a view to exchanging information that is foreseeably relevant to the administration and enforcement of the domestic laws of the Member States concerning taxes of any kind except value added tax and customs duties, or excise duties. Distributed ledger technology or DLT A type of technology that supports the distributed recording of encrypted data. EMA Electronic Money Association ECA European Court of Auditors E-money Electronically, including magnetically, stored monetary value as represented by a claim on the issuer which is issued on receipt of funds for the purpose of making payment transaction, and which is accepted by a natural or legal person other than the electronic money issuer. E-money token Stands for "electronic money token". Means a type of crypto-asset mainly used as a means of exchange and that purports to maintain a stable value by referring to the value of a fiat currency that is legal tender. Ethereum Ethereum is an open source, public, blockchain-based distributed computing platform and operating system featuring smart contract functionality. FATF The Financial Action Task Force (FATF) is the global money laundering and terrorist financing watchdog. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society. The FATF has developed the FATF Recommendations, or FATF Standards, which ensure a co-ordinated global response to prevent organised crime, corruption and terrorism. Fiat currency Fiat currency is a type of currency that is declared legal tender including money in circulation such as paper money or coins. JRC Joint Research Centre KYC For "know your customer". Customer due diligences (CDD) required by Anti Money Laundering Directive (AMLD) to identify and verify the identity of customers and beneficial owners for financial institutions and certain non-financial institutions and professionals. Markets in Crypto-Assets or MICA Proposal for a Regulation of the European Parliament and of the Council on Markets in Crypto-assets, and amending Directive (EU) 2019/1937. Non-marketable crypto-assets A crypto-asset that is not traded in a market or does not require intervention by a professional CASP for carrying out transactions. They are usually only transmitted through peer-to-peer transactions. OECD Organisation for Economic Co-operation and Development Peer-to-peer transaction Also known as "P2P". Individual user-to-individual user of crypto-assets transaction. Pseudo-anonymity The result of the processing of personal data in such a manner that the personal data can no longer be attributed to a specific data subject without the use of additional information, provided that such additional information is kept separately and is subject to technical and organisational measures to ensure that the personal data are not attributed to an identified or identifiable natural person. SMEs Small and medium-sized enterprises Transfer User Any individual or legal person who uses e-money or the services of a CASP. Utility token A type of crypto-asset, which is intended to provide digital access to a good or service, available on DLT, and is only accepted by the issuer of that token. Virtual currency A digital representation of value that is not issued or guaranteed by a central bank or a public authority, is not necessarily attached to a legally established currency and does not possess a legal status of currency or money, but is accepted by natural or legal persons as a means of exchange and which can be transferred, stored and traded electronically. Wallet A device, physical medium or software, used to store public and private keys and to interact with DLT to allow users to send and receive crypto-assets and monitor their balances. See also "Cold wallet" and “custodian wallet provider”. 1. INTRODUCTION: POLITICAL AND LEGAL CONTEXT In the political guidelines for the European Commission, President von der Leyen stressed the Commission’s commitment to stepping up the fight against tax fraud, evasion and avoidance to ensure an economy that works for people and where everybody pays their fair share. Fair and efficient taxation not only promotes social justice for citizens and a level playing field for businesses but also ensures that citizens and businesses can fully reap the benefits of the Internal Market. The COVID-19 pandemic has added greater urgency to the need to protect public finances and to ensure fair burden sharing.

On 15 July 2020, the European Commission adopted an Action Plan for Fair and Simple Taxation Supporting the Recovery Strategy (hereafter referred to as the “Tax Action Plan”). The Tax Action Plan contains measures to reinforce the fight against tax abuse, to help tax administrations to keep pace with a constantly evolving economy and to ease the administrative burden for citizens and companies. Furthermore, the Tax Action Plan envisages improving administrative cooperation between national tax authorities in existing as well as newly developing areas. The European Parliament has on several occasions stressed the political importance of fair taxation and of fighting tax fraud, evasion and avoidance. For example, in a resolution from 2019, the European Parliament called on the Commission to do more to fight tax fraud, evasion and avoidance including through greater administrative cooperation and exchange of information between Member States. More recently, the European Parliament published a resolution about implementing the EU requirements for the exchange of tax information highlighting aspects to improve administrative cooperation, some of which are addressed by this initiative. Fair taxation and the fight against tax fraud, evasion and avoidance are priorities shared by the Council and the European Parliament. Better administrative cooperation and greater exchange of information between tax administrations are essential in the fight against tax avoidance and evasion. Major progress has been made over the past years in this respect. The mechanism for cooperation and exchange of information within the EU for the purpose of direct taxation is framed by the Council Directive 2011/16/EU on administrative cooperation in the field of direct taxation (hereafter referred to as “Directive 2011/16/EU” or “DAC”). Through the provision of an efficient mechanism for administrative cooperation and exchange of information between Member States, the DAC aims at protecting the financial interests of the Member States and the EU while fighting against tax fraud, evasion and avoidance. To this effect, it ensures a proper functioning of the Internal Market, greater transparency, as well as an overall fair taxation system. The scope of DAC has been extended six times over the last years in order to meet new challenges and adjust to new economic realities. Table 1 – DAC evolution Directive on Administrative Cooperation – DAC DAC1 2011/16/EU Applies 1/2013 -Exchange of information on request -Spontaneous exchange of information -Presence in adm. offices -Simultaneous controls -Request for notification -Sharing best practices -Use of standard forms DAC1 2011/16/EU Applies 1/2015 1st exchanges 30.6.2015 -Automatic exchange of information (AEOI) on 5 non-financial categories -Income from employment -Directors fees -Pensions -Life insurance products -Immovable property (income and ownership) DAC2 2014/107/EU Applies 1/2016 1st exchanges 30.9.2017 Automatic exchange of financial account information : -Interests, dividends and other income generated by financial account; -Gross proceeds from sale or redemption; -Account balances. DAC3 2015/2376/EU Applies 1/2017 1st exchanges 30.9.2017 Automatic exchange of information of: -Advance cross-border rulings -Advance pricing agreements. DAC4 2016/881/EU Applies 6/2017 1st exchanges 30.6.2018 Automatic exchange of information

on country-by-country-reports on certain financial information: -Revenues; -Profits; -Taxes paid and accrued; -Accumulated

earnings; -Number of employees; -Certain assets. DAC5 2016/2258/EU Applies 1/2018 Access by tax authorities to beneficial ownership information as collected under AML rules. DAC6 2018/822/EU Applies 7/2020 1st exchanges 31.8.2020 -Mandatory disclosure rules for intermediaries; and -Automatic exchange of information

on tax planning cross-border arrangements. DAC7 2021/514/EU Applies 1/2023 1st exchanges 2.2024 Automatic exchange of information and reporting rules for digital Platform Operators with respect to income earned by Sellers with the use of their platforms for the sale of services and goods. The mechanism for the exchange of information under DAC is in most instances based on a two-step approach: 1. reporting to the tax authorities by the taxpayer or a third party (e.g. financial institution or service provider), and 2. exchange between the tax authorities concerned of the information that has been reported. New challenges are constantly arising and may not be covered by the existing scope of the DAC. In particular, the emergence of alternative means of payment and investment, such as crypto-assets, which may pose new risks of tax evasion, are not covered. Therefore, this impact assessment presents policy actions to expand the exchange of information within the EU to cover income or revenue generated by these new means of payment and investment. Crypto-assets are digital assets based on distributed ledger technology and cryptography. Crypto-asset markets have been growing fast over the past years. In September 2020, the European Commission adopted a proposal for a Regulation on Markets in Crypto-assets (hereafter referred to as “MiCA”) , which will have, once agreed by the legislators, the effect of expanding the EU regulatory perimeter to a range of crypto-asset activities. The inherent cross-border nature of crypto-assets requires strong international administrative cooperation, so as to ensure effective regulation. The proposed MiCA legislation regulates the market for crypto-assets and provides for the conditions for access to the EU market for crypto-assets. This framework, once adopted, would replace national rules currently governing for example the issuance, trading and custody of crypto-assets. This framework does not by itself provide a basis for tax authorities to collect and exchange the information that they would need in order to tax crypto-asset income. This being said, the planned DAC8 proposal would build on this proposed framework, including on the definitions of crypto-assets and service providers. The Commission’s package of legislative proposals to strengthen the EU’s Anti-Money Laundering/Countering the Financing of Terrorism framework (hereafter referred to as “AML/CFT”) includes a proposal to extend the scope of obliged entities subject to AML rules, to the virtual asset service providers regulated by MiCA. The AML package adopted by the Commission in July 2021 aims at extending the EU AML rules to all crypto-assets service providers (hereafter referred to as CASPs). This means that CASPs will have to ensure the availability of certain information relative to crypto-assets (for example as the name of the payer, the payer's payment account number, the payer's address, customer identification number or date and place of birth). Information gathered for AML purposes can be useful for tax authorities, which is demonstrated by a previous amendment to DAC (DAC5) which provides a basis for the use of AML information for tax purposes. However, the information gathered for AML purposes is not fully sufficient for tax purposes. It is intended for other purposes than taxation and neither the information collected, nor the procedure for collecting it are adapted to the needs of tackling tax fraud, evasion and avoidance. The EU initiatives, in particular the proposed legislation on MiCA and the Anti-Money Laundering (AML) package, contribute to better regulating the crypto-assets market, improving traceability and greater transparency at large. However, it does not improve transparency for tax purposes, as envisaged by the proposal for DAC8. An amendment of the DAC is therefore necessary in order to provide for clear reporting obligations with information that is relevant for tax purposes, due diligence rules and a specific mechanism for exchanging information between Member States, which would not be provided by the MiCA Regulation nor by the AML package. The OECD initiative, which is currently still under negotiation at the international level, aims at introducing greater tax transparency on crypto-assets. It is important to ensure consistency between the international OECD and EU rules in order to increase effectiveness of information exchange and to reduce the administrative burden. However, an OECD framework would not eliminate the need for an EU framework. In particular, a future OECD standard is not expected to be binding and would therefore not achieve the same coordinated regulation across participating Member States. It has been standard practice to bring OECD agreements into EU law through directives and it has been used for DAC2, 3, 4, 6 and 7. There is a need to ensure a coordinated approach within the EU with as few variations as possible. There is furthermore a need to ensure that the exchanges of information on crypto-assets can be integrated into the existing EU system of exchange of information. Finally, only an amendment to the DAC can ensure the necessary coherence of rules on reporting and exchange for tax purposes with the previously mentioned EU initiatives (proposal for a MICA regulation and AML package). The European Court of Auditors (ECA) published a report examining the legal framework and implementation of the DAC. This report notes that “Cryptocurrencies are excluded from the scope of information exchange. If a taxpayer holds money in electronic cryptocurrencies, the platform or other electronic provider supplying portfolio services for such customers are not obliged to declare any such amounts or gains acquired to the tax authorities. Therefore, money held in such electronic instruments remains largely untaxed.” It is important to clarify that this initiative focuses on the reporting and exchange of information between tax administrations on the income obtained by the users of crypto-asset services and the use of this information by tax administrations, to ensure the proper application of domestic tax rules. It does not aim at setting out new rules regarding the actual taxation of such proceeds based on each Member State’s national rules, nor does it cover the taxation of the profits made by the CASPs and whether they, as companies, pay their fair share in relation to those profits. Those aspects may be addressed through separate initiatives and work streams. A legislative initiative addressing the issue of exchange of information on crypto-assets (DAC8) is likely to include some fine-tuning of existing concepts in the DAC and filling in some gaps. Areas that could be covered touch upon a further strengthening of administrative cooperation between tax authorities, a review of the current compliance framework, a clarification of the reporting and exchange rules applicable to information about e-money and the opening up of the information exchange on cross-border tax rulings to further types of rulings. Those improvements are briefly presented in Annex 6 but are not economically assessed in this impact assessment. 2. PROBLEM DEFINITION The following analysis has been performed in order to estimate how significant the problem is, although the actual lack of available data has made this analysis challenging. Also, the problem drivers have been examined and the evolution of the problem - in the absence of an EU policy initiative – has been assessed. A problem tree chart has been included to visually present the problem, its drivers and consequences.





Figure 1 Problem Tree 2.1 What are the problems? The key problem that this impact assessment focuses on is that tax authorities lack information to monitor the proceeds obtained using crypto-assets and the potential tax consequences of those. In other words, there is a lack of information available to tax administrations regarding crypto-assets, while the crypto-assets market has gained in importance over the last years. The crypto-assets market capitalization has increased substantially and rapidly, reaching more than EUR 1.8 trillion in 2021. Although Bitcoin maintained a very high market share in the early years, its relative importance has decreased lately due to the increasing use of other new cryptocurrencies, such as Ethereum. In September 2021, Bitcoin’s market share was around 42,8%, followed by Ethereum (18,8%) and Cardano (3,69%). Crypto-assets, like more traditional financial products, are a stock of wealth and can be taxed as such. But more generally, it is the capital gains arising from the trading of crypto-assets that are in principle subject to taxation under the national law of Member States. Those capital gains arise either when (i) crypto-assets are traded for other crypto-assets or (ii) a fiat currency is traded for crypto-assets and back to a fiat currency. The trading can be carried out using crypto-asset service providers or between individuals or entities directly. Information on the details of these transactions is available through the service providers when they are involved. In cases where no service provider is involved, the information is more difficult to obtain and would require detailed knowledge of the information on the blockchain. The fact that there is no reporting (or underreporting) and the lack of exchange of data related to revenues and income gained by investments in and transactions made with crypto-assets means that tax administrations lack the necessary information to ensure that taxes are imposed and effectively paid by taxpayers. Whilst it is difficult to precisely quantify this particular tax gap, it represents a current and future problem that needs to be addressed keeping in mind that the use of these assets is expected to increase substantially in the future. There is also significant potential for eroding the proper functioning of the existing exchanges under DAC2 , which is a key tool in ensuring tax transparency on cross-border financial investments and tackling offshore tax evasion. The majority of Member States already have legislation or at least administrative guidance in place to tax capital gains obtained through crypto-asset investments. However, they often lack the necessary information that would enable them to do so. Figure 2 shows the estimated capital gains, both realised and unrealised, of Bitcoin owners in 2020, ranked by realised capital gains. In 2020, the total realised capital gains by EU citizens amounted to EUR 3.6 billion and the total unrealised capital gains to EUR 9.1 billion, according to a study by Thiemann (2021). Assuming that the realised capital gains had been reported by the taxpayers and taxed at a rate of 25% (without any tax exemptions) by the relevant Member State, tax revenues of about EUR 0.9 billion could have been collected in 2020, taking only into consideration Bitcoin. The lack of reporting rules at national level, as well as the lack of exchange of information between Member States means that non-compliant taxpayers are difficult to detect, which leads to revenue losses. At the same time, there is no information available about how much realised capital gains have actually been taxed by the Member States. This makes it challenging to determine the exact impact of the proposed initiative.



Figure 2 Estimated capital gains from Bitcoin in 2020 across EU countries, realised (green) and unrealised (red) Source: Thiemann (2021) based on Chainalysis Inc. Note: Flows are attributed to individual countries relying on country-based web traffic statistics, time-zone analysis of service providers’ cryptocurrency activity, most popular fiat currency pairs, and additional information (see Chainalysis, 2020); exchange rate to calculate EUR values from the original USD values, as of May, 25, 2021 (1 EUR = 1.2212 USD). It is relevant for the assessment of the problem and its impacts to note that there are already reporting obligations on financial institutions and certain assets, but they are clearly not sufficient. The existing provisions of DAC2 lay down an obligation for financial intermediaries to report financial account information to tax administrations that are then required to exchange this information with other relevant Member States. Crypto-assets are currently not considered a reportable information under DAC2 and thus within its scope (or its equivalent at the international level, the Common Reporting Standard or CRS). They neither represent money held in a depository accounts or in financial assets as they are not considered a commodity or security under the domestic law of most Member States. In addition, crypto-asset service providers are in most cases not considered to be covered by the existing definition of “financial institutions” under DAC2. Currently, tax administrations have few tools available to verify whether the proceeds earned through investments in crypto-assets are properly declared and, if so, whether the correct amount has been declared. As pointed out by the European Parliament, “defining tax bases requires being in possession of a full picture of a taxpayer’s situation”. Consequently, there might be an incentive to invest in crypto-assets rather than in traditional financial products with the aim to avoid DAC2/CRS reporting. National tax administrations may use the information received related to crypto-assets through the exchange of information proposed under this initiative for a range of purposes, such as imposing taxes, conducting risk-assessments and tax audits relating to different tax categories including indirect taxes like Value Added Tax (VAT). The most relevant tax for the calculation of the benefits derived from this proposal are linked to income tax due to the potential capital gains that taxpayers may obtain. The consequences of the lack of reporting and exchange of information on crypto-assets indirectly affects all EU citizens and businesses. Tax fraud, evasion and avoidance lead to fewer resources to fund public services such as education, healthcare, pensions and infrastructure. To maintain the level of public services, everybody must contribute according to the legal framework in force. To support and sustain the recovery from the deep economic crisis caused by COVID-19, it is necessary to ensure that a fair taxation system contributes to this objective. Compliant taxpayers, who pay their fair share of taxes, are particularly affected as they may be asked to pay higher taxes and/or they may have to accept a lower level of public services. Cost reduction achieved by not paying taxes is not an acceptable practice in the EU or elsewhere. Furthermore, the absence of a reporting standard for crypto-assets could be considered an incentive to invest in such products since users/investors would not be subject to the same verification regime as other traditional financial assets. This may affect the level playing field, fairness and integrity of the EU Internal Market.

2.2 What are the problem drivers? The problem related to the lack of information available to tax authorities regarding the proceeds obtained using crypto-assets has various drivers and causes: The lack of centralized control for crypto-assets, hybrid characteristics, and the rapid evolution of the underlying technology and its form present challenges from a taxation perspective. The said characteristics mean that reporting and taxation obligations are unclear and can be easily avoided. These assets escape current definitions in tax law in part due to the targeted nature of those definitions. Furthermore, users or investors can use this form of assets for payment as well as trading purposes, which is different from how traditional assets are traded and invested and which makes its taxonomy and the potential tax compliance framework more complex to design. These difficulties follow from the need to identify the relevant intermediaries, the reportable event, the valuation of crypto-assets and the available information, among other things. Like traditional financial assets, income or capital gains derived from crypto-assets may be subject to taxation depending on each Member State’s legal framework. However, proper enforcement of tax obligations relies on high-quality reporting and the ability of tax administrations to have access to the information. The crypto-asset market is highly mobile and digitalised. Crypto-assets are traded all over the world through service providers that, in turn, have great mobility since they can be located anywhere in the world. The cross-border nature of crypto-assets means that reporting rules at national level are unlikely to adequately capture all necessary information. It represents overall an emerging market. The first cryptocurrency, Bitcoin, was launched in 2009. As of today, there is a huge number of crypto-assets and CASPs and total crypto-asset users have increased from 5 million in 2016 to at least 100 million in 2020 with a market capitalization of total cryptocurrencies reaching EUR 1.8 trillion in September 2021. The crypto-asset markets are very dynamic. New crypto-assets with new features appear almost every day all over the world. There are more than 9,000 different crypto-assets currently available. Although this is both an emerging and rapidly evolving market, the Commission proposals such as MiCA provide for the necessary level of consistency and clarity by defining what crypto-asset service providers and crypto-assets are. Pseudo-anonymity. Overall, in the crypto-asset markets, the level of transparency for tax purposes is deficient. This new technology is used to create, hold and transfer crypto-assets without traditional third-party intermediaries clearly covered by existing legislation. The lack of a central authority, combined with pseudo-anonymity applying in some cases, may lead to risks of tax fraud, evasion and avoidance. The Commission proposal for a Regulation on MiCA establishes uniform requirements for transparency and disclosure for crypto-asset service providers and issuers. The proposed new AML rules will also require CASPs to identify their customers through customer due diligence measures, to comply with new information obligations linked to crypto-assets transfers and to report possible suspicious transactions involving crypto-assets. The DAC8 proposal intends to solve the pseudo-anonymity feature from a tax perspective. In addition, there are substantial valuation difficulties due to the high level of price fluctuations, which poses a major problem to the computation of the overall holdings and capital gains for tax purposes. For instance, Bitcoin investors have experienced considerable volatility over the last ten years. The current absence of financial markets regulation for crypto-assets, pending adoption of the Regulation on MiCA, feeds into its volatility. This volatility may have been curbed to some extent as a result of the implementation by Member States of the Fourth and Fifth Anti-Money Laundering Directive, but is still significant. Apart from daily volatility, in which double-digit increases and decreases of its price are common, there were periods when the crypto-assets’ price changes have outpaced even their usually volatile swings, resulting in massive price bubbles. The unstable value of crypto-assets makes it difficult for tax administration to carry out their core tasks. The value is one of the essential data components that tax administrations need to be able to perform a high-level risk assessment. 2.3 How will the problem evolve in the absence of an EU policy initiative? In the absence of an EU policy initiative, the underreporting of income and revenues will increase in proportion to the growth of the crypto-asset market. Bearing in mind that this market is growing at a double-digit annual pace, the relevance of this proposal is clear. Tax fraud, evasion and avoidance and the associated loss of tax revenues affect Member States’ resources and therefore their capacity to develop their policies. Indirectly all citizens are impacted. In the absence of a European framework for the reporting and exchange of information on crypto-assets for tax purposes, some Member States may decide to implement a domestic reporting framework for crypto-asset transactions. However, such domestic reporting framework would not be sufficient given the international and highly mobile character of the market. Furthermore, Member States are likely to take different approaches to reporting and there will be no efficient exchange of such information amongst them. This would increase the risk of tax fraud, evasion and avoidance. With regard to peer-to-peer transactions, the risk of tax fraud, evasion and avoidance is even higher given that these transactions cannot be traced. The risk is that crypto-asset users could decide to change to peer-to-peer transaction in order to evade reporting. Consequently, the main difficulty stems from the fact that no CASPs are in-between and therefore, no reporting is possible. According to the targeted consultation of the Member States, most Member States have not yet introduced any tax provisions or guidance at national level concerning the reporting of crypto-assets for tax purposes. The introduction of divergent reporting requirements would result in a more complex business environment: for a hypothetical CASP operating across 27 Member States. Costs of compliance with 27 different requirements would be higher than having to deal with one standard for reporting. Eventually, this would also create distortions in the Internal Market. If a CASP is based in a Member State without any requirement for reporting, yet operating in several Member States, it may have a competitive advantage vis-à-vis a CASP that provides the same services but is based in a Member State with a reporting requirement. More subtly, distortions may be created by differences between regulatory frameworks leading to a different compliance burden depending on the Member State.



3. WHY SHOULD THE EU ACT?

3.1 Legal basis The legal basis of DAC relies on Articles 113 and 115 of the Treaty on the Functioning of the European Union (TFEU), which aim at ensuring the proper functioning of the Internal Market. Article 113 of the TFEU provides a legal basis for the harmonisation of indirect tax systems of Member States, as far as needed to ensure the functioning of the Internal Market and to avoid distortion of competition. Article 115 of the TFEU provides for the approximation of such laws, regulations or administrative provisions of the Member States, which directly affect the establishment or functioning of the Internal Market and make the approximation of laws necessary. The aim of the DAC is to ensure a legal instrument of high quality for enhancing administrative cooperation in the field of direct taxation, in order to allow functioning of the Internal Market by reducing the negative effects of tax avoidance and evasion. Applying the same conditions, the same methods and the same practices for administrative cooperation facilitates the work and efficiency of the authorities in the fight against tax fraud, evasion and avoidance in the European Union. 3.2 Subsidiarity: Necessity of EU action Based on their current national legislations, most Member States may not be able to access information about crypto-asset users that are not resident in that Member State. This is relevant for the taxation of the capital gains from crypto-assets, where taxation rights are usually based on the users' tax residency. According to the current state of play of the Member States’ legislation, the national legal basis is insufficient for effectively collecting information from CASPs. In some countries, there is no legislation for third party reporting. In other countries, the current state of legislation does not cover CASPs residing in other countries and through which their residents engage in crypto-asset transactions. Furthermore, there are uncertainties as to whether domestic legislation applies to and can be enforced upon CASPs resident outside the jurisdiction. Given that crypto-assets markets are internationalised and that CASPs can easily operate remotely, this calls for a coordinated EU action. There is a need to act at the EU level to ensure that Member States can effectively access information on their tax residents, irrespective of the location of the service provider. 3.3 Proportionality: The added value of EU action Given the need to act and the nature and extent of the problem set out in chapter 2, an EU approach to tax transparency on crypto-assets appears to be the best solution in order to avoid a patchwork of reporting requirements unilaterally implemented by some or all Member States. The information needs to reach the Member State where the income and revenues are due to be taxed. Still, it is often likely to be held by intermediaries located in another Member State or even in third countries. Since the scope of a new reporting framework should define the (i) type of CASPs in scope, (ii) the crypto-asset users in scope, (iii) content of the information and (iv) timing of collection of the data, a coherent and comprehensive solution at EU level would result in a relatively lower administrative burden for both tax administrations, reporters and taxpayers. Furthermore, to ensure coherence, to reduce administrative burden for reporting entities and administrations and in order to close potential loopholes considering the volatile nature of the assets in question it appears justified to also include domestic CASPs and users in the scope. Given the developments at the international level, in particular work led by the OECD, some form of regulation is likely to be introduced by Member States at a certain stage. The fact that today there might be a lack of regulation in certain Member States does not imply that an EU initiative would cause disproportionate burden for administrations or reporting entities. Quite the contrary, the introduction of new EU provisions and procedures is expected to be less burdensome overall than the introduction of 27 different frameworks. The added value of EU action is broadly confirmed in the public consultation where the vast majority of respondents from different categories and sizes stated that CASPs should have the same reporting obligations for tax purposes throughout the EU in terms of laying down a single set of rules.

4. OBJECTIVES: WHAT IS TO BE ACHIEVED? 4.1 General objectives The general objective is to ensure a fair and efficient functioning of the Internal Market where all taxpayers pay their fair share of taxes. In general, it can be observed that tax authorities characterise the crypto-assets market as a tax opaque market. This initiative will increase the transparency of the crypto-asset market by providing tax administrations with information that can reduce tax fraud, evasion and avoidance and better ensure a level playing field with the more traditional financial markets.

The crypto-asset market continues to increase in popularity. This new market brings with it benefits but also challenges, particularly when it comes to taxation and the risk of non-compliance with tax obligations. The crypto-asset market is an international market where users worldwide invest through different CASPs established in or outside the European Union. Its international nature leads to cross-border transactions, which makes it difficult for tax administrations to access tax-relevant information without an exchange of information. Extending and clarifying the reporting obligations concerning the creation, transactions and holdings of crypto-assets will provide legal certainty and increased transparency for the crypto-assets market, in a manner that enables tax administrations to reduce tax evasion, avoidance and fraud. This initiative therefore also aims at safeguarding Member States’ revenues. This initiative should therefore benefit national treasuries and tax administrations. At the same time, users and service providers will benefit from such an initiative because of the harmonised reporting framework across the EU. This will avoid a situation where individual Member States put in place national reporting frameworks, which may differ from jurisdiction to jurisdiction and would make it hard and more burdensome for service providers to comply. This element is one that applied equally to previous DAC amendments. This proposal intends to set a reporting framework regarding crypto-assets exchanges. The proposal does not regulate how Member States tax the users’ capital gains, the holdings or any other direct or indirect tax related to crypto-assets. A CASP may be established in a jurisdiction that is not currently taxing any income derived from crypto-asset transactions, but its users might be tax resident in a different jurisdiction that taxes income derived from crypto-assets transactions. 4.2 Specific objectives Specific objectives are to enhance the relevant information available to tax administrations to perform their duties more effectively and to reinforce the general compliance with the provisions of the DAC. This would allow tax administrations to monitor the risk of non-compliance with tax rules and ensure proper tax collection. More specifically, the initiative will improve the ability of Member States to detect and counter tax fraud, evasion and avoidance. The initiative would require CASPs to report relevant information to tax administrations across the EU thereby ensuring a level playing field across the Union. Tax authorities' tasks to ensure the correctness of tax returns and to counter tax fraud, evasion and avoidance relies upon good quality and relevant information. If tax officers have the information they need, at the right time, to check that crypto-asset users declare what they obtained, it will be possible for them to better assess the tax due and ensure that tax is paid. In addition to the ability to actively detect and counter tax fraud, evasion and avoidance, this initiative, once adopted, would also have deterrent effects. There is evidence that taxpayers are aware of a higher probability of being caught for avoiding and evading taxes with automatic exchange of information measures in place. Automatic exchange of information is a most effective tool to foster voluntary compliance. In other words, by increasing the probability of detecting non-compliance, the initiative is expected to provide an incentive to declare and pay taxes owed. The monitoring of the implementation and the effects of the initiative will be carried out through yearly assessments where Member States provide quantitative and qualitative information to the Commission, including references to key performance indicators.



5. WHAT ARE THE AVAILABLE POLICY OPTIONS? The starting point is the baseline scenario, against which various options are assessed. This chapter describes the options identified. The baseline scenario is based on the assumption that the EU level would not act and would leave any potential action or non-action to the Member States. A soft-law approach would establish some requirements for Member States to act but would not be legally binding, thereby providing them with some leeway to design an appropriate solution for the existing problem. A legislative option would imply a legally binding framework to encompass reporting by CASPs and the relevant exchange of information. Concerning the expansion of the scope of DAC to crypto-assets, the EU would intervene to regulate the adoption of reporting and exchange of information obligations, building on the work of the OECD and existing EU proposals. In the broad lines, CASPs would be subject to reporting obligations under the DAC, and would therefore be required to collect information on users and report such information to the tax authority. Tax authorities would then be required to exchange this information with the relevant other Member State(s). In practice, the obligations that would fall on CASPs under the DAC would be largely equivalent to the ones already imposed on reporting subjects under DAC, such as financial institutions under DAC2 or digital platform operators under DAC7. Those obligations would mainly consist of collecting and verifying relevant data to identify taxpayers and their respective Member State of residence and reporting information relative to the proceeds and holding of crypto-assets.

The design of the legislative options is influenced by the following building blocks: -Which crypto-assets are in scope? Crypto-asset definitions commonly refer to digital or virtual assets based on distributed ledger technology (DLT) and cryptography as part of their perceived or inherent value. Additionally, these assets can be held and transferred in a decentralised manner without the intervention of traditional financial intermediaries. These two key elements distinguish crypto-assets from traditional financial assets already covered under DAC2. The proposal for a Regulation on MiCA defines crypto-assets as “a digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology.” The group of crypto-assets covered by the scope of the initiative is to a great extent similar to that of the proposal for the Markets in Crypto-Assets (MiCA) Regulation. The general definition used is the same and includes payment tokens, asset-referenced tokens and e-money tokens defined as follows: ·The most well-known crypto-assets covered by the suggested definition, such as Bitcoin or Ethereum and Litecoin, are designed to serve as a general purpose store of value, medium of exchange or means of payment, and/or unit of account. They are sometimes referred to as “crypto currencies” or “payment tokens”. ·“Asset-referenced tokens” aim to maintain a stable value by referencing several currencies that are legal tender, one or several commodities, one or several crypto-assets, or a basket of such assets and subsequently act as a means of payment to buy goods and services and as a store of value. It is suggested to report and exchange information on these crypto-assets under the new regime for crypto-assets. Examples are LAToken, Salt and Tether. Asset-reference tokens together with e-money tokens make up what is called “stablecoins”. ·“E-money tokens” are crypto-assets with a stable value based on only one fiat currency that aims to function in a similar way to electronic money. However, different from e-money, e-money tokens referencing one fiat currency which is legal tender do not provide their holders with a claim on the issuers of such assets. ·“Central bank digital currencies” refers to digital currencies representing a claim on an issuing Central Bank. ·Equity tokens are digital tokens or "coins" that represent equity shares in a corporation or organization. Debt tokens are tokenized assets that represent debt instruments such as real estate mortgages or corporate bonds. ·Non-fungible tokens: A non-fungible token (NFT) is a unique and non-interchangeable unit of data stored on a digital ledger ( blockchain ). NFTs can be associated with reproducible digital files such as photos, videos, and audio. NFTs use a digital ledger to provide a public certificate of authenticity or proof of ownership , but it does not restrict the sharing or copying of the underlying digital file. The lack of interchangeability ( fungibility ) distinguishes NFTs from blockchain cryptocurrencies , such as Bitcoin . Two types of assets would not be reported under the crypto-asset reporting obligation framework, given their features: o“Utility tokens” are intended to provide digital access to a good or service, available on DLT, and are only accepted by the issuer of that token. Utility tokens are issued with non-financial purposes to digitally provide access to an application, services or resources available on distributed ledger networks. Due to the absence of financial purposes these assets are rarely relevant for tax purposes. A start-up can create utility tokens for access to the services or products it is developing. Filecoin (FIL) is an example of a utility token. FIL holders gain access to the platform’s decentralized cloud storage services. o“Non-marketable crypto-assets" are not traded in a publicly available market or do not require intervention by a CASP. These assets are not covered by the initiative due to the fact that they are not usually subject to trading. An example is Sorare, a fantasy football trading card game, where users can exchange the cards of real players and manage their team to win prizes every week. The cards are all non-marketable and are stored on blockchain. CRYPTO-ASSETS TAXONOMY New Crypto-assets reporting framework (CARF) DAC2 Not covered by the crypto-assets reporting obligation Payment tokens or exchange tokens (Bitcoin, Ethereum) E-money tokens Utility tokens Asset-reference tokens (such as Tether, USD Coin, Binance ) CBDC Non-marketable crypto-assets Equity and debt tokens NFT

-Which CASPs are in scope regarding reporting obligations? CASPs are defined as any person whose occupation or business is the provision of one or more crypto-asset services to third parties on a professional basis. They can perform exchanges between crypto-assets and fiat currencies or exchanges between one or more forms of crypto-assets. The above definition is narrower than the definition provided in the proposal for a MiCA Regulation. This is because services such as “providing advice”, covered in the MiCA Regulation proposal, do not have any relevance for establishing holdings or capital gains that would be relevant for tax purposes. The “issuance” of crypto-assets is not covered either since it is not a transaction that will give rise to a measurable capital gain. CASPs can be, among others, exchanges, brokers and dealers, trading platforms (DEFi) as well as crypto-asset ATMs. They play a crucial role in facilitating a market for crypto-assets and are therefore best placed to collect and report information relevant for assessing tax liabilities (i.e. capital gains and income), including details of gross proceeds. In general, these intermediaries have access to the value of the crypto-assets and the transactions carried out. The proposal would contemplate that the new reporting and exchange framework will impose reporting requirements solely on CASPs that are in the professional business of conducting exchanges of crypto-assets. CASPs already fall under the scope of obliged entities under the Financial Action Task Force (FATF) Recommendations and are consequently expected to efficiently collect and review the required documentation of their customers on the basis of the AML/KYC requirements. In order to determine which CASPs are in scope regarding reporting obligations, two dimensions are being considered: size and location. As far as size is concerned, it can be envisaged whether (i) all CASPs should report, irrespective of their size, or whether (ii) an exclusion based on size should be introduced (i.e. SME CASPs). As far as location is concerned, it can be considered whether non-EU based CASPs should be subject or not to the reporting obligations, in addition to EU-based CASPs. In this respect, it should be noted that, once adopted, the Regulation on MiCA will oblige CASPs operating on the EU market to have their services authorized in the EU. This would facilitate the identification of non-EU based CASPs. CASPs that would be subject to an equivalent reporting standard, following an agreement on a standard in the OECD, may be excluded from the scope of EU obligations. This would require an equivalence decision from the EU, similar to what has been adopted in the context of DAC 7 for reporting by non-EU digital platform operators. -Which type of reporting? CASPs can provide services related to different types of crypto-assets, and to different types of transactions such as acquisitions, sales and transfers of crypto-assets but also safekeeping of assets and provision of financial services related to i.a. issuance of assets. The inclusion of crypto-asset transfers under the reporting and exchange framework would help catch transfers to cold wallets and track the wealth of a particular taxpayer. It would assist tax authorities to reconcile information reported from several CASPs, in case a taxpayer uses multiple providers for acquiring and/or selling crypto-assets. The reporting requirements need to take into account the characteristics of the asset and the type of information to be reported. Most crypto-assets are subject to very frequent transactions and their value can vary significantly even within very short timeframes. However, some crypto-assets are more stable in value and are in most cases not subject to daily multiple transactions. Two examples of the latter category are Central bank digital currency (CBDCs) and e-money tokens which are not subject to high fluctuations in value and are used mainly for payment purposes. Different reporting possibilities could be considered for crypto-asset reporting: The reporting of balances is an option under which the CASPSs would provide information about the crypto-assets balances of each user. This type of reporting is similar to what is required under DAC2 for traditional financial assets, where information is exchanged on end-of-year account balance. For assets that are characterised by a stable value and which are not subject to very frequent transactions, such as CBDC and e-money tokens, it would not be necessary to require detailed reporting. For such assets, it would be sufficient to require reporting of balances and other relevant information, similar to what is the case under the current provisions of the DAC for financial assets. In terms of reporting of transaction-based information, three alternatives can be considered in terms of level of granularity: reporting (i) on a fully aggregated basis, (ii) on a transaction-by-transaction basis, (iii) on an aggregated basis with some breakdowns (hybrid option). During a meeting organised by the Commission services in November 2020, Member States expressed diverging views on the desired level of granularity of reporting of gross proceeds derived from crypto-asset transactions. Most Member States favoured a fully aggregated reporting of gross proceeds that would both have a deterrent effect and allow tax authorities to perform a high-level tax risk assessment before further investigation. Other Member States were in favour of an approach whereby the concrete tax liabilities of taxpayers could be identified, requiring a transaction-by-transaction reporting scheme. With an aggregate reporting, tax administrations would receive a global picture of the value of and proceeds derived from all crypto-assets held by a taxpayer. Furthermore, the data transferred to the tax administration would be compressed and limited. However, this information may not always be sufficient to allow tax administrations to assess the actual tax liability associated with specific transactions in crypto-assets and it may require additional requests for further information resulting in time-consuming contacts between tax administrations and reporting entities. With a transaction-by-transaction reporting, tax authorities would receive for each taxpayer an overview of each transaction it has engaged over the year (with information on type of transaction, type of crypto-asset, value and proceed of each transaction). Tax administrations would therefore have immediate access to all available information, which would remove the need for follow-up contacts with other Member States or with CASPs also to ensure the necessary tax treatment in other tax areas such as indirect taxation. However, the volumes of information would be considerable and it would entail high administrative burden and costs for tax administrations.

In a “hybrid” or middle-ground scenario, reporting would be in-between aggregate gross proceeds reporting and full transaction-by-transaction reporting. It would require aggregate reporting on acquisitions, transfers and disposals per type of crypto-asset. It would also require distinguishing between crypto-to-crypto and crypto-for-fiat transactions to enhance the usability of the data for the receiving tax administrations. Additional financial information would be provided for further granularity, such as the number of transactions, the number of units transacted and the amount of any fees and commissions withheld by the CASPs in respect of relevant transactions. If relevant, the reporting on transaction-based information can be complemented with information on balances. On the basis of these building blocks, various options are assessed in the following analysis. The proposed IT implementation choices are feasible no matter which policy option is chosen. The feasibility of the IT solution depends neither on the size of the CASPs, nor on the types of crypto-assets in scope nor the reporting method. The issue to determine with regard to the IT solution is more about the efficiency of the different IT solutions in achieving the initiative’s objectives. 5.1 Baseline scenario (Option 0) Under this option, the EU would not act. However, other actors, mainly the Member States as well as the OECD, might still act. The use of crypto-assets has been growing a lot recently. While some Member States have not yet addressed the problem domestically, it does not mean that they will not act in the near future. Different approaches to the reporting for tax purposes across the EU may also have a negative effect on the crypto-asset market and the issuance and use of crypto-assets. The OECD is currently working on developing a new international standard intended to impose reporting obligations on CASPs and subsequent exchange of information between jurisdictions. A new international standard would include an obligation for CASPs to collect and provide tax authorities with certain aggregated information. The granularity of the information that CASPs would be required to provide would enable tax authorities to carry out effective tax risk assessments and provide visibility on transactions and holding patterns. Member States are likely to rely on this to implement rules at national level. However, there is a risk of divergences among the Member States’ legal frameworks that would jeopardize the coherence of the system for exchange of information within the EU as established by the DAC. It would also put at risk the integrity of the EU market in crypto-assets as regulated by the proposed MiCA Regulation. The OECD standard would not necessarily be adapted to the domestic provisions, leading to the reporting of third country CASPs risking to be less effective. 5.2 Recommendation for the implementation of a global standard Under this option, the Commission would propose a legally non-binding recommendation addressed to Member States to implement consistent rules addressing the lack of reporting and exchange of information related to the taxation of income or revenue generated through the use of crypto-assets. Such a recommendation would call on the Member States to implement a future OECD standard and, to the extent needed, be complemented by guidance adapting such rules for the Internal Market. A non-legally binding option may imply that Member States do not implement the international standard uniformly, giving rise to differences that could affect the functioning of the Internal Market. 5.3 EU legislative initiative – Six options regarding the type of reporting and the impact of having a threshold for SME- (Options 1-6) Under the EU legislative option, the reporting and exchange of information would apply to all crypto-assets, which are relevant from a tax perspective (i.e. all crypto-assets except non-marketable crypto-assets and utility tokens). Under this option, the coverage would not include certain types of crypto-assets in the scope. This would be based on the fact that non-marketable crypto-assets and utility tokens are not traded on exchanges and mostly do not have a value outside the context of their issuer. Their use does generally not have any tax consequences and the information would therefore not be useful for tax administrations. As discussed above, the reporting would focus on transactional information, which would allow tax administrations to make a more precise risk assessment. Considering that many users make many transactions within short time frames, a reporting of information based on balances only would in many cases require tax administrations to ask the CASPs for more detailed information, thus creating a second round of more detailed reporting. For the CASPs, the option would mean that less information would need to be reported initially, which would keep the administrative burden low. However, due to the likely frequent need for more detailed information, there would be an increased administrative burden in the second step of follow-up requests for information. Regarding the type of transactional information to be reported, we may distinguish three sub-options: Aggregated reporting, transaction by transaction and hybrid. In all cases, a SME threshold is analysed against any of these three sub-options making them in total six sub-options. Option 1. Transaction by transaction. Under this policy option, the reporting and exchange of information would apply to all crypto-assets, except non-marketable crypto-assets and utility tokens, introducing a reporting obligation on all CASPs that have EU users. In this case, the information would be reported on a transaction by transaction basis which means that each and every transaction made by a CASP for a crypto-asset user will have to be reported. Under this option, CASPs would report the data concerning each transaction with crypto-assets owned by EU users. In the same way, as under Option 3 and 5, all CASPs would need to report as far as they intermediate EU users’ transactions, regardless of where they are located. The reported information would consist of detailed transactional information per crypto-asset user. Consequently, the level of information would be so precise that tax administrations would not need to seek additional information to calculate the taxes due by crypto-asset users. However, the mass of data that would have to be managed by CASPs and tax administrations would entail higher investments in IT infrastructure to guarantee its functionality and operability, resulting in higher costs than other options. Option 2. Transaction by transaction with a SME threshold. This option is similar to the previous one, but it introduces a threshold for CASPs that are SMEs. In this case SMEs would not need to report.

The costs associated to the initiative could be contained by introducing an SME threshold as the amount of information would be reduced. However, these thresholds would constitute a loophole in the system as some users would prefer to use SME CASPS to avoid having information concerning their crypto-assets transactions reported, even though large value transactions could still be performed through SME CASPs. Option 3. Fully aggregated reporting: Under this policy option, the reporting and exchange of information would apply to all crypto-assets, except non-marketable crypto-assets and utility tokens, introducing a reporting obligation of fully aggregated information on all CASPs that have EU users. Fully aggregated information would provide a general picture of the crypto-asset user’s transactions, which could only be used for risk assessment purposes. In case of need for additional information, tax administrations would have to request it from CASPs through a second round of reporting on request. Consequently, the fully aggregated option would require follow-up action from the tax administration concerning taxpayers that present a higher level of risk. The absence of a threshold on the size of the CASPs would result in a more significant volume of information being reported to tax administrations. This would result in a higher administrative burden for tax administrations, but would equip tax administrations with different means to combat tax fraud, evasion and avoidance. However, this would lead to additional administrative burden for the CASPs of a smaller size, which would be proportionately more burdensome than for CASPs of a bigger size. Option 4. Fully aggregated reporting with an SME threshold: This option introduces a SME threshold to allow smaller CASPs not to be subject to the reporting obligations. A threshold on the size of CASPs would have two effects. Firstly, tax administrations would get a lower amount of information as more minor entities would not be reporting. Secondly, for CASPs below a specific size, it would mean that the administrative burden of reporting, which would be more significant as a share of the overall administrative burden than for larger CASPs, would be removed. However, there could be incentives for those users who intend to conceal their crypto-assets tax information to act through those SME CASPs. Option 5. Hybrid or middle ground option: In the hybrid or middle-ground option, the tax administrations would receive more granular information than in a fully aggregated reporting system, allowing tax administrations to perform a high-level risk assessment and calculate the crypto-asset user’s capital gains. The type of additional data to be reported would be, for instance, the number of crypto-assets exchanged, the type of crypto-assets exchanged and the costs charged by CASPs for the transactions. As in the other options, all CASPS would need to report no matter where they are established, and only non-marketable crypto-assets and utility tokens would be out of scope. The main advantage of this reporting method is that the amount of information to be managed by tax authorities and CASPs would be moderate as they would not be obliged to report each transactional data. However, it would allow tax administrations to obtain the data required to limit the follow-up requests for information to the CASPs. The detailed information would in many cases suffice to directly calculate the potential capital gains of a user. Option 7. Hybrid or middle ground option with a SME threshold: Under this policy option, the reporting and exchange of information would apply to all crypto-assets, except non-marketable crypto-assets and utility tokens, and for all CASPs that have EU users. The information here would be reported on a middle ground basis. The introduction of a SME threshold would mean that SMEs do not incur the costs to aggregate and report the information. However, as in the previous analyses, this option would not avoid creating a potential loophole and distorting the EU market of crypto-assets. The effort that SME would need to perform to comply with this information requirement would be within the proportionality framework, and therefore, it would be justified not to have any threshold on SME. 5.4 Options discarded at an early stage Some of the options highlighted above were considered as not a viable way forward either because there was no deemed added value or because experience with similar approaches has proven ineffective in the past:



Option discarded Section Explanation Non-legislative approach 5.2 This option would bring no added value as the OECD framework would be developed and Member States that would wish to do so would implement the framework. A Commission Recommendation would bring no added value as it would not be legally binding, hence it would not address the issue of fragmentation of reporting requirements across the EU. In particular, it would still be for each Member State to decide on the introduction of such reporting obligations and on their precise scope. In addition, the difficulty of enforcing domestic legislation vis-à-vis CASPs resident in another jurisdiction would not be addressed. Other potential consequences would be heterogeneous reporting obligations throughout the EU and distortion of internal market. Only EU-based CASPs would be within the scope of the reporting framework. 5 Some of the intrinsic characteristics of crypto- assets are that they are highly mobile and digitalized and can therefore be exchanged all over the world. That means that European users can use the exchanges services of any CASPs no matter where the CASPs have their jurisdiction. A reporting of information framework where only EU-based CASPS would need to report would favour non-EU-based CASPS against their European competitors, and would only provide limited information to EU tax adminsitrations.





6. WHAT ARE THE IMPACTS OF THE POLICY OPTIONS? 6.1 Overview of options The expected impacts of the options presented are discussed in more detail in the following section. These cover economic impacts (costs and benefits) on CASPs, national tax administrations and the Commission, impacts on sectors competitiveness and SMEs, as well as social and environmental impacts. All the policy options have been assessed against the baseline scenario. The table below provides an overview of available policy options considered in the analysis. Option 1 Option 2 Option 3 Option 4 Option 5 Option 6 CASPs report detailed transactional information on all assets types except for non-marketable crypto-assets and utility tokens. Threshold on CASP size does not apply. CASPs report detailed transactional information on all assets types except for non-marketable crypto-assets and utility tokens. Threshold on CASP size applies. CASPs report aggregated transactional information on all assets types except for non-marketable crypto-assets and utility tokens. Threshold on CASP size does not apply. CASPs report aggregated transactional information on all assets types except for non-marketable crypto-assets and utility tokens. Threshold on CASP size applies. CASPs report hybrid transactional information on all assets types except for non-marketable crypto-assets and utility tokens. Threshold on CASP size does not apply. CASPs report hybrid transactional information on all assets types except for non-marketable crypto-assets and utility tokens. Threshold on CASP size applies. 6.2. Economic impacts The various options focus on improving the reporting and exchange of information relative to crypto-assets transactions. Still, there is a lack of official statistics on service providers and the underlying transactions they tend to facilitate, which would be needed to estimate the economic impacts of the initiative in a reliable manner. We do, however, estimate as much as possible both the benefits and the costs of the measure on the basis of reasonable and sound assumptions combined with extrapolations based on available data. Despite the said limitations, these estimates can still provide a solid basis for policy-making purposes and the achievement of the objectives under this proposal. This should be taken as the best effort by the Commission services, to assess the most significant impacts of the initiative. 6.2.1. Benefits One of the key aims of this initiative is to prevent tax fraud, evasion and avoidance stemming from crypto-asset transactions. As previously discussed, revenues earned through these are currently under-reported. Better reporting and exchange of information should therefore have a positive impact on the revenues to be collected by tax administrations, which we try to estimate. Central to the benefits estimation stands the concept of capital gains. Realised capital gains accrue when the selling price of a crypto-asset exceeds the price of their initial purchase and the asset is sold or exchanged. Such income may be subject to tax. The estimates provided hereafter are therefore based on the previously mentioned exchange dynamics. Information related to Bitcoin has been used due to its prevalence on the cryptocurrency market and the availability of data. Data regarding other crypto market players is difficult to acquire and it is doubtful whether it would be reliable. Detailed information on the methodology used to estimate the benefits and the employed assumptions can be found in Annex 4. In 2020, the total realised capital gains by EU citizens from Bitcoin amounted to EUR 3.6 billion according to a study by Thiemann (2021)., The employed data had been tracked by Chainalysis (a blockchain data platform) who are considered a trusted source of information. The distribution of capital gains across the Member States is uneven. Member States have different approaches when it comes to taxing realised capital gains, with some Member States not taxing them at all. The above-mentioned study has found that, by applying a uniform 25% tax rate on realised capital gains from Bitcoin across all Member States, approximately EUR 0.9 billion of tax revenue could have been collected in 2020. The alternative scenario, the one applying the actual tax rates on realised capital gains in the Member States, has produced similar results yielding roughly EUR 0.85 billion of tax revenue. For simplicity reasons and taking into account the narrow difference in tax revenues between the two analysed approaches in the study, our benefit estimations are henceforth based on the application of the 25% uniform tax rate on total capital gains from all crypto-assets. However, since crypto-assets are prone to high volatility, as explained in the previous chapters, we have also performed a sensitivity analysis by introducing two additional rates of 15% and 35%. Besides this, and as explained in chapter 5, we have excluded non-marketable crypto-assets and utility tokens (as these types of crypto-assets are not relevant for tax purposes). The benefit estimates and the corresponding sensitivity analysis are presented in Table 4 below, while the rationale behind the estimated figures and the employed assumptions are detailed in Annex 4. Uniform tax rates on capital gains Tax revenues estimates (in billion EUR) 15% 1.0 25% 1.7 35% 2.4 When applying different uniform tax rates (as shown in the table above), the estimated tax revenues range between EUR 1 and 2.4 billion. These figures should be interpreted with caution as crypto-assets (i.e. Bitcoin) may suffer even greater value oscillations (according to the available statistics) than what has been captured by our sensitivity analysis. This considerable volatility of the crypto-assets’ value hinders reliable growth projections. Besides capital gains, crypto-assets could be subject to other types of taxes (e.g. wealth tax) and these additional tax revenues have not been reflected in the above estimates due to lack of data. Moreover, the benefit estimates cannot take into account behavioural responses and arbitrages. For example, some users might rely on peer-to-peer transactions instead of relying on services transactions, which could obfuscate reporting and identification of crypto-asset generated profits.

Nevertheless, the crypto market has grown exponentially thus far and it is likely to continue expanding. It can therefore be expected that the related tax revenues should increase over time as well. The estimated benefits in relation to the available options are summarised in the table below. Option Assessment 1 Direct benefits in terms of additional tax revenues are expected to exceed EUR 1 billion (i.e. the lower bound). All CASPs with EU users regardless of the size would report detailed transactions to tax administrations. While all the necessary information will be available to tax administration, detailed data could overburden them, leading to inefficiencies linked to possible processing omissions and consequently less tax revenue. 2 Direct benefits in terms of additional tax revenues are expected to be lower than in Option 1, but still above the lower bound of EUR 1 billion. This is due to the exclusion criteria based on size, which reduces the number of reporting CASPs. Even though we do not have reliable information on how many SMEs operate as CASPs, it cannot be excluded that those smaller business have large(r) customer bases (i.e. there could be possibly a higher amount of unreported transactions). 3 Direct benefits in terms of additional tax revenues could amount to EUR 1.7 billion (i.e. the middle bound). All CASPs with EU users regardless of the size would report aggregated transactional information to tax administrations. The aggregated data, however, might not always provide enough information to ensure proper taxation, which would imply the need for the second round of information requests by the tax administrations that come with higher costs. The net benefits (taking into account the second-round information) are therefore likely to be lower compared to Option 1. 4 This option is similar to the previous one, but it applies a threshold based on size, which could likely result in less benefits (direct and net) in terms of additional tax revenues. These benefits are expected to be close to the middle bound nevertheless. 5 Direct benefits in terms of additional tax revenues could reach EUR 2.4 billion (i.e. the upper bound). The hybrid reporting approach would ensure a balance between too detailed transactional information to be reported by all CASPs with EU users regardless of the size (Option 1), and the need for second round information requests (Option 3). 6 This option is similar to the previous one, but it applies a threshold based on size, which could likely result in less benefits (direct and net) in terms of additional tax revenues. These benefits are expected to be close to the upper bound nevertheless. Even though the above benefit estimates give a quantitative indication concerning the impact of this legislative initiative, their materialisation may come with certain risks. In particular, the main risk lies with the actual use of the information obtained by Member States. While Member States are expected to take this new information into account to ensure proper taxation, there are variations across Member States regarding their ability to make the best use of the data. 6.2.2.Costs Requirements for CASPs to report data and for tax administrations to exchange them will entail costs. The costs can be categorised as: ·One-off, substantive compliance costs, incurred when a new (IT) system is introduced or when the existing one is being updated (i.e. development costs). ·Recurrent administrative and, for tax administrations, compliance measure costs, to operate the systems once it has been set up and to ensure it works as expected. The cost analysis is built upon the costs of setting up and operating DAC2, which resembles most of the reporting obligations of this initiative. Additionally, the IT costs for tax administrations (see Annex 5) have been predicted with a relatively higher degree of precision due to the experience gained with previous amendments of the DAC. Even so, these calculations must overall be approached with caution considering the absence of precise information on the market structure and scope of the transactions on the market. However, since the costs estimates must consider specificities of the crypto-market, additional assumptions and extrapolations had to be introduced. These were based on the analytical documents and statistics from Chainalysis (a blockchain data platform), Binance (a crypto-currency exchange) and Coin Market Cap (a price-tracking website for crypto-assets). The need for combining various sources of information is a result of the restricted availability of data, which consequently reduces the overall certainty of the projected costs. The computed estimates are therefore indirect and as such, fragile. Annex 4 provides additional information on the categories of costs and benefits and on the assumptions made. In order to quantify the costs for service providers, as well as tax administrations, the following factors needed to be estimated: ·The number of service providers (and accounts) facilitating transactions. Such a figure may vary depending on whether there are exemptions and thresholds. If the overall scope is broad and some exemptions are introduced, the number of reportable service providers will be lower than if the scope were without exemptions. ·The cost of complying with the initiative, ideally per service provider and tax administration. The hypothesis is that, the more users (i.e. accounts) a certain provider has, the higher the costs. Therefore, providers with a relatively low number of accounts will bear lower costs than larger market players. At the same time, we would expect that the costs, one-off and recurrent, for one tax administration running controls on a higher number of accounts to be higher than for an administration running controls on fewer of them. We estimate that there are around 168 CASPs with EU users. In addition to this, we quantify the number of active accounts under the available service providers. It should be noted that for the sake of estimation, we use the available data on Bitcoin users (for CASPs). There, we assume that the number of accounts equals the number of users, even though having one or more accounts per user and investing in other cryptocurrencies on top of Bitcoin remains a possibility. Furthermore, in the absence of precise market data on crypto-assets, we have assumed that each asset category to be excluded represented a 3% market share (similar to benefit estimation). Given that two types of assets are to be excluded, this represents 6%. A sensitivity analysis has been performed as well to account for crypto-asset value volatility that may affect the customer base of a CASP, and for the possibility of providing additional information (second round requests) to the tax administrations should they ask for it explicitly. The table below shows the summary of the estimated costs for CASPs. To estimate these, several assumptions have been used (see Annex 4). Detailed information in relation to the policy options considered is provided in the next section. One-off Recurrent Sensitivity interval -10% 0 +10% -10% 0 +10% Reporting on all crypto-assets, except non-marketable crypto-assets and utility tokens 233.1 259 284 20.3 22.6 24.9 In terms of IT implementation, three solutions can be envisaged (see Annex 5 for details): (i) a decentralised system, which is the approach taken in DAC 1, 2 and 4 with bilateral exchanges of information between Member States, (ii) a centralised system, which has been implemented for DAC3 and DAC6, where the information is made available by one Member State to the other Member States via a central Directory, and (iii) a single access point, which would be a completely innovative solution, whereby CASPs would directly report into a central system accessible to all relevant Member States. The proposed IT implementation choices are feasible no matter which policy option is chosen. The feasibility of the IT solution depends neither on the size of the CASPs, nor on the types of crypto-assets in scope nor the reporting method. The question here is more about the efficiency of the different IT solutions in achieving the initiative’s objectives.

The type of IT solution comes with different costs both, for the Commission and the national tax administrations. These are summarised in the table below and explained in more detail in the coming sections. Tax administrations European Commission IT solution One-off Recurrent One-off Recurrent Single Access Point 0.5 0.2 1.4 0.2 Central Directory 1 – 13 1 – 5.7 0.5 0.2 Decentralised IT solution 64.8 6 0.8 0.1 Largely, the risk of non-materialisation of the estimated costs is rather limited. The forthcoming initiative would oblige tax administrations to make adjustments to their IT systems and include efforts to process and exchange the received information from CASPs. These actions will entail costs and as such, they have been accounted for in this impact assessment. 6.2.2.1 Impact on CASPs As displayed in Table 5, one-off cost estimates for CASPs will vary between EUR 233.1 million and EUR 284 million, or roughly between EUR 1.4 million and EUR 1.7 million per service provider respectively. The total recurrent costs, on the other hand, are estimated to range between EUR 20.3 million and EUR 24.9 million, or roughly between EUR 120 000 and EUR 150 000 per entity respectively. These estimates cover all CASPs with EU users (see Annex 4). The costs are largely dependent on their customer base (on how many users they will need to report). It should be stressed that these estimates, including on number of users, are based on several assumptions and they do not necessarily reflect the actual costs service providers will incur, especially those having to report a relatively low number of transactions. Additionally, there is a risk, though limited, for CASPs to pass through their costs onto consumers. In particular, due to the increased costs arising from this initiative, service providers might raise their service fees paid by their customers so as to offset (partly) the newly incurred costs. However, this is likely to be minimal since the crypto-market offers a possibility of transacting with crypto-assets without intermediation. Table 8 Assessment of costs per policy option (CASPs) Option Assessment 1 Total one-off costs estimate is likely to surpass EUR 233.1 million (i.e. the lower bound). The SME (size) threshold does not apply. On an individual basis, this means approximately EUR 1.4 million in one-off costs per CASP. Analogously, recurrent costs incurred by CASPs would amount to EUR 20.3 million in total or roughly EUR 121 000 individually. These relatively lower costs compared to other options (except for Option 2) are due to transaction-by-transaction reporting, which does not require additional processing of data by CASPs before submitting it to tax administrations. 2 The projected costs (both aggregated one-off and recurrent) are likely to be lower than in Option 1, but still above the lower bound. This is due to the SME threshold that here applies, and which means that a more reduced number of entities will incur costs. 3 One-off costs are estimated to reach the upper bound of EUR 284 million (or EUR 1.7 million per CASP). The recurrent costs are estimated not to surpass EUR 149 000 (upper bound) per entity on a yearly basis. This option entails a slightly heavier reporting since service providers need aggregate data before sending it over to the tax administrations. The cost upper bound also reflects the need of providing additional information to the tax administrations (second round of information requests) since data aggregation does not necessarily disclose all the relevant information needed for tax purposes. 4 This option is similar to the previous one, but it applies a threshold based on size, which is likely to result in lower costs (aggregated one-off and recurrent). These costs are expected to be close to the upper bound nevertheless. 5 Total one-off costs estimate are likely to reach EUR 259 million (or EUR 1.5 million per CASP). The recurrent costs are estimated not to surpass EUR 135 000 per entity on a yearly basis. The hybrid reporting approach would ensure a balance between too detailed transactional information to be reported by all CASPs with EU users regardless of the size (Option 1), and the need for second round information requests (Option 3). 6 This option is similar to Option 5, but with lower costs (one-off and recurrent) due to the exclusion criteria based on size, which reduces the number of reporting CASPs. These costs are expected to be close to the middle bound nevertheless. 6.2.2.2 Impact on tax administrations and Commission The estimated costs incurred by tax administrations and the European Commission are largely dependent on the IT solution needed for the reporting by CASPs and the subsequent exchange of information by tax administrations. These have been quantified and the relevant information is available in Table 6 above and Annex 5. One-off costs by tax administrations in the EU-27 when processing crypto-asset transactions are estimated to range between EUR 500 000 and EUR 64.8 million or between EUR 18 000 and EUR 2.4 million per tax administration on average, depending on the IT solution chosen. The estimated recurrent costs vary approximately between EUR 100 000 and EUR 6 million on a yearly basis, or between EUR 3 700 and EUR 220 000 on average per Member State. These estimates are extrapolated from the costs incurred by Member States under previous editions of DAC. They broadly aim at estimating costs for information on all crypto-assets in the EU. Furthermore, the type of reporting and scope under the various options, will also affect recurrent costs for tax administrations. These are qualitatively assessed, however, and summarised in the table below. Option Assessment 1 The transaction-by-transaction reporting would bring increased costs for tax administrations, as the information received would be much more voluminous, thus requiring more time to process. Compared to aggregate or hybrid reporting, transaction-by-transaction reporting is likely to be quite significant with respect to processing a much higher amount of untreated data, as all transactions by a single taxpayer would have to be made available. Therefore, more information will need to be processed by tax authorities, with an impact on IT infrastructure needed. 2 The potential issues remain the same as in Option 1, but the estimated costs (recurrent in particular) are likely to be lower, as there is a threshold on CASP size, meaning less data will be transmitted to the tax authorities. Reporting less data, however, might be problematic since even smaller CASPs can still have relatively large customer bases, which could lead to less tax income (this is also applicable to Options 4 and 6). 3 The data sent to the tax authorities by CASPs should contain aggregate information. While the volume of information is likely to be lower than under Options 1 and 2, the tax administrations might need additional clarifications leading to second round of inquiries to the CASPs. However, it cannot be precisely predicted how often will this occur, but the costs are still expected to be lesser than in previous two options. 4 This option is similar to Option 3, but the estimated costs (recurrent in particular) are likely to be lower, as there is a threshold on CASP size, meaning less data will be transmitted to the tax authorities. 5 This option encompasses hybrid reporting by the CASPs, which is the most cost efficient modality for the tax administrations. This is due to the fact that the data received is predominantly aggregated (i.e. no large data volumes to process) and detailed information is requested to the CASPs only when necessary (i.e. the need for the second round of information is being significantly reduced). 6 This option is similar to Option 4, but the estimated costs (recurrent in particular) are likely to be lower, as there is a threshold on CASP size, meaning less data will be transmitted to the tax authorities.

Besides tax administrations, the Commission would also bear costs. In any legislative option, on the basis of current and past experience, it is likely that the Commission would incur development costs for defining the common EU reporting specifications (i.e. the type of data to be reported, collected and exchanged), and for setting up new and/or adapting the existing IT systems to enable the exchange of information. Commission’s one-off costs could vary between EUR 500 000 and EUR 1.4 million. The recurrent costs for the European Commission are estimated to range between EUR 100 000 and EUR 200 000 on a yearly basis, and mainly relate to operating and maintaining the IT system for data storage and exchange relative to crypto-assets. There are different IT solutions for exchange of information available, which influence the costs range and are described in more detail in Annex 5. 6.2.3.Impact on sector’s competitiveness and SMEs The rapid digitalisation of the economy suggests that the economic role of CASPs as facilitators in crypto-asset transactions is becoming increasingly relevant. The users engaging in such transactions through service providers appreciate the speed of exchanges, availability of the amenities and anonymity. It cannot be excluded that this legislative initiative may affect the competitiveness of certain service providers that, in a baseline scenario, do not currently have any reporting obligations. Looking ahead, it is expected that reporting rules will however be put in place in more countries, even in the absence of a European initiative. The proposal aims at providing a single set of rules throughout the EU, thereby reducing the compliance burden at least for those operators that are active in various countries and subject to different rules. Introducing reporting rules could also affect the service providers’ customer base. The initiative could decrease the number of users that transact via the service providers, most likely from those users who want to avoid complying with their tax obligations. On the other hand, the initiative could increase the trust in the system and attract new users who appreciate reputational and trusted providers. This would positively affect the competitiveness of CASPs, and could compensate, in part, for the loss of the clients favouring unregulated environments. A level playing field requires all to be subject to the same rules, which makes the competition fair and efficient. That is, the available policy options do not differentiate between CASPs based on location, meaning all service providers with EU users will have to report and face the same compliance costs. The EU initiative would also level the playing field within the EU as it would also prevent competitive disadvantages arising from possible differentiated reporting requirements across the Member States. In addition to ensuring fairness within the crypto-asset market, it would also positively affect competition with respect to the traditional financial institutions. This is because CASPs would be subject to reporting obligations like traditional financial institutions. When CASPs are SMEs, they tend to face a relatively higher administrative burden when fulfilling tax requirements due to their relatively small size and limited resources. However, since most of the information that needs to be collected is already collected for AML/KYC purposes, it is largely available to CASPs for their daily operations. Furthermore, the crypto market matures relatively fast and so do the SMEs by becoming big players on the market (provided they enable transactions of high value increasing their turnover). Regardless of the size, SMEs can still have large user bases since high digitalisation facilitates the management and processing of vast volumes of transactions. Impact on SMEs and competitiveness as per available policy options is qualitatively described in the table below. Option Assessment 1 Common rules at EU level would be beneficial for competitiveness of the Single Market as the level playing field between the countries would be guaranteed, thus not leaving certain business in a less advantageous position. SMEs would not be carved out from the initiative, which would likely increase their compliance costs. However, transaction-by-transaction reporting is less cumbersome for SMEs compared to other reporting modalities. This would also exclude second round information requests by tax administrations (also applicable to Option 2). 2 Competitiveness of the Single Market is expected to be worse off than in Option 1. Since SMEs would be considered out of scope, this would mean that potentially large user bases they may have and their underlying transactions would not be reported. SMEs would avoid some administrative burden, which would be beneficial at first. Implementing the right reporting framework once they grow bigger might be more burdensome than having it in place from the beginning (this also applies to Options 4 and 6). Nevertheless, transaction-by transaction reporting would entail less administrative burden. 3 Common rules at EU level would be beneficial for competitiveness in the Single Market as the level playing field between the countries would be guaranteed, thus not leaving certain business in a less advantageous position. SMEs would not be carved out from the initiative, which would likely increase their compliance costs (higher than under Option 1).This is due to aggregate reporting which is more cumbersome for SMEs compared to other reporting modalities. Second round information requests by tax administrations are also likely (applicable to Option 4). 4 Competitiveness of the Single Market is expected to be worse off than in Option 3. Since SMEs would be considered out of scope, this would mean that potentially large user bases that they would not be reported. If SMEs grow bigger over time, aggregate reporting would still bring about higher compliance costs than under Option 2. 5 Common rules at EU level would be beneficial for competitiveness of the Single Market as the level playing field between the countries would be guaranteed, thus not leaving certain business in a less advantageous position. SMEs would not be carved out from the initiative. The hybrid reporting modality would make compliance costs relatively manageable (somewhere in between Options 1 and 3), with limited amount of second round information requests by tax administrations. 6 Competitiveness of the Single Market is expected to be worse off than in Option 5. SMEs would be carved out from the initiative. If they grow bigger ove