CARF first landed in the EU, and DAC8 includes encryption assets in the scope of tax information exchange.

Written by: FinTax

In October 2023, the Council of the European Union adopted Directive (EU) 2023/2226 (DAC8), completing the seventh revision of Directive 2011/16/EU on Administrative Cooperation in Direct Taxation (DAC), formally incorporating the Crypto-Asset Reporting Framework (CARF) of the Organization for Economic Cooperation and Development (OECD) into the EU tax cooperation system. By 2025, EU member states will gradually complete the domestic legal implementation of DAC8. On January 1, 2026, the provisions of DAC8 will officially come into effect, marking the beginning of the first annual reporting of tax information on crypto assets, and the European crypto asset market will gradually move towards substantive implementation.

DAC8 aims to strengthen the overall legal framework of automatic exchange of information (AEOI) by including information on crypto assets within the scope of tax information exchange, in order to combat tax fraud, tax evasion, and tax avoidance.

1. CARF and DAC8

CARF is an international tax information automatic exchange standard promoted by the OECD, aimed at regulating the cross-border tax information disclosure related to crypto assets. DAC8 is based on CARF and stipulates the rules and procedures for exchanging user information related to crypto assets, standardizing the service providers and their users engaged in crypto asset trading through the implementation of due diligence procedures and reporting rules.

1.1 The main content of DAC8

DAC8 establishes the due diligence and reporting obligations of crypto asset service providers. The directive requires EU countries to obtain information from Reporting Crypto-Asset Service Providers (RCASPs) and exchange this information annually with the taxpayer's EU country of residence. RCASPs are required to collect transaction information regarding their non-resident investors during the reporting year and send this information to the tax authorities of their home country in the calendar year following the reporting year, and exchange information with the tax authorities of the EU country where the non-resident investors reside within 9 months after the end of the reporting year. Specifically, the information exchange related to the first reporting year (2026) will be completed by September 30, 2027.

As for the scope of tax information exchange under DAC8, the directive is based on the definition of crypto assets in the European Markets in Crypto-Assets Regulation (MiCA), covering a wide range of crypto assets, including electronic money tokens and some non-fungible tokens.

1.2 The relationship between CARF and DAC8

CARF itself does not have legal effect and needs to be implemented through regional or domestic legislation in various regions and countries. The EU institutionalized the CARF through DAC8, integrating it into the EU legal framework.

DAC8 adopts the definitions of CARF regarding crypto assets, RCASP, and reportable users, and aligns with CARF in terms of transaction categories, due diligence rules, and reporting data fields. DAC8 transforms CARF into a mandatory, enforceable EU extraterritorial tax transparency mechanism, integrating it with MiCAR and existing DAC tools. DAC8 not only standardizes EU tax information exchange but also effectively incorporates crypto asset reporting into the EU's financial regulatory framework.

In addition, DAC8 makes certain extensions to CARF with respect to EU characteristics. DAC8 treats extraterritorial compliance as a condition for entering the EU market, imposing mandatory reporting obligations on non-EU crypto asset service providers when providing services to EU users.

2. Review of the EU Tax Information Exchange and Regulatory Framework

The EU began issuing the DAC series of directives in 2011. DAC itself does not involve tax collection, but establishes a coordinated framework that allows EU member states to collect and exchange tax information related to individuals and companies, in order to meet the mutual assistance needs in the field of taxation among EU countries and ensure administrative cooperation between national tax authorities.

2.1 The Evolution of the DAC System

As of now, DAC has undergone eight revisions, which have expanded the scope of taxpayers and increased the types of data that need to be reported. The specific evolution of the DAC system from DAC to DAC9 is shown in the table below:

The evolution of DAC reflects the EU's shift from passive information exchange to active, systematic, and technology-driven tax transparency, transitioning from traditional revenue to complex cross-border structures and gradually expanding into the digital and crypto economies.

2.2 The Positioning of DAC8 in the DAC System

DAC8 expands the scope of information automatically exchanged under the DAC framework, requiring RCASP to report information on reportable transactions and transfers involving crypto assets and electronic money. It ensures that crypto assets follow the same information logic as traditional financial assets, continuing the DAC tax information exchange framework and improving the coverage of asset categories. This marks the full inclusion of crypto assets into the EU's general tax transparency and administrative cooperation system, rather than being regarded as a special or marginal asset category.

In addition to crypto assets, DAC8 further improves the existing provisions of DAC. It enhances the reporting and communication rules for Tax Identification Numbers (TIN) to facilitate tax authorities in identifying relevant taxpayers and assessing related taxes. At the same time, it grants member states flexibility in areas such as penalties and compliance to ensure the implementation of DAC.

3. The formulation and implementation process of the EU DAC8

The formulation and implementation of DAC8 are divided into the EU level and the EU member state level, specifically:

3.1 The formation of the EU DAC8

At the EU level, the origin of DAC8 can be traced back to 2022, and the timeline of related events for its formulation and implementation is shown in the table below:

3.2 EU Member States' Transposition of DAC8

DAC8 sets a transition period for EU member states, requiring them to complete the implementation of DAC8 by December 31, 2025. The results of the implementation in some member states are as follows:

Overall, at the EU level, DAC8 serves as a tool for constructing a coordinated and unified system, incorporating the reporting of crypto assets into the existing tax transparency framework of the EU; at the member state level, it is an administrative system oriented towards transformation, influenced by the law enforcement culture, administrative capacity, and policy priorities of each country. The effectiveness of DAC8 depends not only on a unified legal design but also on the ability of member states to transform crypto asset data into effective law enforcement.

4. Potential Impact of DAC8 on the EU Market

4.1 Impact on Cryptocurrency Service Providers

For crypto asset service providers, RCASP is the primary information transmission channel of DAC8. Crypto asset service providers will transform into tax reporting intermediaries and are subject to mandatory obligations to determine the tax residency status of clients, collect Tax Identification Numbers (TIN), and classify transactions. They must comply with due diligence rules and submit annual reports to tax authorities. RCASP has been incorporated into the EU's tax administration system.

DAC8 requires crypto asset service providers to have IT systems with supporting capabilities, legal and tax expertise, and ongoing reporting capabilities. This results in high fixed compliance costs, raising the capital threshold for crypto asset service providers. Smaller crypto asset service providers may face mergers or market exits, which to some extent accelerates the concentration and specialization of the EU crypto asset market.

DAC8 is applicable to crypto asset service providers established in the EU and non-EU crypto asset service providers serving EU users, which globalizes the EU compliance standards for the crypto asset industry through market access conditions.

4.2 Impact on Traditional Financial Institutions

The implementation of DAC8 will also have an indirect impact on traditional financial institutions such as banks, raising higher risk management requirements for them. This directive brings crypto assets into the regulated financial system, making crypto assets a compliance risk factor for traditional financial institutions, forcing them to reassess clients related to crypto assets and strengthen due diligence on clients with high trading volumes of crypto assets.

4.3 Impact on Individual Investors

DAC8 eliminates the structural tax opacity of crypto assets, and the tax residency status of individual investors, the transaction volume of crypto assets, and cross-border transactions will be reported to tax authorities and automatically exchanged between EU member states. This increases the compliance burden on individual investors to some extent and regulates their crypto asset trading behavior.

In addition, although DAC8 does not have retroactive effect, the data it obtains may trigger audits of previous years. Historical violations of individual investors in cryptocurrency asset trading may be reassessed and subjected to penalties.

5. Response and Outlook

In the face of the potential impacts brought by the implementation of DAC8, market participants need to enhance their compliance awareness, start data integration, and attempt to transform the compliance burdens brought by the transparency of cryptocurrency transaction taxation into their own competitive and governance advantages. Specifically:

For cryptocurrency asset service providers, they need to register in an EU member state or appoint an EU reporting intermediary to centrally conduct DAC8 reporting. At the same time, they can attempt to tag transactions by asset type, nature of the transaction, etc., and incorporate tax logic into product design for easier information collection.

For traditional financial institutions, they can collaborate with RCASP supporting DAC8 to conduct risk control related to crypto assets. By leveraging the compliance advantages brought by the existing DAC infrastructure, they can develop businesses such as crypto asset brokerage and tokenized securities, re-entering the crypto asset market.

For individual investors, it is essential to fully understand DAC8 and recognize the transparency of cryptocurrency asset trading. The attitude towards cryptocurrency asset trading should shift from risk avoidance to compliance planning, choosing an EU-regulated RCASP as the cryptocurrency asset trading platform. For legacy compliance issues, voluntary disclosure and correction documents should be considered. If necessary, professional tax advisory assistance can be sought.

6. Conclusion

The importance of the cryptocurrency asset market is increasingly evident, but the growth in the use of cryptocurrency assets should not come at the expense of tax transparency. The implementation of CARF through DAC8 marks a milestone in European cryptocurrency asset regulation. The EU has incorporated cryptocurrency asset reporting obligations into the DAC framework, transforming a non-mandatory international standard into a legally binding, interoperable, and enforceable transparency mechanism. DAC8 eliminates the last major blind spot in European tax information exchange to date, accelerates the normalization of cryptocurrency assets as taxable financial instruments, and positions the EU as a global leader in the governance of cryptocurrency asset transparency.