Several major cryptocurrency users in China were subject to tax audits for personal income tax

A large account broke the news to Wu that since the beginning of 2022, a local tax department has asked him to audit his personal income tax. There are many other large accounts that have been audited and a detailed list. The procedure has been going on for nearly a year, but it has not yet been concluded and the final audit and collection results have not been produced. The large account has withdrawn about tens of millions of RMB. At the beginning of 2022, some mainstream domestic exchanges also provided the tax department with a large amount of detailed information on the transactions of some large accounts. Interpretation by tax-related personnel: The tax rate for property transfer income in personal income tax is 20% of personal profit/income. In the above specific case, it should be 20% of the withdrawal income.

Currently, various parts of the world have gradually improved the tax laws on cryptocurrencies. Since China has defined cryptocurrencies as illegal, there are some controversies in the taxation process, because taxing cryptocurrencies largely means recognizing their legal status. This conflicts with the position of the central bank and other financial management departments.

In October 2021, the China Taxation News under the State Administration of Taxation published an article entitled "Preventing Tax Risks Brought by Virtual Currency", which to a certain extent represents the position of the tax department.

The article states that according to the principle of "no retroactive effect of laws", the services previously provided by overseas exchanges to residents in my country can be regarded as "not expressly prohibited by law", but they must pay value-added tax, corporate income tax, stamp duty and other related taxes and fees on their income from my country in accordance with my country's tax laws. According to the previous transaction volume and income of various virtual currency exchanges, the overall tax scale of the exchange industry is quite considerable, and the taxation of other related industries needs to be further clarified.

The article states that although my country has currently imposed strict restrictions on illegal financial activities in the form of virtual currencies, it is difficult for global transactions of virtual currencies such as Bitcoin to disappear in a short period of time, and the direction of future development is uncertain. At the same time, within the current legal framework, my country does not prohibit individuals from holding virtual currencies such as Bitcoin, and the transaction of virtual currencies is defined as an "invalid civil act", but it is not explicitly prohibited by law.
The article emphasizes: China should improve the relevant property declaration and registration mechanism, and conduct real-name registration and dynamic tracking of users who hold a large amount of virtual currency. In the judicial fields such as fines and confiscations, restructuring and mergers, and bankruptcy liquidation, the disposal methods of virtual currency should be clarified to avoid the loss of national tax revenue. In addition, the tax department should take the initiative to cooperate with the central bank, financial supervision, market supervision, public security and judicial departments to severely crack down on illegal activities such as the use of virtual currency in the underground economy, smuggling, money laundering, and tax evasion.

It is worth noting that the above-mentioned exchanges provide information and conduct audits on large users, which is undoubtedly "real-name registration and dynamic tracking of users holding a large amount of virtual currency." Wu said that he also understood that a leading mining machine manufacturer and a large number of miners were also subject to tax audits, but it may be more of a corporate behavior rather than targeting individuals.

A senior tax professional told Wu that China's individual income tax law is very broad. According to his understanding, any Chinese national, whether earned in China or abroad, should pay individual income tax. From this perspective, the tax department has its basis for taxation. In the past two years, there have been many cases against live-streaming influencers and celebrities. Under the banner of common prosperity, tax audits on large households have become more stringent. Recently, the tax bureau has also conducted an investigation into the overseas income of high-net-worth individuals through CRS information exchange.

On the other hand, the article in the China Procuratorate also pointed out that due to the huge financial risks of virtual currencies such as Bitcoin, my country has tightened its control over them in recent years. If it was still regarded as a specific virtual commodity in 2013, then at the current macro-financial policy level in my country, all virtual currency-related business activities are prohibited, and the exchange, sale and pricing services that reflect its property attributes are not recognized by my country's legal order. In this context, the criminal law should not protect virtual currencies such as Bitcoin as property. Article 1, paragraph 4 of the 2021 "Notice" stipulates that "any legal person, non-legal person organization or natural person who invests in virtual currency and related derivatives violates public order and good morals, and the relevant civil legal acts are invalid, and the losses caused by this shall be borne by themselves; if it is suspected of disrupting the financial order and endangering financial security, the relevant departments shall investigate and deal with it in accordance with the law."

If cryptocurrencies and related activities are not legal, the biggest problem in taxation will be here. As early as 2008, there were a lot of similar discussions about virtual currencies in online games. Therefore, there is also a view that the demand for taxation of cryptocurrencies may force the legalization of the cryptocurrency industry in China.

The situation in Hong Kong, which is currently vigorously promoting the development of WEB3, is as follows: According to the revised version of Hong Kong Inland Revenue Ordinance Interpretation and Implementation Guide No. 39 ("DIPN 39"), a section on digital asset taxation has been added. The Inland Revenue Department will refer to and apply the "Business Marking Rule" principle to determine whether the digital assets held should be 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 activities will be considered to determine whether tax should be paid.

China Taxation News article full text:

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

Full text of the Chinese Prosecutor's article:

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

Cryptocurrency tax issues in Hong Kong

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

Research on the taxation issues of cryptocurrency in China under the background of digital economy: Taking the mining mechanism of Bitcoin as an example

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