On-chain is not a tax haven: CARF closes in, a global tax crackdown on crypto assets.

Author: danny

Who would have thought that the modern transnational tax information system was triggered by a tube of toothpaste? A UBS banker smuggled diamonds across the border by stuffing them into a toothpaste tube—a scene reminiscent of Hollywood—unexpectedly tolled the death knell for Swiss banking secrecy laws. Now, the gears of history are relentlessly grinding into the encrypted world—that once-hidden "tax haven" is about to face its reckoning.

This article will unveil the mystery of CARF: a global tax operation in full swing. From Binance's strategic move to relocate to the UAE to buy time, to the harsh reality that cryptocurrency trading is no longer tax-exempt; from Hong Kong's countdown to compliance, to the shattering of mainland investors' hopes.

This is not only a reshaping of the industry landscape, but also a survival guide that every crypto asset holder must face – after all, in this algorithm-woven cage, no one can continue to be an ostrich burying its head in the sand.

Foreword: What is CARF?

CARF stands for Crypto-Asset Reporting Framework. Its core mechanism involves Crypto-Asset Service Providers (RCASPs) with reporting obligations collecting tax-related information about their clients and related transactions, and submitting this information to the tax authorities in their respective jurisdictions. Ultimately, this information is automatically exchanged internationally between tax authorities. This is similar to the CRS in the traditional financial sector, but CARF specifically focuses on the buying, selling, exchanging, custody, and transfer of crypto assets.

In short, previously, when users traded cryptocurrencies on exchanges, their home country's tax authorities had limited access to comprehensive information. Now, CARF connects users' tax residency countries with the jurisdictions of exchanges. Once a CARF partnership is established, the user's tax residency country can obtain detailed information about its tax residents' overseas cryptocurrency trading activities and conduct tax collection accordingly.

By the end of 2025, more than 75 jurisdictions had committed to implementing CARF in 2027 or 2028, with over half having signed relevant competent authority agreements. From January 1, 2026, the CARF framework will come into effect in the first batch of 48 jurisdictions, covering the UK, EU, Japan, South Korea, Singapore, and other regions.

Chapter 1: Diamonds in Toothpaste, The End of Secrecy, and the Arrival of CRS

To understand CARF, this "new sickle," we must first look at the "old fishing net"—CRS (Common Reporting Standard).

The protagonist of the story is Bradley Birkenfeld, a former key account manager at UBS. His mission was to smuggle $200 million in untaxed assets belonging to his client, American real estate tycoon Igor Olenicoff, back to the United States without leaving a trace.

Birkenfeld came up with a plot point that only Hollywood screenwriters would dare to use: he bought diamonds, stuffed them into a tube of ordinary toothpaste to evade customs X-ray machines, and then brazenly flew across the Atlantic to deliver the diamonds to Olenicoff to cash in.

In 2007, when Birkenfeld discovered he might become a scapegoat for an internal compliance purge after reviewing an internal bank report, he made a decision that defied the traditions of Swiss banking: he defected. He walked into the U.S. Department of Justice with a document containing top-secret internal emails and a list of clients.

Birkenfeld's testimony directly led to UBS paying a record-breaking $780 million fine in 2009 and unprecedentedly releasing the names of over 4,000 American clients. This marked the death of Swiss banking secrecy laws. (Interestingly, Birkenfeld also received a bounty of $104 million.)

The U.S. Congress realized that relying on informants like Birkenfeld was far from enough, and that an automated monitoring mechanism was necessary. Thus, in 2010, the Foreign Account Tax Compliance Act (FATCA), the most authoritarian law in tax history, was enacted. Its logic is simple and brutal: "Banks worldwide that want to do business with the United States must report the account balances of Americans to us annually."

Seeing the immediate effectiveness of the US approach, the OECD began to replicate it on a one-to-one basis. In 2014, the global standard based on FATCA—CRS (Common Reporting Standard)—was officially launched.

This is why the underlying logic of CRS is very similar to checking bank statements: it assumes that wealth will eventually settle in bank accounts, generate interest, and form a balance. It is a monitoring system tailored for the "fiat currency era," aiming to make hidden wealthy individuals nowhere to hide through an annual "balance snapshot."

Just as everything was moving in the direction regulators hoped for, a new phenomenon called Bitcoin was quietly emerging. This CRS system, based on "balance monitoring," was about to face a completely new adversary it had never imagined.

Chapter Two: The Hole in the Old Hunting Net – Why Do We Still Need CARF When We Have CRS?

Using AI as an analogy, CARF is like a high-definition camera that operates 24/7, set up at the entrance of every compliant exchange.

The biggest difference between it and CRS is that CRS checks "how much money you have", while CARF checks "where you have spent your money".

2.1 Origin and Strategic Intent of CARF

The CARF (Common Reporting Standard) was born out of G20 countries' fears of tax base erosion. While the traditional CRS (Common Reporting Standard) has been effective in combating offshore tax evasion, it primarily targets traditional bank accounts and custodian accounts. Crypto assets, due to their decentralized nature and peer-to-peer transfer capabilities, have become a blind spot for CRS.

The OECD has explicitly stated that the goal of CARF is to eliminate this blind spot by including crypto asset service providers (CASPs) in the same information reporting obligations as banks. As of the end of 2025, more than 50 jurisdictions (including the UK, Canada, France, Germany, Japan, and the Cayman Islands) have committed to implementing CARF. This framework quietly began data collection in the Cayman Islands and other locations on January 1, 2026, and will conduct its first information exchange in 2027.

2.2 Comparison of CARF and CRS 2.0: From "Stock" to "Circulation"

The core logic of CRS is to monitor "existing wealth", while the core logic of CARF is to monitor the flow of wealth.

Under the CRS framework, the tax authorities see almost nothing in between except for the year-end balance. However, under CARF, if an investor converts Bitcoin to USDT, transfers USDT to their cold wallet, or even uses cryptocurrency to purchase over $50,000 worth of $PUNDIAI (retail payment transactions), each action generates a report record. CARF effectively elevates the perspective from a "static balance sheet" to a "dynamic cash flow statement."

2.3 Scope of “Related Crypto Assets”

CARF's definition of "related crypto assets" covers almost all crypto assets:

Stablecoins: Although many stablecoins claim to be alternatives to fiat currency, under CARF they are explicitly classified as crypto assets. This means that an exchange between USDT and USD may no longer be considered a "currency exchange" but rather a transaction, and such transactions are taxable events.

NFTs: While CARF primarily focuses on assets used for payments or investments, most high-value NFTs are likely to be included in the reporting scope due to their secondary market trading attributes.

Tokenized securities: Even tokenized stocks or bonds that are already regulated in traditional financial markets may be subject to both CRS and CARF coverage even if they are on-chain (although the OECD has tried to avoid double reporting by revising CRS, such overlap is hard to avoid in tax practice, which is based on the principle of "better to kill the innocent than let the guilty go free").

Chapter Three: The Retail Investor's Sentimentality, Wishful Thinking, and Devastation

3.1 Cryptocurrency-to-crypto trading: A mandatory "fair pricing" mechanism

CARF stipulates that all exchanges between crypto assets must record their fair market value in fiat currency at the moment the transaction occurs.

In the eyes of the tax authorities, "crypto-to-crypto trading" is equivalent to "selling before buying." There's a common misconception: "If I exchange Bitcoin for Ethereum, as long as I don't convert it to fiat currency (USD/CNY), it doesn't count as a sale, and I don't need to pay tax." But this is just wishful thinking on the part of novice investors.

CARF requires exchanges to record: "On a certain day, Zhang San exchanged 1 Bitcoin for 20 Ethereum. At that time, 1 Bitcoin was worth $50,000." From the tax authorities' perspective, this is a taxable event of "selling Bitcoin for $50,000." Even though you didn't receive the cash, your tax bill has already been generated.

CARF has completely ended the tax avoidance strategy of "using crypto to fund crypto". After 2026 (2027 in some regions), every cryptocurrency swap will be recorded as an asset disposal event and leave a definite "fiat currency income record" in your tax file, regardless of whether you convert it into fiat currency/stablecoin.

3.2 Penetrating Wallets: Transaction Hash and Address Cleaning

In CARF's XML Schema, RCASP was required to report the specific type and value of transactions. Although the final rule, following strong lobbying from the industry, removed the mandatory requirement to report all non-custodial wallet receiving addresses, the internal system collects and retains information about this address and its associated beneficiaries for at least 5 years (aka the "retention rule").

This means the tax authorities have the right to access data at any time. If the tax authorities discover that a taxpayer had a large amount of "withdrawal" records in 2026 but failed to declare subsequent gains, they can send a batch information request to the exchange to accurately obtain these external wallet addresses.

When you withdraw cryptocurrency from an exchange to your own wallet plugin or cold wallet, the exchange must record and report (if requested) "which address was withdrawn." This is similar to withdrawing cash from a bank; the bank not only records how much you withdrew but also tracks you and notes which safe deposit box you put the money in. Once your wallet address and your real identity are linked in the tax bureau's database, all your on-chain DeFi operations are effectively exposed.

3.3 Standardization of Valuation Anchoring

What if the transaction involves two extremely obscure cryptocurrencies (e.g., exchanging "cryptocurrency A" for "cryptocurrency B"), and there's no fiat currency pair? CARF stipulates a "cascading valuation method": if asset A has no fiat currency price, the fiat currency price of asset B is used as a reference; if neither is available, the service provider must use a reasonable valuation method to enforce pricing based on this. In short, the system must generate a fiat currency value and send it to the tax authorities. This eliminates the possibility for users to use price fluctuations to make vague tax declarations when filing taxes.

3.4 Mandatory Taxpayer Identification Number (TIN)

CARF requires RCASP to collect users' tax residency status and corresponding taxpayer identification number (TIN). However, if a user only declares a jurisdiction with a lower tax rate (such as Dubai), but the exchange discovers through IP address, telephone area code, or login logs that the user frequently operates in a jurisdiction with a higher tax rate (such as France), the exchange is obligated to question the legitimacy of this self-certification.

Chapter Four: The Trap of Retrospection: 2026 as the "Year of Exposure"

Many veteran OGs believe that everything will be fine as long as they handle their assets before the first exchange of information in 2027, which is incorrect. This is because everyone has overlooked the "backward effect" of CARF, which means that the 2027 information exchange implies the submission of information from 2026.

4.1 “Opening Balance” and Historical Audit

When the tax authorities receive the CARF data for the entire year of 2026 in 2027, they will first focus on the “beginning balance” or “total annual transactions”.

Scenario simulation:

Suppose that Mr. Nakamoto, a Chinese investor, sold $10 million worth of $PUNDIAI tokens through a compliant Hong Kong platform in 2026. The platform reported this data to the Inland Revenue Department (IRD) according to CARF. The IRD's AI system immediately compared this data with Mr. Nakamoto's personal income tax returns from 2025 onwards. If Mr. Nakamoto had never previously declared holding overseas crypto assets, the source of this $10 million would become a major question.

The tax authorities used the hash value of this transaction to trace back to when these $PUNDIAI tokens were purchased. If they were purchased in 2024, then all unreported capital gains from 2024 to 2026 would be exposed.

It's worth noting that tax authorities in many countries have deployed AI-based big data analytics systems specifically designed to identify discrepancies between reported asset levels and actual income. We anticipate a major tax recovery crisis for crypto billionaires in 2026.

4.2 Compliance Window in 2026

For investors who are not yet compliant, 2026 is effectively the last window of opportunity. Before the data gates close, investors face difficult choices:

• Proactively declaring historical assets to the tax bureau can usually help you reduce or waive penalties.

• Reorganize your asset holdings within a compliant framework (such as a family trust or offshore company), or seek assistance from professional financial and tax firms to rationally plan your crypto assets. (Advertisement here; ad space is currently being tendered!)

Chapter 5, Behind Binance's Relocation: Trading Space for Time

Why did Binance ultimately choose Abu Dhabi among a host of regulatory-friendly jurisdictions? In addition to local policy support and advantages in fund transfer channels, another important factor was the time difference in compliance.

Binance is currently based in the Cayman Islands, one of the jurisdictions committed to implementing CARF, with the first information exchange expected in 2027. This means that crypto service providers (RCASPs) with CARF reporting obligations will need to start collecting and storing information for reporting from 2026. If Binance remains based in the Cayman Islands, it will have to immediately begin building a comprehensive CARF compliance system.

In contrast, the UAE, according to the CARF implementation timeline, is among the second batch of jurisdictions to implement CARF, and plans to launch information exchange in 2028.

From the Cayman Islands to the UAE, Binance has secured a one-year strategic buffer period. This period is significant for Binance, which serves over 300 million users.

First, mitigate the risks of early implementation. Observe how the first implementing jurisdictions such as the UK and the Cayman Islands operate, learn from the experiences and lessons of other exchanges, and thus optimize your own compliance plan.

Second, Binance can participate in rule-making. Currently, the CARF legislation and implementation details in the UAE are still being formulated. As a leading exchange with considerable influence, Binance has the opportunity to express its opinions and consult with the authorities during this process, thereby exerting a positive influence on the formation of localized rules.

Third, complete the system upgrade. This year will allow Binance ample time to deploy and debug a data reporting and management system that meets the complex requirements of CARF.

This is what is known as "trading space for time".

Chapter 6. CARF in China: Impact and Trends

As one of the world's largest markets for crypto asset users, China's situation is somewhat unique.

Some people say that because mainland China was not on the first list of signatories to the OECD's CARF, cryptocurrency transactions in Hong Kong are not visible to the mainland tax authorities—this is actually a misunderstanding.

Mainland China has not yet joined or committed to implementing CARF, therefore, mainland tax authorities will not obtain data on Chinese tax residents' cryptocurrency transactions based on the CARF mechanism. However, this does not mean that mainland Chinese cryptocurrency tycoons can rest easy. Mainland China is already an active participant in CRS. Although CARF targets cryptocurrency, if cryptocurrency is converted into fiat currency and deposited in a bank, or held in the form of financial assets (such as ETFs), it is already within the CRS monitoring network. Furthermore, the consultation document also mentions that CARF information will be exchanged with "partner jurisdictions."

Attentive readers will notice that Hong Kong is in the second tier of implementing CARF, having already initiated legislative consultations on CARF and CRS amendments and developed a clear implementation roadmap, with plans to complete legislative preparations in 2027 and exchange information in 2028.

Under the "dual-track" regulatory framework for encryption, the impact of CARF's implementation in China needs to be considered in different ways:

Crypto users with Hong Kong residency are obligated under the CARF framework to submit self-verified information to exchanges. Subsequently, their crypto asset trading data on overseas exchanges will be reported and exchanged with the Hong Kong tax authorities through an automatic exchange mechanism. This means increased transparency in assets and transactions, making it more difficult for users to evade tax obligations by leveraging the decentralized and anonymous nature of crypto transactions.

Meanwhile, as RCASPs, Hong Kong cryptocurrency exchanges are required to strengthen KYC procedures and establish data collection and reporting systems in accordance with CARF requirements. Failure to register, report, conduct due diligence, or submit inaccurate information may trigger legal liabilities, with fines potentially reaching millions of Hong Kong dollars.

In contrast, the impact of CARF on mainland China in the short term is relatively limited. This is related to the mainland's characterization of crypto assets as "illegal." However, transparency in crypto taxation is an inevitable trend, and mainland Chinese tax residents cannot be complacent. With Hong Kong's access to CARF's global information exchange network, it cannot be ruled out that mainland China may obtain relevant crypto transaction data from Hong Kong through other channels, or join CARF in the future.

For mainland Chinese investors, the era of relying on Hong Kong as a "safe haven" is over. Although there may be a time lag of a few years for automatic data exchange, the "on-demand exchange" channel is open, and data retention rules ensure that historical records are always accessible.

Chapter Seven, Survival Guide – Don't be an ostrich burying its head in the sand.

If you ask a Korean oppa what the three unavoidable things in this world are: life and death, Samsung, and taxes.

As individuals caught in the torrent of this era, what should we do?

Pay attention to the tax consequences of cryptocurrency trading: Don't naively assume you don't pay taxes if you don't withdraw funds. From now on, every click of "buy/sell" may incur taxes. (In countries with capital gains tax)

Clean up your accounts: Those "zombie accounts" registered on unknown small exchanges or with dubious identities should be cleaned up immediately. Either cancel them or withdraw your funds. When the CARF network is implemented, these accounts will be among the first to be subject to risk control.

Understanding Cold Wallets: Cold wallets remain your last line of defense for your data, but the bridge between them is being monitored. When you transfer funds from Binance to a cold wallet, the transaction itself becomes a record. While the IRS cannot see everything in a cold wallet, they know: "This address belongs to Nakamoto Murao, who transferred 10 bitcoins into it in 2027."

Pay attention to the timelines for the UAE and Hong Kong: Both the UAE and Hong Kong are in the second batch (exchange in 2028) of regions implementing this policy. This means you have roughly a one- to two-year window to adapt and plan. Using this time to learn about compliance or find a professional tax advisor is far more practical than searching for the next "tax haven."

postscript

This article thanks @FinTax_Official for their professional analysis of tax regulations and observations of various jurisdictions, which enriched the practical perspective of this article.