DAC 8: the EU's lethal weapon for monitoring crypto-taxpayers

While for some taxpayers there is a clear desire to evade tax, for others it's more the difficulty of the declaration itself that gets them off track (our guide to declaring everything by the book).

The fact remains that the tax authorities don't get their act together when they do the sums. 🤔

"At a time when governments are seeking to finance the ecological transition and curb the socio-economic impact of the health crisis, the capital gains realised on blockchain are looking like El Dorado", PwC already indicated in a report on the subject published in 2021.

According to US blockchain data analysis company Chainalysis, the French would have realised €3.7 billion in crypto capital gains in 2021.

In theory, this should have brought €1.2 billion into the coffers. Except that the Treasury 🇫🇷 told BFM Business that it had only received €400 million in crypto capital gains tax in 2022 (tax year 2021).

Without getting into big calculations, the shortfall is pretty obvious.

A tried and tested solution: automatic exchange of information

It is to recover this windfall, in France and other EU countries, that the Commission has begun work on its DAC 8 directive.

"States have made great efforts in recent years to combat tax evasion," explains Alexandre Lourimi, a tax lawyer with ORWL, a firm specialising in disruptive technology law. "In the case of financial flows, what has been very effective is the implementation of better administrative cooperation between States, and cryptos will not cut it," he stresses.

The various Member States of the European Union will soon be subject to the 8th revision of the Directive on Administrative Cooperation (DAC 8). This will mainly affect crypto exchange platforms.

"Currently, Exchanges operating on European soil are obliged to report their customers' transactions to the tax authorities where they are based," explains Alexandre Lourimi. "This is effective when the clients are from the same country, but it gets complicated when they are foreign," he adds.

In other words, the French tax authorities are not necessarily aware of the crypto activity of a French tax resident in... Italy. And vice versa.

Except that this reporting will soon be automatically sent to the tax authorities in the customer's country of residence. In practical terms, the French tax authorities will know what taxpayers are doing on the Austrian exchange platform 🇦🇹 Bitpanda without even having to ask.

"The prism of information is very broad, there are obviously the names of customers and their contact details, but also all the transactions carried out during the year, i.e. deposits, withdrawals, cryptos to which they have been or are exposed, crypto-crypto exchanges, crypto-fiat exchanges, staking income or even cryptos received as part of airdrop", lists Alexandre Lourimi. 📡

The adoption of DAC 8 has not yet been validated, but there is a (very strong) chance that it will pass.

With the current timetable, we can bank on it coming into force in 2026. That is, more or less when the MiCA regulation will be fully active.

The tax authorities have until now been tracking down inconsistencies

The tax authorities obviously did not wait for the DAC 8 directive to take action, but the system remains poorly targeted. The biggest fish usually get caught by sending funds to their bank account from a crypto exchange platform.

The alert is triggered by the banks. When they detect a suspicious movement, they are obliged to inform the intelligence services in charge of combating money laundering, terrorist financing and tax fraud. In France, this is TracFin. 👋

Without this, the tax authorities move almost blindly.

But what is meant by "suspicious"?

If you receive an unusual amount compared to your regular flows (for example €100,000 when the largest payments are your salaries), there is a good chance that you will be the subject of a request for information from the tax authorities (read our investigation into the taxman's techniques for spotting fraudsters).

"The tax authorities do not currently have the capacity to track all movements," points out Alexandre Lourimi. "Many taxpayers, particularly those cashing in small or medium capital gains without arousing the vigilance of the banks, probably slip through."

With DAC 8, absolutely all flows will be automatically transmitted to the tax authorities in each client's country of origin, regardless of where in Europe the platform is located 🥸.

The tax authorities will therefore be able to gain a much more detailed view of all taxpayers' crypto portfolios.

There remains, however, the case of non-European platforms (even though in theory any platform that has at least one European customer must be registered somewhere in Europe)...

The OECD is preparing a system similar to DAC 8

For platforms operating outside Europe, the Organisation for Economic Cooperation and Development (OECD), which brings together 38 countries (including France), is working on a similar automatic information exchange system.

The name of this system: Crypto Asset Reporting Framework (CARF). It will operate on the same principle as DAC 8 (the latter was in fact inspired by it), but with a much broader target.

Given that this system requires the signing of a multilateral convention between states, its entry into force could take years. "This type of negotiation takes a very long time," insists Alexandre Lourimi.

In the end, crypto accounts will be subject to the same regime as the traditional financial system, which has been obliged since 2014 to automatically exchange all client information with their country of residence.

This is notably what put an end to banking secrecy in Switzerland 🇨🇭.

According to the OECD, the information exchanged between states concerned more than 111 million financial accounts involving almost €11,000 billion in financial assets during 2021.

"The positive side of this is that it will help bring the crypto sector out of hiding, if only from the point of view of banks that are not comfortable with their customers investing in cryptos," believes Alexandre Lourimi. "They will have much less reason to be suspicious when they see a transfer from an exchange platform that cooperates", he continues.

However, we have to ask ourselves the question of privacy in a world where little escapes the surveillance of states and large corporations.

"I would remind you that economic exchanges are an integral part of the private lives of individuals", warns the lawyer.