The information about your assets can be shared by exchanges worldwide without trader's knowledge. Read if cryptocurrencies are in scope of FATCA or CRS.
The information about your assets can be shared by exchanges worldwide without trader's knowledge or even consent. In this short assessment we are looking at popular cryptocurrency exchanges to analyse, if they are in scope of FATCA or the Automatic Exchange of Information (CRS - Common Reporting Standard) - meaning are the exchanges obligated to reveal the information about their users and their portfolios?
What is FATCA/CRS
FATCA stands for Foreign Account Tax Compliance Act . The US invented it in 2010 and made it a worldwide law for foreign financial institutions to disclose information on their US account holders directly to the US. If you are a bank or an institution outside of the US trading in financial assets and your investors are US tax persons, then you have to disclose their names and assets to the US on an annual basis under FATCA reporting regime, otherwise you have to withhold 30% tax. FATCA is very US-centered so if you are an investor and not a US tax person, you are not affected.
However, if you live in one of the OECD countries that have committed to exchange foreign taxpayer information under the Standard for Automatic Exchange of Financial Account Information in Tax Matters (CRS), starting in 2017 in respect of 2016 financial data. CRS is based on FATCA concept. The OECD thought that if US can have information on its taxpayers to check whether they disclose their foreign assets on their US tax returns, why not do it for other countries? So the OECD countries made it happen and one hundred countries have already committed to exchange information and are referred to as Participating Jurisdictions. Under the CRS Standard a financial institution (bank or broadly any other institution trading in financial assets) in country A that has an investor resident in country B (A and B agreed to exchange information under CRS) will annually send information to country B on its taxpayer disclosing the taxpayer's name and assets.
CRS & FATCA have sound legal framework
The legal framework for disclosing the information under FATCA are the Intergovernmental Agreements between US and other jurisdictions (check if your country has signed an IGA with US). If your country did not sign an IGA with the US, it still does not relieve it from sending the information to the US under FATCA as every foreign financial institution is still subject to the FATCA regulation.
The legal basis for exchanging information under CRS are the CAA agreements. The list of countries who have activated exchange relationships for CRS is published on the OECD website.
How do the popular exchanges deal with FATCA/CRS today?
I have not found any information about their approach to compliance with FATCA/CRS. A company that is offering a cryptocurrency on an exchange platform could be considered a financial institution for FATCA and CRS, because it is offering a currency to worldwide investors. Although FATCA does not mention e-money, the OECD is indirectly implying that an electronic money provider is not excluded from the definition of a financial institution .
If the exchange is in the US, it is outside of scope of FATCA. If it is outside of the US, it falls automatically in scope of FATCA and also CRS, if the country of where the exchange is located have committed to share information under CRS.
US based trader investing abroad: If you are a US investor who purchased cryptocurrency on a non-US exchange, you might be subject to FATCA.
Swiss trader investing in Germany: If you are Swiss investor who purchased cryptocurrency on German exchange, your account might be subject to CRS.
The financial institution or the exchange platform does not have to be subject to the local banking regulation and does not have to have a banking licence to fall in scope of FATCA and/or CRS, nevertheless has to be compliant with both regimes.
Although popular cryptocurrency exchanges do not mention their compliance with FATCA/CRS both traders & exchanges could be in scope of FATCA/CRS.
Is cryptocurrency in scope of FATCA/CRS?
Most likely yes. Cryptocurrency, like any other currency might be a financial assets and FATCA and CRS are all about disclosing financial assets held by foreign investors.
What investor information is being shared under FATCA/CRS
The financial institutions have an obligation to collect information on its account holders under due diligence rules and then report this information annually, typically using an XML file according to FATCA or CRS reporting schema. They disclose the names of the investors, their address, tax identification numbers, account number, account valuation and total payments made to that investors within the reporting period.
In order to demonstrate how CRS/FATCA rules apply to a real life example, I decided to take a look at Kraken, one of the leading exchanges with a European focus. The platform is extremely friendly and easy to use, definitely worth trying out!
Based on their website, Kraken is a cryptocurrency exchange based in San Francisco, trading Bitcoin, Ripple, Ethereum and other cryptocurrencies to anyone in the world. It seems to also be registered in the Companies House in the UK under the name Payward Ltd and its nature of business is Financial intermediation not elsewhere classified. From my personal experience Kraken uses a bank account in Germany for traders’ deposits. If you want to buy a cryptocurrency, you have to send fiat currency (e.g. Euro or USD) to the bank account in Germany to then purchase crypto coins.
When you sign up to Kraken you need to "get verfied" and Kraken collects information such as your name, country of residence, date of birth, verified proof of residence (utility bill). Kraken asks all the questions a financial institution would ask for due diligence purposes and perhaps to be used later for reporting purposes.
Is Kraken subject to FATCA / CRS and who reports?
Very likely, but let’s look at the detail to see who needs to report what.
The bank in Germany is without any doubt a financial institution and subject to FATCA and CRS. It is subject to FATCA under German IGA with US to disclose information to the US on US taxpayers. It is subject to CRS because Germany committed to share information with other Participating Jurisdictions and will disclose information on foreign tax resident to other OECD countries.
Scenario 1 - Bank account held by Kraken US
German bank as part of its compliance obligations will perform due diligence on its account holders among which Kraken is expected to be identified as a foreign account holder. Now the question is, is Kraken a US person or tax resident in one of the CRS Participating Jurisdictions? If the bank account is held by Kraken as US entity, the bank may report to the US informing US that Kraken-US has a bank account in Germany and provide a year end valuation.
Scenario 2 - Bank account held by Kraken UK
If Kraken as UK entity is the account holder, the bank may consider sending the information to the UK under CRS on its account holder informing HMRC that Kraken-UK has a bank account in Germany and disclose its account balance at year end, unless Kraken-UK confirms to the bank that it is also a financial institution and will do its own reporting under FATCA and CRS.
Scenario 3 - Kraken is a financial institution and reports
Kraken is, among other countries, registered in the UK. It can be considered a financial institution for FATCA and CRS as it is offering and trading with cryptocurrencies that are most likely considered financial assets. The UK and the US have an IGA in place and the UK is also one of the CRS Participating Jurisdictions. Under both regimes Kraken may need to disclose information on its foreign account holders. If a US investor has an account with Kraken, Kraken may have to report that investor to the US under FATCA. If a French tax resident investor has an account with Kraken, Kraken may have to report that investor to France under CRS.
What about other exchanges?
As you can see it is never a straightforward answer and the reporting obligations depend on many factors and variables. Here we studied one example and the answers are likely to be different for Poloniex, Coinbase or other exchanges.
If you are a bitcoin investor and trading on an unregulated cryptocurrency exchange, information on you and your investment may still be disclosed under FATCA and CRS regimes. It is probably worth to consider your tax and financial situation now. In case you have not disclosed your investment in bitcoin on your tax return as one of your financial assets, one of the exchanges might need to do it sooner than you think.
This is a fascinating new area, where compliance, finance and tech meets. I am curious to read your comments and questions as this chapter on crypto compliance is still to be written, or if you have any questions, please don't hesitate to get in touch with our CRS & FATCA experts .