Exchanges confirm 'overseas tax obligations'... With 'CARF' introduction, what should investors prepare?

International standardization of virtual asset transaction information, information collection phase begins this year

Foreign assets also come into tax authorities' sight… automatic information exchange begins next year

Domestic investors feel little change… high-net-worth or internationally-linked investors need to prepare

The key is organizing evidence… must be able to explain the flow of funds

The domestic virtual asset market is also entering the big trend of 'global standardization of tax information.' With the Crypto-Asset Reporting Framework (CARF, Crypto-Asset Reporting Framework) taking effect from the new year, customer identification and data collection procedures for virtual asset service providers such as exchanges are expected to become more thorough.

On the 2nd (local time), according to the Organisation for Economic Co-operation and Development (OECD) and tax authorities, major countries including South Korea will officially begin collecting information to implement CARF from this year. CARF is an international standard that standardizes user information collected by businesses in each country and automatically exchanges the transaction details of residents of partner countries each year. The South Korean government has been preparing to introduce the system by signing the Multilateral Competent Authority Agreement (MCAA) on information exchange in 2023.

CARF is closer to an 'information infrastructure' that allows tax authorities in each country to more precisely grasp virtual asset transaction and holding details, rather than a system that immediately introduces new taxation. However, as the scope of information collection and exchange broadens, it is assessed that investors clearly need to prepare more than before.

Like 'CRS' for virtual assets… What is CARF?

CARF is commonly called the 'virtual asset version of CRS (Common Reporting Standard).' While the account-centered CRS has automatically exchanged financial account information between countries, CARF expands that scope into the virtual asset domain. The intent is to manage areas that were difficult to capture under existing financial regulatory frameworks—due to the nature of virtual assets traded through decentralized networks—in a standardized way.

The reporting entities are 'virtual asset service providers' that intermediate transactions or execute asset transfers. These entities must report users' identity information and certain types of virtual asset transaction details annually to the competent tax authorities.This entities must report users' identity information along with certain types of virtual asset transaction information annually to the competent tax authorities.

Reportable transactions include exchanges with fiat currency, exchanges between virtual assets, and transfers of virtual assets. In particular, payment-type transactions for goods and services exceeding 50,000 dollars are also subject to reporting, and the monitoring scope includes flows that use virtual assets as a means of payment as well as trades for investment purposes.

The range of assets subject to reporting is also wide. In OECD documents, virtual assets encompass digital representations of value based on distributed ledger technology, and non-fungible tokens (NFTs) may also be included as reportable assets depending on their structure and use. This means it is not limited to simple 'coin investments.'

Information collection starts this year; automatic exchange from next year

The implementation of CARF will proceed in phases. From January 1 of this year, virtual asset service providers in each country will begin collecting user information and transaction data, and from January 1 of next year, automatic information exchange between countries will be in full swing. In other words, 2026 is the preparatory phase in which information is accumulated, and 2027 is the point when that information begins to move across borders.

However, not all countries will participate at the same pace. As of the end of last year, jurisdictions for CARF implementation reached around 70 countries and regions, but the actual start of information exchange may vary depending on each country's domestic legal arrangements. Some countries may delay the start of exchange.

Lee Jae-hyeok, partner at PwC Samil Accounting Firm, explained, "For example, in countries like the United Arab Emirates (UAE) that joined CARF late, information sharing related to Binance users could be delayed until 2028, so some exceptional delays may occur."

Nevertheless, in the long term, the transaction details of residents using overseas exchanges are also likely to come into the view of Korean tax authorities. CARF has a structure that can deliver foreign platform information about Korean residents' transactions to Korea through the concepts of 'reporting jurisdiction' and 'reportable resident.'

Most South Korean investors feel no change… investors with overseas ties need to prepare

Many domestic investors do not have overseas tax obligations and therefore are not directly included as reportable subjects. In such cases, the perceived change is likely to be limited mainly to strengthened identity verification procedures. However, exchanges must verify and manage information such as taxpayers' tax residence and taxpayer identification number (TIN) through self-certification methods, and users must comply with this.

Lee Jae-hyeok said, "Korea has already operated a data collection system for tax purposes, so changes at the domestic system level are limited," adding, "CARF supplements that system with standards to extend it internationally and link it with foreign tax authorities."

Thus, investors who only use domestic exchanges will likely only face strengthened identity verification procedures, but those who use overseas exchanges or have histories of overseas stays or multiple tax obligations face different situations. In particular, if past transaction records are not organized, they are likely to face requests for explanation after information exchange begins.

Prepare documentation of asset source and movement

The most important task for investors in the CARF environment is 'explainability.' As tax authorities obtain overseas transaction details, the core is whether one can logically explain how assets were acquired and how they moved.

Investors should first organize transaction histories and asset movement paths into a single flow. Aligning transfers between exchanges, personal wallet inflows and outflows, and the source of funds for won-denominated deposit accounts in chronological order will make it easier to respond to future requests for clarification. Also check the possibility of changes in tax residency due to overseas stays, immigration, employment, or study abroad.

High-net-worth investors should also reconfirm overseas financial account reporting obligations. If the balance of an account at an overseas virtual asset service provider exceeds 500 million won on any day during the year, it becomes subject to reporting. As CARF implementation increases the likelihood that holdings on overseas exchanges will be shared automatically, reporting risk may materialize.

Lee Jae-hyeok said, "The biggest change after CARF implementation is not taxation itself but tax authorities' access to information," adding, "Because overseas exchange holdings and past transaction histories could be automatically linked, organizing documents so you can explain the source and movement of funds at any time is practically essential." He added, "The larger the holdings and the higher the proportion of overseas exchange use, the more pre-arrangement is not optional but preparation from a risk management perspective."

Lee Young-min, Bloomingbit reporter 20min@bloomingbit.io, Lee Su-hyun, Bloomingbit reporter shlee@bloomingbit.io