What does it mean that China's tax authorities are speeding up efforts to tax cryptocurrency companies and individuals?
Written By: Colin Wu
The whale told WuBlockchain that since the beginning of 2022, a local tax department asked for an audit of its personal income tax. There are many people and a detailed list of the whales that have been inspected. The procedure has been going on for nearly a year, but it has not yet been finally concluded and the final results of the audit have not yet been produced. This whale has cashed out about tens of millions of yuan. In early 2022, some major domestic exchanges also provided extensive detailed information about the transactions of some of the whales to the tax authorities. Interpretation of tax related personage: The tax rate of property transfer income in personal income tax is 20% of personal profit/income, in the above specific cases, it should be 20% of the income from the fund.
Tax laws on cryptocurrencies have been improved around the world. In China, there is some controversy over the advancement of taxation due to the wholesale definition of cryptocurrency business activities as illegal, as taxation of cryptocurrencies largely represents recognition of their legal status. This is in conflict with the position of financial authorities such as the central bank.
In October 2021, China Tax News, a subsidiary of the State Administration of Taxation, published an article “Preventing Tax Risks from Virtual Currencies”, which to some extent represents the position of the tax authorities.
According to the article, according to the principle of “non-retroactivity”, the services previously provided by overseas exchanges to residents in China can be regarded as “not expressly prohibited by law”, but they must pay VAT, enterprise income tax, stamp duty and other related taxes on the income they obtain from China in accordance with China’s tax laws. According to the previous trading volume and income of each virtual currency exchange, the overall taxation scale of the exchange industry is considerable, and the taxation of the rest of the related industries needs to be further clarified.
According to the article, although China currently has strict restrictions on illegal financial activities in the form of virtual currencies, but from the current situation, bitcoin and other virtual currencies in the global trading is difficult to disappear in a short period of time, the future direction of development can not be determined. At the same time, within the current legal framework, China does not prohibit individuals from holding virtual currencies such as Bitcoin, and the trading of virtual currencies is defined as an “invalid civil act”, but is not explicitly prohibited by law.
The article emphasizes that China should improve the property declaration and registration mechanism, and register users with large amounts of virtual currencies under their real names and dynamic tracking. In judicial fields such as confiscation and seizure, reorganization and acquisition, bankruptcy and liquidation, the disposal of virtual currencies should be clarified to avoid the loss of national tax money. In addition, the taxation department should take the initiative to link up with the central bank, financial supervision, market supervision, public security and justice departments to crack down on illegal acts such as virtual currencies used for underground economy, smuggling, money laundering and tax evasion.
It is worth noting that the above-mentioned exchanges to provide information and audit of large accounts, is undoubtedly the “real name registration and dynamic tracking of users holding a large number of virtual currencies”. WuBlockchain said also understood that a top mining machine manufacturers and a large number of miners were also subject to tax audits, but may be more corporate behavior rather than for individuals.
A senior tax professional told WuBlockchain that China has very broad regulations on personal income tax law, and according to his understanding, any Chinese national, who earns income within or outside China, should pay personal income tax. From this point of view, the taxation department has its basis for taxation. From the past 2 years, there have been many cases against live streaming KOL and celebrities, tax audits on whales under the banner of common wealth have become stricter, and recently the tax authorities have launched investigations on the overseas income of high net worth individuals through CRS information exchange.
On the other hand, an article in the China Public Prosecutor’s Journal also points out that China has tightened its control over virtual currencies such as Bitcoin in recent years due to the significant financial risks associated with them. In this context, the criminal law should not protect virtual currencies such as bitcoin as property. 2021 “Notice” Article 1, paragraph 4, “Any legal person, unincorporated organizations and natural persons to invest in virtual currencies and related derivatives, contrary to public order and good morals, the relevant civil legal action is invalid, the resulting losses shall be borne by their own; suspected of undermining the financial order, endangering financial If it is suspected of damaging the financial order and endangering financial security, the relevant departments shall investigate and deal with it according to the law”.
If cryptocurrency-related activities are not legal, the biggest problem of taxation is also stuck here. As early as 2008, there were a lot of similar discussions around virtual tokens in online games. Therefore, there is also a view that the need to tax cryptocurrencies may have the potential to force the legalization of the cryptocurrency industry in China.
In the case of Hong Kong, which is currently vigorously promoting the development of WEB3, the revised version of the Hong Kong Inland Revenue Ordinance Interpretation and Practice Note №39 (“DIPN 39”) adds a section on the taxation of digital assets, and the Inland Revenue Department will refer to and apply the principle of the “Doing Business Marking Code” to determine whether digital assets held are subject to Hong Kong profits tax. As for cryptocurrency transactions, the nature of the profit, the operation that generates the profit, and the location of the profit-making activity will be considered to determine whether the tax is payable.
Full text of China Tax News article:
Full text of Chinese prosecutor’s article:
Taxation of cryptocurrencies in Hong Kong
Research on tax issues of Chinese cryptocurrency under the background of Digital economy — Taking Bitcoin mining mechanism as an example