European directive on cryptocurrency should raise billions in tax revenue

The crypto world is still relatively new, but since its existence it has changed the world of payments and investing forever. Because of its fast-changing nature, its growing popularity among users and the exponential growth of the crypto market in itself, (tax) authorities are facing challenges in regulating the trading of crypto-currencies and gaining tax revenue from them.

The difficulty with this is that crypto transactions are not easily traceable and often cannot be directly linked to a specific person or entity. The crypto market is currently still characterised by a certain degree of anonymity. After all, trading takes place without the intervention of traditional financial institutions such as banks. The European Commission hopes that with the implementation of DAC8 – which deals with the collection and exchange of financial data – these issues will be a thing of the past.[1] The directive will enter into force on 1 January 2026, with the first information to be provided by providers of crypto-currencies or services by 31 January 2027.

In my earlier blogs, I have already announced the advent of the DAC8 Directive and covered it in outline along with a package of European law measures dealing with other elements to regulate the cryptocurrency sector. DAC8 will have a major impact on the crypto market, which is why in this blog I write about the nature and functioning of the directive in more detail.[2] In doing so, the following topics are highlighted:

• The background and functioning of DAC8 (framework).
• What impact does DAC8 have on exchanges and users?
• What information will be exchanged?

The centre of the question of this blog is whether tax evasion will be in the past with cryptocurrencies DAC8?

‘DAC’, stands for ‘Directive on Administrative Cooperation’. As the name suggests, we have now reached the eighth version of the directive. The directive was created in 2011 to promote cooperation between member states on the exchange of information relevant to taxation, as well as to detect and combat tax evasion and -avoidance. 

The directive requires European Union member states to implement legislation to ensure that certain institutions and individuals such as banks, digital platforms and intermediaries exchange financial data about their clients or users. DAC8 focuses these regulations on cryptocurrency and service providers. This information is then shared between member states’ tax authorities. In this way, a member state’s tax authorities can track cross-border transactions and should be enabled to tax income realised from holding and trading cryptocurrencies.

Framework

Know-your-customer

DAC8 covers ‘reportable crypto asset service providers’,[3] such as exchanges, exchange platforms (brokers) and digital wallet providers. They will be required to collect information on their users. This information primarily concerns data to be captured as part of the know-your-customer (KYC) process. This involves verification of personal data based on ID proof as well as bank and name and address details. This obligation applies to all cryptocurrency providers, regardless of their size or location, serving customers within the territory of the European Union. It is not required, incidentally, that the provider(s) are themselves established in the EU. KYC obligations currently also apply under the Money Laundering and Terrorist Financing (Prevention) Act to cryptocurrency providers operating in or from The Netherlands. They must register with DNB for this purpose (see Register of crypto service providers).

Obligation of reporting individual transactions

In addition, cryptocurrency providers will be required to collect data on the transactions made by their users. This includes transactions from fiat currencies such as euro to crypto and vice versa, as well as from crypto to crypto, and both domestic and cross-border transactions must be administered.

Electronic money, e-money tokens and central bank digital currencies (CBDCs)[4] are highlighted in the directive but are not covered by DAC8, they are already covered by the scope of DAC2 (relating to financial institutions, such as banks).
The background to this is that these products are more stable in nature and therefore less prone to day trading. CBDCs are therefore only subject to a reporting requirement on asset positions and not on individual transactions.

The European Commission estimates that around 9,000 different cryptocurrencies are traded on the market today. Due to the highly volatile nature and high frequency of trades made in this context, it is difficult for tax authorities to tax accurately. Through DAC8, they should gain (more/better) insight into the trades made and the capital gains resulting from them. DAC8 thus dovetails with the MiCA Regulation, which comes into force from 30 December 2024. Both aim at European harmonisation of legislation on crypto-currencies, with MiCA specifically aiming to protect the position of consumers against the risks of investing in crypto-currencies and DAC8 aiming to facilitate the taxation of crypto-currencies.

Impact of DAC8 on exchanges and users

Exchanges

DAC8 obliges member states to implement legislation requiring cryptocurrency or service providers to record transactions of their users.

As a result, crypto operators face significant administrative burdens. In contrast, the Commission argues that the obligations should be applied in the same way in every Member State, ultimately contributing to a ‘level playing field’ for all crypto companies doing business within the EU while doing their bit to combat tax avoidance and -evasion.

Users

DAC8 does not impose any direct obligations on the customers of cryptocurrency or service providers. However, they are going to feel the impact of the regulation by having to provide more information to crypto service providers. Crypto companies trading in or from the Netherlands are already currently required to record the personal data of their users, under DAC8 all providers with customers within the EU will be required to do so. In addition, I expect the impact of the directive to be felt as more specific checks can and will be carried out by tax and investigation authorities.

In a broader perspective, DAC8 contributes to the increasingly far-reaching regulation of the crypto market, which is also expected to take a step towards maturity with it. Excesses where exchanges fall over due to poor financial management should be minimised by (among other things) these measures, but for users this also means that their trade and goings-on will become (more) transparent to government bodies.

What information is exchanged?

The information to be recorded about the cryptocurrency and service provider, the user and the cryptocurrency itself is shown below. This information is exchanged automatically between the tax authorities of the member states. Providers of cryptocurrencies or services are required to provide this information from 31 January 2027.

N.B. in het NL blog staat er ergens een harde return na ‘vanaf’ zodat 31 januari 2027 op de volgende regel staat. Er is dus veel wit ruimte na vanaf.

Reportable data provider crypto asset services:

• Name
• Address
• TIN (Tax Identification Number)
• Identification number and Legal Entity Identifier (LEI code)

Reportable data user (individuals):

• Name
• Address
• TIN (BSN for individuals)
• Member State (domicile for tax purposes)
• Place and date of birth

Crypto asset data to be reported:

• Full name of crypto currency and type
• Amounts paid or received as a result of crypto exchange for fiat, number of transactions and number of units traded
• Value of crypto currency at acquisition and total proceeds at sale, in case of crypto-crypto transaction, the foregoing should be administered for both crypto currencies
• Transactions to non-custodial wallets such as ledgers
• Direct crypto payments for goods or services exceeding €50,000

Conclusion

Based on the obligations arising from DAC8, Member States have a powerful tool to exert controls as part of the fight against tax evasion and avoidance. Transactions carried out by EU residents must be administered by exchanges wherever they are established. Tax evasion will not be a thing of the past after the implementation of regulations resulting from DAC8, but it will significantly increase the ‘chance of getting caught’. The administrative burden imposed on crypto providers remains a major concern for them because of the costs involved. The impact of the regulation will also be felt by users from 2027 onwards. There is expected to be an increase in the number of audits by tax and investigation authorities.

Also read my previous blogs on regulations regarding cryptocurrencies:

• From 2024, the tax authorities will have more and more ways to check whether you have cryptocurrencies and their origin
• The future of crypto exchanges, time for regulation?
• Groundbreaking MiCA regulation should end ‘Wild West’ in crypto-currency field
• European Commission wants to ban anonymous cryptocurrency transfers

[1] European Parliament (EU Legislation in Progress), ‘Tax transparency rules for crypto-asset transactions (DAC8)’, July 2024.

[2] Please note that on the basis of DAC8, only information is collected and exchanged on transactions and not on asset positions. Therefore, this information is not used to (automatically) complete returns but serves as a control tool for the tax authority of a member state.

[3] Reportable cryptocurrency providers are referred to as RCASPs: Reportable crypto-asset service providers. This includes crypto asset providers (exchanges), providing services such as brokerage or custody wallets, which serve customers with a tax residence or place of business within the EU.

[4] CBDCs: Central bank digital currencies.

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