The European Commission Approves New Tax Directive For Crypto Platforms

Updated: 21 May 2023

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Recently, the European Commission approved a new tax directive for crypto industries within its jurisdiction. The order encompasses a political agreement of various Council of Ministers of the European Union (EU). The Commission agreed on new tax transparency rules for all service providers facilitating transactions in the crypto platforms.

The European Commission Tightens Laws on Taxation in the Crypto Ecosystem

Based on the Commission proposal, the new rules align with the Markets in Crypto Assets (MiCA) Regulation and the Transfer in Funds Regulation (TFR). Notably, they are consistent with the OECD initiative on the Crypto-Asset Reporting Framework.

However, this development marks a significant step in the European Union’s efforts to regulate the growing cryptocurrency sector. In a press release from the Commission’s Directorate of Taxation and Customs Union, the new reporting requirements on crypto assets, e-money, and central bank digital currencies will be practical on January 1, 2026.

Further, by registering crypto companies in the member state where they operate, the operators must enable their clients with accurate identity data. Additionally, they should transmit the required information about users and their monetary movements to the receiving financial entities.

Notably, the directives call for an automatic exchange of information on cross-border tax resolutions. This involves applying to individuals regardless of the number of cryptocurrencies transferred.

Significantly, these obligations extend to all financial providing services linked to electronic money and central bank digital currencies (CBDCs). Consequently, once the digital euro project initiated by the European Central Bank is completed, transactions conducted with CBDCs and user data will also be subject to sharing.

However, the latest agreement on fiscal transparency was achieved based on a proposal prepared by the Commission. The deal will complement the Crypto Asset Market regulation and the Transfer of Funds Regulation, which the European Parliament approved in April.

The TFR facilitates tracking of Bitcoin and other cryptocurrency transactions in Europe. This is to identify potential illicit activities, aligning with the Financial Action Task Force’s (FATF) “Travel Rule,” which mandates the provision of information on fund origins and beneficiaries.

The Remaining Concerns on Privacy and Data Protection Laws

Nonetheless, the regulations have raised concerns regarding privacy and data protection laws associated with crypto transactions. Valdis Dombrovskis, the Executive Vice President for an Economy that Works for People, has stipulated that:

Crypto-assets and e-money have great potential to drive economic activity and innovation – but they also carry risks of reducing transparency and enabling tax evasion or fraud. Updating our tax rules to address these issues will help national administrations collect taxes more efficiently and keep up with evolving technology as Europe progresses with its digital transition.

Further, the European Commission argues that tax authorities lack crucial information to effectively monitor the income generated through crypto-assets, limiting their ability to enforce tax payments and depriving states of significant tax revenue. However, the European Commission has noted that rules are consistent with the Organization for Economic Cooperation and Development’s (OECD) proposal on crypto-assets. They seek to establish a global framework for fiscal transparency and facilitate reporting and information exchange among cryptocurrency companies.

On the other hand, Paolo Gentiloni, the Commissioner for Economy, has noted that:

Today’s agreement is good news for tax transparency in a financial world evolving quickly. Anonymity means that many crypto-asset users making significant profits fall under the radar of national tax authorities – and this is unacceptable. Once this directive enters into force, Member States will get the information they need to ensure that taxes are paid on gains made in trading or investing in crypto-assets.

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