Informed sources: Several major domestic cryptocurrency holders are being audited for personal income tax

Source: Colin Wu

A major account holder revealed to Wu that since early 2022, a certain local tax authority has demanded an audit of personal income tax from them. There are multiple other major account holders who have also been audited, along with a detailed list. The process has been ongoing for nearly a year and has yet to conclude or produce a final audit collection result. This major account holder has withdrawn approximately tens of millions of RMB. In early 2022, some mainstream domestic exchanges also provided the tax authorities with a large amount of detailed information regarding the transactions of certain major account holders. Tax-related individuals interpret that the tax rate on capital gains from property transfer in personal income tax is 20% of personal profits/gains, which in the aforementioned specific case should be 20% of the withdrawal gains.

Tax laws related to cryptocurrency have been gradually improved around the world. In China, since cryptocurrency business activities are entirely defined as illegal, there are some controversies regarding tax collection, as taxing cryptocurrency largely represents an acknowledgment of its legal status. This conflicts with the stance of the central bank and other financial regulatory authorities.

In October 2021, an article titled "Preventing Tax Risks from Virtual Currencies" was published in the China Taxation News under the State Administration of Taxation, which to some extent represents the position of the tax authorities.

The article states that according to the principle of "laws do not have retroactive effect," services previously provided by overseas exchanges to residents in China can be regarded as "not explicitly prohibited by law," but they must pay value-added tax, corporate income tax, stamp duty, and other related taxes on income obtained from within China according to Chinese tax laws. Based on the previous transaction volumes and income of various virtual currency exchanges, the overall tax scale of the exchange industry is quite considerable, while the tax situation of other related industries still needs further clarification.

The article notes that although China currently imposes strict restrictions on illegal financial activities involving virtual currencies, it is difficult for transactions of virtual currencies like Bitcoin to disappear globally in a short time, and the future direction of development remains uncertain. Meanwhile, under the current legal framework, China has not prohibited individuals from holding virtual currencies like Bitcoin, and the trading of virtual currencies is defined as an "invalid civil act," but it has not been explicitly prohibited by law.

The article emphasizes: China should improve the relevant property declaration and registration mechanism, conducting real-name registration and dynamic tracking of users holding large amounts of virtual currencies. In judicial areas such as confiscation, restructuring, mergers and acquisitions, and bankruptcy liquidation, the disposal methods for virtual currencies should be clarified to avoid the loss of national tax revenue. Furthermore, tax authorities should actively collaborate with the central bank, financial regulation, market supervision, public security, and judicial departments to crack down on illegal activities involving virtual currencies used for underground economies, smuggling, money laundering, and tax evasion.

It is worth noting that the information provided by the aforementioned exchanges and the audits conducted on major account holders undoubtedly represent "real-name registration and dynamic tracking of users holding large amounts of virtual currencies." Wu also learned that a leading mining machine manufacturer and many miners had previously been audited by the tax authorities, but this was likely more related to corporate behavior rather than targeting individuals.

A senior tax expert told Wu that China's regulations on personal income tax are very broad. According to his understanding, any Chinese national, regardless of whether the income is obtained domestically or abroad, should pay personal income tax. From this perspective, the tax authorities have their basis for taxation. Over the past two years, there have been many cases targeting live-streaming influencers and celebrities, and tax audits on major account holders have become stricter under the banner of common prosperity. Recently, the tax bureau has also investigated the overseas income of high-net-worth individuals through CRS information exchange.

On the other hand, an article in the China Prosecutor's Journal also pointed out that due to the significant financial risks associated with virtual currencies like Bitcoin, China's regulation has tightened in recent years. If in 2013 they were still regarded as specific virtual goods, currently, at the macro-financial policy level, all virtual currency-related business activities are prohibited, and services related to the exchange, sale, and pricing of their property attributes are not recognized by China's legal order. In this context, criminal law should not protect virtual currencies like Bitcoin as property. Article 1, Clause 4 of the 2021 "Notice" states, "Any legal person, unincorporated organization, or natural person investing in virtual currencies and related derivatives, which violates public order and good customs, shall have their related civil legal acts invalidated, and any losses incurred shall be borne by themselves; those suspected of disrupting financial order and endangering financial security shall be investigated and dealt with by relevant departments in accordance with the law."

If cryptocurrency-related activities are not legal, the biggest challenge in taxation lies here. There have been many similar discussions surrounding virtual currencies in online games as early as 2008. Therefore, some viewpoints suggest that the demand for taxation on cryptocurrencies may potentially force the legalization of the cryptocurrency industry in China.

Currently, the situation in Hong Kong, which is vigorously promoting the development of WEB3, is as follows: According to the revised Interpretation and Implementation Guidelines No. 39 of the Hong Kong Tax Ordinance (DIPN 39), a section regarding the taxation of digital assets has been added. The tax authority will refer to and apply the "business marking principle" to determine whether the digital assets held are subject to Hong Kong profits tax. As for cryptocurrency transactions, the nature of the profits, the operations generating the profits, and the location of the profit-generating activities will be considered to decide whether taxes should be paid.

Full text of the China Taxation News article:

https://ishare.ifeng.com/c/s/v0020w3F9I--7BgAvDqe4xGTLThCLQLxZjA4PUfpZL0qF--uQ__

Full text of the China Prosecutor's Journal article:

https://new.qq.com/rain/a/20221122A06SV500

Hong Kong cryptocurrency tax issues

https://www.businessgo.hsbc.com/en/article/2022041301?

Research on the Tax Issues of Cryptocurrency in China under the Background of Digital Economy------Taking Bitcoin Mining Mechanism as an Example

https://hanspub.org/journal/PaperInformation.aspx?paperID=41484\&btwaf=53831990