The Digital Security Tax Gap: How Tokenized Stocks Are Forcing Convergence Between CARF and CRS

The Digital Security Tax Gap: How Tokenised Stocks are Aligning CARF and CRS

The transition of traditional equities to on-chain infrastructure is moving from experimentation into institutional reality. Driven by initiatives such as the SEC’s proposed Innovation Exemption and the UK’s wholesale market reforms, markets are preparing for 24/7 trading and tokenised settlement.

What is discussed far less, however, is the operational impact on tax compliance.

While much of the industry focus centres on capital efficiency, a significant structural challenge remains. When blue-chip equities are issued and traded in tokenised form, traditional tax compliance systems face a fundamental hurdle. Identifying and tracking beneficial owners becomes more complex, not only for capital gains reporting, but also for the correct application of withholding tax on dividends.

To address this, global tax authorities are driving a convergence between two major reporting regimes.

The Overlap of CRS 2.0 and CARF

Historically, traditional and digital asset compliance have operated in separate silos. CRS was designed for traditional financial accounts, custodians, and brokerage relationships. CARF, by contrast, was built as a crypto-native framework to capture decentralised digital asset activity.

Tokenised securities sit directly between these regimes. They combine characteristics of traditional financial instruments with a digital asset wrapper, effectively removing the boundary between the two frameworks.

In practice, many of the onboarding and due diligence requirements under CARF mirror, or closely align with, the updated CRS framework. As a result, financial institutions and Crypto Asset Service Providers can no longer treat traditional and digital asset compliance as distinct processes. A fragmented approach leads to duplication, higher operational cost, and increased risk of inconsistency. A unified documentation model becomes necessary.

The US approach and a growing asymmetry

While much of the global market is aligning around CARF, the United States has developed its own domestic reporting approach. This highlights a significant asymmetry, particularly in relation to foreign investors accessing US-based digital assets.

The introduction of Form 1099-DA places reporting obligations on digital asset brokers to capture gross proceeds and cost basis for US taxpayers. However, it does not address the treatment of non-US investors.

This creates a gap when compared to traditional securities. Foreign investment in US equities is subject to well-established withholding and reporting obligations under Form 1042-S. In a tokenised environment, those same obligations do not translate cleanly. If a foreign investor holds a tokenised version of a US equity that pays a dividend, existing frameworks do not provide a clear mechanism for reporting or withholding.

This gap is one of the drivers behind the US commitment to CARF. While the US does not participate in CRS, its decision to engage with CARF reflects the need to access data on US taxpayers trading digital assets offshore. In turn, this will require US platforms to collect and share more comprehensive information on foreign users.

With early adopting jurisdictions targeting exchanges of information from 2027, and the US expected to follow on a slightly later timeline, these challenges are not theoretical. They are already emerging in operational models today.

Where the operational challenge sits

Managing compliance for tokenized securities introduces two distinct challenges.

The first is entity classification. Determining whether an investor, particularly a complex entity or fund structure, falls under CRS, CARF, or US domestic rules requires nuanced classification logic. Differences in definitions, especially around investment entities and controlling persons, mean that a simple, standardized approach is difficult to implement consistently.

The second is the shift from account-based to transaction-based reporting. CRS and traditional US reporting frameworks rely on account-level data and year-end balances. CARF introduces detailed transaction-level reporting requirements. For tokenised assets that can move across platforms and jurisdictions continuously, systems must be able to reconcile and integrate both approaches.

What Can Be Done?

For institutions offering tokenised equities, the primary constraint is not the technology itself, but the compliance model that sits around it. Requiring users to navigate separate processes for different regimes introduces friction and increases the risk of data errors.

This is where regulatory technology becomes an increasingly critical infrastructure component.

TAINA’s platform automates classification for both individuals and complex entities, assessing customer profiles against CARF, CRS, and US domestic requirements in real time. This ensures that the correct obligations are applied without introducing duplicated or inconsistent workflows. At the same time, it streamlines the user experience by validating self-certifications, including W-8 and W-9 forms, and performing real-time TIN verification.

By bringing FATCA, CRS, Form 1099-DA, and CARF into a single data architecture, institutions can ensure that their compliance framework evolves alongside their products, while maintaining consistent data quality and auditability.

Conclusion

Regulatory initiatives are helping to shape the structure of tokenised markets, but long-term viability depends on meeting global tax transparency requirements. As tokenised securities continue to blur the line between traditional and digital finance, the complexity of compliance will only increase.

Those that succeed will be the platforms that can manage CARF, CRS, and US reporting seamlessly in the background, allowing innovation to scale without introducing unnecessary operational risk.

If you’d like to see how TAINA can simplify and streamline your CARF and CRS compliance journey, we’d be delighted to request a demo.

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