Imagine you have a piggy bank, but instead of coins, it’s full of digital money, like Bitcoin or other crypto. Governments want to know what’s inside that piggy bank so they can make sure people pay taxes when they should. But crypto is tricky: it’s digital, it can move across countries, and sometimes it’s hard for tax authorities to see what’s happening.

That’s where CARF and DAC8 come in. These are new rules that make crypto companies report what’s going on, so tax authorities can keep better track. In this blog, you’ll learn what CARF and DAC8 are, how they work, who they affect, and why they are a big deal.

CARF is an international standard, while DAC8 represents the European Union’s implementation of it. Both frameworks require crypto-asset service providers (CASPs) to report user details and transaction information to tax authorities to enhance transparency and prevent tax evasion.

What Is CARF?

CARF stands for the Crypto-Asset Reporting Framework. It is a dedicated tax transparency standard developed by the OECD to ensure the collection and automatic exchange of information on crypto-assets.

Why It Exists

Crypto assets (like Bitcoin, stablecoins, and some NFTs) can be transferred without banks, making them less visible to tax offices. Because of that, some people could avoid paying taxes on their crypto gains. CARF wants to fix that by forcing crypto-asset service providers (like exchanges or wallet companies) to collect important info about their users and report it. This helps governments track who owns how much crypto, where they live for tax, and how they use their digital assets.

Who Reports Under CARF

The people who must report are called RCASPs: Reporting Crypto-Asset Service Providers. These include crypto exchanges, brokers, and other platforms. Even some decentralized providers (like non-custodial wallets) might be included, depending on how much control they have.

What Information Has to Be Reported

CARF requires that RCASPs do due diligence, meaning they check and collect specific user data, like:

• User identity: Tax residence (which country the user pays tax in), tax ID (TIN), and other identifying info.
• Transaction data: What crypto-assets were bought or sold, how much, and when.
• Transfer information: This includes crypto sent from one wallet to another, as well as payments made with crypto.

All this information is reported annually. To share this data between countries, CARF uses a standard data format in XML.

What Is DAC8?

DAC8, or the Eighth Directive on Administrative Cooperation, is an EU directive that strengthens tax transparency by mandating the automatic sharing of information on crypto-asset transactions and other digital activities among EU member states’ tax authorities. Its goal is to prevent tax evasion and avoidance in the digital economy by giving tax authorities the information they need to ensure proper compliance.

You can read more about the directive on the official European Council website.

Why the EU Made DAC8

Crypto is very borderless: someone in Germany could use an exchange in Spain, or a wallet service in another country. Because of this, EU tax authorities need a strong way to share data about who owns crypto and what they do with it. DAC8 makes it mandatory for crypto companies in or serving the EU to report the needed tax info. The rules in DAC8 are based on CARF, so they follow the same global standard.

Key Dates for DAC8

• Adopted: October 17, 2023
• Published: October 24, 2023
• Transposition: EU countries must add DAC8 into their own laws by December 31, 2025.
• Effective Date: January 1, 2026.
• First Exchange: Data exchanges between EU tax authorities must happen by September 30, 2027.

What DAC8 Requires Crypto Companies to Do

The EU’s DAC8 directive requires crypto-asset service providers (CASPs), including exchanges and wallet providers, to perform rigorous due diligence, collect user and transaction data, and report this information annually to the tax authorities of EU Member States.

RCASPs must collect data about their users who are “non-resident” (i.e., users who live in a different EU country than where the service provider is based). They need to do customer due diligence, asking users for tax residence and tax ID. Then, they must send that info to their national tax authority. After that, the national tax office will share that information with the tax office in the country where the user lives.

CARF vs DAC8: Quick Comparison

How CARF & DAC8 Work Together

The Crypto-Asset Reporting Framework (CARF) and the EU’s Directive on Administrative Cooperation (DAC8) function together as linked systems for the automatic sharing of tax-related information on crypto-assets. While CARF serves as the international standard, DAC8 provides the legal framework to enforce these rules specifically within the European Union.

Because of DAC8, EU countries will share crypto-asset data with each other every year. The OECD also changed another tax standard (CRS) to include more digital-asset details, ensuring crypto aligns with traditional finance. If you need help understanding how this affects your portfolio, consider speaking with a specialist crypto tax accountant.

Why These Rules Matter

For Tax Authorities

They get better visibility on crypto usage and ownership, which was hard before because of how digital and cross-border crypto is. With annual reporting, tax offices can audit or assess taxes on capital gains more fairly.

For Crypto Companies

They have to collect more data (like where users pay tax, their tax ID, and more). They need systems that can report in XML and follow the technical rules set by the OECD. If they don’t comply, they could face penalties.

For Crypto Users / Investors

If you use an exchange or wallet that falls under CARF or DAC8, you might need to provide your tax ID and where you live. More of your crypto transactions get reported, so there’s less privacy when it comes to tax. On the bright side, this could lead to fairer tax treatment.

What Should People Do to Prepare

For Crypto Users / Investors

• Be ready to share tax info: Make sure you know your tax residence and tax ID.
• Keep good records: Track your trades, transfers, and wallet activity.
• Talk to a tax advisor: If you trade a lot or hold a lot of crypto, it’s smart to get professional help from 7 Crypto Tax Accountants.

For Crypto Service Providers

• Upgrade systems: Build or improve your compliance and reporting systems.
• Use the XML schema: Make sure your reporting matches the OECD’s standards.
• Train your team: Educate people on what CARF and DAC8 require.