How to collect taxes on cryptocurrencies? Various countries have come up with measures to become the focus

Wu Shuo Author | Tan Shu

Editor of this issue | Colin Wu

Taxation issues involving cryptocurrencies

According to the Asahi Shimbun[report](1), Tokyo tax authorities recently revealed a tax evasion case in which a Tokyo photo studio helped three Chinese people transfer 27 billion yen (approximately US$237 million) to Japan over a three-year period using cryptocurrency for real estate investment in the country.

Due to China's foreign exchange control, the annual foreign exchange that an individual can exchange is capped at US$50,000, so investors who intend to invest in overseas real estate often use other methods to exchange foreign exchange. For Tokyo's tax authorities, how Chinese investors exchange foreign exchange is not within their scope of management, but this has brought difficulties to their tax collection.

The photo studio helped customers convert cryptocurrencies into Japanese yen and collected a portion of the commission. However, the studio reported an annual income of only 10 million yen (about 80,000 US dollars). During the verification process, the tax authorities found that there was a huge amount of money flowing into the company's account. Therefore, from the perspective of the tax authorities, the company obviously evaded a large amount of taxes.

The company's income could not be reported to the tax authorities because it clearly violated China's foreign exchange control regulations. On this issue, retired tax official Shenhong Tsunoda, now chairman of Ernst & Young Japan, pointed out:

“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, due to the two countries' completely different attitudes towards cryptocurrencies, the difficulty of cooperation can be imagined.

The natural “tax avoidance” attribute of cryptocurrency

Benjamin Franklin, the founding father of the United States, once said that in this world, the only things that are unavoidable are death and taxes. For a long time, the idea of ​​taxation as a matter of course has been ingrained in the minds of Americans. Therefore, the topic of "tax evasion" is a taboo in the Western context, and few people discuss it publicly.

But when cryptocurrencies emerged, things took a turn for the better. Although the topic of tax evasion is still taboo, many cryptocurrency users are aware of the "tax avoidance" function of this new thing. During this period, some extreme liberals openly declared that the current tax policy is unreasonable. Their main defense is that part of the US tax revenue is used for war, but as peace-loving people, they are unwilling to spend money to support war, so unless the government can distinguish which taxes are used for war, people can refuse to pay taxes.

A representative figure who holds this view is Roger Ver, who is known as “Bitcoin Jesus” (2). Although he is a US citizen, he eventually voluntarily gave up his US citizenship due to his extreme liberal attitude. Of course, “in this world, the only things that are unavoidable are death and taxes”. As a US citizen, one of the prerequisites for giving up his citizenship is to pay all taxes.

Significant differences in tax structures between China and the United States

The outside world has no idea how much tax Roger Ver has paid. He holds a huge amount of Bitcoin, and since Bitcoin has risen too much since he bought it, he faces a huge "capital gains tax." From this perspective, as the price of Bitcoin continues to rise, giving up his U.S. citizenship earlier has actually relieved him of some taxes. Of course, whether he has truthfully reported his cryptocurrency holdings to the U.S. tax authorities, or whether the U.S. tax authorities are able to find out the actual amount of cryptocurrency he owns, is another topic.

Capital gains tax, a very common tax in the United States, is a little unfamiliar in China. Simply put, if a person buys an asset and then sells it, as long as the selling price is higher than the purchase price, the corresponding income should be subject to capital gains tax. This has nothing to do with the status of the asset, whether the asset is a stock, bond, real estate or a new thing like cryptocurrency. (For the topic of capital gains tax, please refer to WuSayReal's previous article: Why did Biden's tax increase cause a sharp drop in the price of cryptocurrencies? Do Chinese cryptocurrency traders need to pay taxes?

Other countries have similar practices. For example, Austria plans to impose a 27.5% capital gains tax on cryptocurrency assets such as Bitcoin and Ethereum starting in March next year. South Korea said it will impose a 20% capital gains tax on cryptocurrencies starting in January next year.

In some countries, there is no such thing as capital gains tax, such as Singapore, so Singapore has become a "tax haven" in a certain sense. For China, there is no capital gains tax either. For example, if you buy Moutai shares for 100 yuan and sell them for 2,000 yuan, you don't have to pay any tax on the 1,900 yuan increase in asset value.

Of course, China is not a "tax haven". China's tax revenue is mainly reflected in value-added tax. For individual investors in China, although there is no capital gains tax, since most of the Chinese people's assets are in real estate, China has a real estate value-added tax for real estate transactions. For example, if a house is bought for 1 million and sold for 5 million, the value-added tax of about 5.3% needs to be paid for the 4 million yuan of added value.

For tax agencies, taxation must also take into account the input-output ratio. For example, Americans' wealth is mainly in the stock market, so capital gains tax on stock investment is very important. Chinese people's wealth is mainly in real estate, so related tax sources for real estate are very important.

For a country, the expenditures for national defense and social public services all come from taxes, but as taxpayers, there is a natural motivation to pay less or no taxes, so this is a test of the tax collection capabilities of tax departments in various countries. The US IRS has the strongest tax collection capabilities among governments around the world, but people can still find various ways to avoid paying taxes. Former US President Trump, as a wealthy man, only paid $750 in taxes in 2016 and 2017, which caused an uproar. For ordinary people whose assets are far less than those of the rich, it is completely understandable to "avoid taxes" through cryptocurrencies. After all, according to the design, one of the functions of taxation is to reduce the gap between the rich and the poor rather than widen it.

As for China, since reform and opening up has only been going on for more than 40 years, the ability to collect taxes is still under construction. Although the tax evasion incidents of celebrities such as Liu Xiaoqing and Zheng Shuang can be seen in the news, ordinary people always feel that such incidents are too far away from them, and are far from the level of hiring professional accountants to help them file taxes like Americans. However, things are slowly changing. In 2003, the "Golden Tax Phase 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 declaration app should be able to feel the accuracy of its information.

There is currently no capital gains tax in China, so cryptocurrency investors do not need to consider the tax issues of profits from selling cryptocurrencies for the time being. What they need to consider is whether the event of "selling cryptocurrency" itself violates relevant regulations.

China's tax authorities are also paying attention to cryptocurrencies

On October 19, the China Taxation Newspaper under the State Administration of Taxation published an article titled "Preventing Tax Risks Brought by Virtual Currency", which caused an uproar. However, after 924, the central bank determined that "virtual currency-related business activities belong to illegal financial activities" and tried to clean up the industry comprehensively, so it is impossible to collect taxes around it for the time being. The article stated: According to the principle of "no retroactive effect of law", 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 the income they obtain from China in accordance with my country's tax law. 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 stated that although my country currently has strict restrictions on illegal financial activities in the form of virtual currency, from the current situation, it is difficult for the global trading of virtual currencies such as Bitcoin to disappear in a short period of time, and the future development direction is also 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 trading of virtual currencies is defined as an "invalid civil act", but it is not explicitly prohibited by law. From a tax perspective, for domestic enterprises and residents participating in domestic and overseas transactions of virtual currencies, my country should strengthen inter-departmental collaboration and international multilateral regulatory cooperation, focus on preventing illegal cross-border outflow of funds and tax evasion at home and abroad using virtual currencies, and include virtual currency accounts in the exchange of tax-related information on financial accounts. At the same time, my country should improve the relevant property declaration and registration mechanism, and conduct real-name registration and dynamic tracking of users holding a large amount of virtual currencies. In judicial fields such as fines and confiscations, restructuring and mergers, and bankruptcy liquidation, the disposal methods of virtual currencies should be clarified to avoid the loss of national tax revenue. In addition, the tax department should take the initiative to work with the central bank, financial supervision, market supervision, public security and justice departments to crack down on illegal activities such as the use of virtual currencies in the underground economy, smuggling, money laundering, and tax evasion.