The U.S. Treasury Department faces a complex task in enforcing its proposed digital asset reporting rules on foreign trading platforms. The regulations, introduced in late August, primarily address domestic transactions, leaving potential difficulties in enforcing reporting requirements on foreign digital asset brokers, especially those operating cryptocurrency trading platforms.

One potential avenue for the Treasury to obtain offshore data is through joining the Organization for Economic Cooperation and Development (OECD)’s cross-border tax information exchange system. However, this move poses its own set of challenges, notably the requirement for the U.S. to reciprocate data sharing with other participating countries. Although Treasury has signaled interest in exchanging information under the OECD’s crypto-asset reporting framework, or CARF, the department may face statutory constraints in collecting information about foreign individuals using U.S. trading platforms.

Law360 covered the topic in an article on September 6, 2023 where Gray Reed Partner Joshua Smeltzer was one of the experts interviewed. Board Certified in Tax Law by the Texas Board of Legal Specialization, Joshua uses his experience as a former litigator for the U.S. Department of Justice to defend clients in tax audits, tax appeals, and litigation in Federal District Court, U.S. Tax Court, the U.S. Court of Federal Claims, and tax issues in U.S. Bankruptcy Court.

Excerpt:

As some see it, even if Treasury isn’t able to collect information about U.S. customers overseas until it potentially joins CARF, foreign asset exchanges may still take notice of the department’s proposed reporting rules.

According to Joshua Smeltzer, a partner at Gray Reed, enforcement of the reporting requirements or penalties for noncompliance may be “impractical or a hollow threat” unless Treasury can rely on formal or informal agreements with jurisdictions outside CARF.

However, if foreign digital asset companies want the benefits of the U.S. market, he said, “I think that they are going to need to navigate any presumed exemption from the reporting requirement very carefully.”

Read the full article here (subscription required).