From the U.S. and South Korea to China: The Cryptocurrency Tax Conundrum
According to an Asahi Shimbun report (1), Tokyo tax authorities recently unveiled a tax evasion incident in which a photo studio in Tokyo, over a three-year period, helped three Chinese people transfer 27 billion yen (about $237 million) through cryptocurrencies for real estate investments in Japan.
Due to China's foreign exchange controls, there is a limit of US$50,000 per year for individuals to exchange foreign currency, so investors interested in investing in overseas real estate often adopt other methods to exchange foreign currency. For Tokyo's tax authorities, the method of foreign exchange used by Chinese investors is not within the scope of their management, but it poses a problem for them in terms of taxation.
The aforementioned photo studio helped customers convert cryptocurrencies into Japanese yen and received a portion as commission. However, the photo studio declared an annual income of only 10 million yen (approximately more than $80,000), and in the process of verification, the tax authorities found that there was a huge flow of funds in the company's account. Therefore, from the tax authorities' perspective, it was clear that the company had evaded a significant amount of tax.
And the company's income could not be properly reported to tax authorities because it clearly violated China's regulations on foreign exchange control. On this issue, Shenhong Kakuta, a retired tax official who is now the chairman of Ernst & Young Japan, stated.
"This case shows that the tax authorities of China and Japan need to cooperate to thoroughly unravel the flow of funds, clarify the issues involved in such transactions, and implement measures to deal with the problems."
However, because of the two countries' very different attitudes toward cryptocurrencies, cooperation is understandably difficult.
Cryptocurrencies' natural "tax avoidance" properties
Benjamin Franklin, one of the founding fathers of the United States, once said that in this world, only death and taxes are inevitable. For a long time, taxation has been ingrained in the American psyche. As a result, the topic of "tax evasion" is considered as a taboo in the Western context and is rarely discussed openly.
But things took a turn for the worse when cryptocurrencies emerged, and while the topic of tax avoidance remains taboo, many cryptocurrency users are unaware of the "tax avoidance" function of this new thing. During this time, there were some extreme libertarians who openly claimed that the current tax policy was unreasonable, mainly arguing that a portion of the U.S. tax revenue was used to fight wars, yet as peace-loving people who do not want to spend money to support wars, people could refuse to pay taxes unless the government could distinguish which taxes were used for war.
Roger Ver(2), the representative person holding this view, known as the "Bitcoin Jesus", is a U.S. citizen who eventually renounced his nationality voluntarily due to his extreme libertarian attitude. But of course, "in this world, only death and taxes are unavoidable ", being a U.S. citizen, one of the prerequisites for renouncing citizenship is to pay all taxes.
The Significant Differences in the Tax Structures of the U.S. and China
There is no way to know how much Roger Ver has paid in back taxes, as he holds a huge amount of bitcoin and faces a huge "capital gains tax" because it has risen so much since he bought it. In that sense, the earlier renunciation of his U.S. citizenship has has instead relieved him of some taxes as the price of Bitcoin continues to rise. Of course, whether or not he has truthfully declared his cryptocurrency holdings to the U.S. tax authorities, or whether the U.S. tax authorities have the ability to find out how much cryptocurrency he actually owns, is a different topic.
The "capital gains tax", which is a common tax in the United States, is a bit unfamiliar in China. Simply put, if a person buys an asset and sells it, as long as the sale price is higher than the purchase price, the corresponding portion of the proceeds will be subject to capital gains tax, regardless of the condition of the asset, whether the asset is a stock, bond, property, or something new like cryptocurrency. (On the topic of capital gains tax, see Wu says Real's previous article: Why Biden's tax hike triggered a plunge in cryptocurrency prices Is Chinese cryptocurrency speculation taxable?)
Other countries are doing something similar, such as Austria, which plans to start imposing a 27.5% capital gains tax on cryptocurrency assets such as bitcoin and ethereum in March next year. South Korea says it will start imposing a 20% capital gains tax on cryptocurrencies in January next year.
In some countries, there is no such thing as capital gains tax, such as Singapore, which has become a tax haven in a sense, and for China, there is no capital gains tax either. For example, if you buy Maotai shares for 100 yuan and sell them for 2,000 yuan, you will not have to pay tax on the 1,900 yuan of asset appreciation.
Of course, China is not a "tax haven" and its taxes are mainly reflected in value-added tax (VAT). For individual investors in China, although there is no capital gains tax, since most Chinese property is in real estate, there is a real estate VAT for real estate transactions, for example, if you buy a house for $1 million and sell it for $5 million, you will have to pay a VAT of about 5.3% on the $4 million appreciation.
For tax authorities, taxation must also take into account the input-output ratio. For example, Americans' wealth is mainly in the stock market, so a capital gains tax on stock investments is important, and Chinese people's wealth is mainly in real estate, so a related tax source on real estate is important.
For a country, spending on defense and social public services comes from taxes, but as a taxpayer, there is a natural incentive to pay less or no taxes, thus this is a test of the tax collection ability of the tax authorities of each country. The tax collection ability of the U.S. IRS is arguably the strongest in the global government, but people can still find various ways to avoid paying taxes, former U.S. President Donald Trump, as a wealthy man, paid only 750 in taxes, which had caused an uproar. For ordinary people with far less assets than the rich, it is perfectly understandable that they can "avoid taxes" by means of cryptocurrencies, after all, one of the functions of taxes by design is to reduce the gap between the rich and the poor rather than to widen it.
In the case of China, with only 40 years of reform and opening up, the ability to collect taxes is still under construction. Previous incidents of tax evasion by celebrities such as Liu Xiaoqing or Zheng Shuang were visible in the news, but ordinary people always felt that such incidents were too far away from them, far from the need to hire professional accountants to help them file their taxes as Americans do. However, things are slowly changing. In 2003, the "Golden Tax II Project" was completed, which largely eliminated fake VAT invoices. Not long ago, the "Golden Tax Phase III" was completed, and readers who have used the personal tax return app should be able to appreciate the accuracy of the information.
As there is no capital gains tax in China yet, investors in cryptocurrencies do not need to consider the tax implications of selling cryptocurrencies for profits for the time being, but rather whether the event of "selling cryptocurrencies" itself violates the relevant regulations.
On October 19, China Tax News, a subsidiary of the State Administration of Taxation (SAT), published an article entitled "Preventing Tax Risks Associated with Virtual Currencies", which caused an uproar. However, after 924, the central bank, the People’s Bank of China, decided that "virtual currency-related business activities are illegal financial activities" and tried to clean up the industry, so it is impossible to collect taxes around it for the time being. (4)