The Crypto Reporting Gap the U.S. Can’t See

Over more than a decade, global tax transparency has evolved into a dense regulatory net that now illuminates even the darkest corners of the financial system. It isn’t perfect, of course, but regulators have continually updated and amended the rules where needed. FATCA reshaped international reporting but focused solely on identifying U.S. persons. The OECD introduced CRS to cover everyone else. Arbitrage existed, but CRS has since been updated, first to refine its framework, and more recently to incorporate crypto‑assets and align with CARF.

Despite this progress, a significant gap has emerged. U.S. investors can gain exposure to crypto‑assets in ways that escape automatic reporting to the IRS. And at present, there are no known plans to close this blind spot.

Where’s the gap?

To understand it, we need to consider what each of the three major automatic exchange regimes captures.

FATCA

FATCA was created in 2010 for a financial system very different from today’s crypto markets and remains tightly focused on identifying U.S. taxpayers. Its scope depends on whether an offshore entity qualifies as a Foreign Financial Institution and whether an asset qualifies as a Financial Account; definitions built around traditional financial products. They have not been meaningfully updated to encompass modern crypto alternatives. As a result, many offshore crypto exchanges, derivatives platforms, and structured‑product venues fall outside FATCA’s technical definitions.

The U.S. has introduced new domestic broker reporting rules, such as Form 1099‑DA, but these do not generate cross‑border, automatic exchanges of information. That gap is one reason the U.S. has signaled interest in eventually participating in CARF.

CRS

CRS was designed as the global counterpart to FATCA. With more than 100 participating jurisdictions, financial institutions must identify and report on nearly all non‑resident account holders, not just U.S. persons.

CRS has also been updated more frequently than FATCA. Its newest revisions broaden the definitions of Financial Asset and Investment Entity to ensure that custodians and brokers report derivative positions, even when the underlying is a crypto‑asset. It now also covers Central Bank Digital Currencies (CBDCs) and specified e‑money products, using rules aligned with CARF to minimize duplication.

CARF

CARF is crypto‑native and built around transactional transparency. It requires reporting of:

• Crypto‑to‑fiat trades

• Crypto‑to‑crypto swaps

• Transfers, including those to self‑hosted wallets

• Retail payments above set thresholds

CARF mandates detailed data fields: token identifiers, wallet metadata, and inflow/outflow sequencing. Jurisdictions will begin automatic exchanges from 2027 for 2026 activity, with additional adopters following in 2028 and 2029.

This is where the arbitrage appears. The U.S. is expected to participate in CARF, but it does not participate in CRS and relies on FATCA instead. Although CRS has been amended to fill the gaps left by CARF, FATCA has not.

What does this mean?

Assume the U.S. participates in CARF and begins automatic exchanges. A U.S. person holding Bitcoin in a UK‑based custodial wallet would be reported by the UK service provider to the UK tax authority, which would then pass the information to the IRS. Straightforward.

But consider a different scenario: instead of holding Bitcoin directly, the U.S. investor enters into a cash‑settled derivative contract; an option that never involves any transfer of Bitcoin to or from a wallet in the investor’s name. The investor obtains full economic exposure to Bitcoin without ever owning it.

• Under CRS, this derivative position would be reportable.

• Under FATCA, it generally would not be reportable unless the contract produces U.S. source FDAP income or qualifies as a dividend equivalent; neither of which applies to a non‑U.S. source, cash‑settled crypto derivatives.

• Under CARF, it is not reportable because CARF covers crypto transactions, not synthetic exposure.

Because the U.S. does not participate in CRS, this activity is never transmitted to the IRS. This results in a blind spot that FATCA and CARF alone cannot close.

What can be done?

At present, there are no indications that the U.S. government plans to update FATCA in the near term, though doing so would be the most direct way to address the gap. However, joining CRS is politically unlikely; it would effectively place U.S. international tax transparency under an OECD framework rather than a U.S. controlled one.

Modernizing FATCA is not as simple as amending a domestic statute. FATCA is implemented primarily through a network of Intergovernmental Agreements (IGAs), which define what is in and out of scope. Updating these agreements across more than 100 jurisdictions would be complex and time‑consuming.

The U.S. is not expected to participate in CARF until at least 2028, with exchanges beginning in 2029. The gap therefore already exists and is currently even wider as no non‑U.S. crypto‑asset activity is being automatically reported back to the IRS at all.

The IRS still has time, but the clock is ticking. If the U.S. wants visibility into the full range of offshore financial exposures its taxpayers hold, FATCA must evolve. We live in a crypto‑driven financial era, and in crypto, change happens quickly.

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