Does the buying and selling of coins in the Chinese cryptocurrency circle require taxation? Will it involve foreign exchange control?

The following article is from Huo Xiaolu, written by Huo Xiaolu. This article is exclusively authorized to be edited and reprinted by "Wu Says Blockchain".

Recently, many people have consulted about virtual currency taxation and whether there are any violations of foreign exchange control regulations. This may be due to the three articles on blockchain and virtual currency published by the People's Daily Blockchain Channel at the beginning of the month - the "Getting to the bottom of it" series. The third article in the series went viral in the currency circle, and many people pushed it to Huo Xiaolu at the time. Perhaps everyone has their own expertise, and there are some issues that I still want to discuss rigorously.

Note: All titles and content in this article are from People's Daily Online

Let’s get to the point.

In summary, the article 3 mainly analyzes the relevant legal risks from three perspectives: "acquisition of virtual currency", "sale and withdrawal of virtual currency", and "transaction services of virtual currency", and believes that:

Token Issuance Financing and Trading Services

From the third point, the issuance of tokens for financing and the provision of trading services have always been prohibited by policy. This should be the consensus of people in the industry, and there is no need to say more. The wind direction has never changed since 1994, and the practice of "exporting to domestic sales" has been cracked down on.

As for the crimes involved, the article basically mentioned them. However, there is a deviation in understanding of some less popular and complex crimes such as "money laundering" and "illegal business operation". This can also be seen from other parts of the article. Specifically, Huo Xiaolu will write another article on another day, which is the 2.0 version of the "Special Report || The Five Major Criminal Risks Most Involved in Cryptocurrency Circles" at the end of 2018.

Let me emphasize again that no matter which crime it is, issuing coins for financing and providing trading services are always illegal and against regulations.

Selling coins

Let’s talk about “buying and selling coins”, which is what investors are most concerned about. Let’s start with what the article considers to be “high-risk selling coins”.

The article discusses five situations, mainly involving tax evasion risks, foreign exchange control risks, and money laundering risks.

Let's talk about the risk of tax evasion first. Some countries do require tax declarations for profitable activities such as virtual currency transactions. But in China, Huo Xiaolu believes that there is no need to worry about tax issues for the time being. Domestic taxes are paid in RMB. Most virtual currencies are denominated in US dollars. Assuming that taxes are to be paid, virtual currencies must be converted into corresponding US dollars and then converted into RMB. This process involves both the pricing of virtual currencies and the issue of disguised exchange with legal currency. Both of these points are prohibited by the 94 Civil Order. Therefore, under the current policy background, taxation is only a hypothetical issue. If it is really declared, the tax department may have a headache.

Let's look at the risk of foreign exchange control. Let's start from the perspective of investors. I believe that in life, most investors buy and sell virtual currencies with the same currency, so foreign exchange control is not involved. So what situations will violate relevant foreign exchange control regulations? As mentioned in the article, buying and selling different currencies, and intending to use virtual currencies as an intermediary to exchange and purchase foreign exchange, etc., may be suspected of violations. To fully realize this, it depends on the risk control settings of the trading platform and the local KYC policy of the relevant bank cards. But it can be said with certainty that once illegal exchange occurs, the risk of the platform is essentially far greater than that of the investor, and it may not only be illegal, but also a crime.

Finally, let's look at the risk of money laundering. As mentioned in the previous article, the author's understanding of the crime of money laundering is slightly biased. The word money laundering is not unfamiliar to the cryptocurrency circle, and many people outside the circle also associate the cryptocurrency circle with these two words. Many investors whose cards have been frozen are also due to black money withdrawals. However, to constitute a crime of money laundering, in short, two basic conditions must be met: knowing + assisting, that is, knowing that it is black money, assisting in laundering or transferring it. As mentioned in the article, simply transferring virtual currency and other assets overseas does not necessarily constitute a crime of money laundering if the source is legitimate.

Buying coins

At the end of the article, we return to the low-risk “Acquisition of Virtual Currency” section.

In judicial practice, there are two completely different opinions. Some regions believe that any virtual currency transaction in the country is illegal because the trading platform is illegal; some regions believe that relevant transactions or entrusted investments are recognized on the premise that the investment risks are borne by the investors themselves.

This has also led to another phenomenon: many investors are lured into investing by high interest rates. If they make a profit, they will stop. But if they suffer losses, they will ask the court to rule that the transaction is invalid and demand the return of the principal on the grounds that the virtual currency transaction is illegal.

From a policy perspective, ordinary virtual currency transactions are neither encouraged nor explicitly prohibited. It only reminds individuals to be vigilant against illegal financial activities and beware of being deceived, and emphasizes that investment risks must be borne by the individual.

Disclaimer: The author of this article is Huo Xiaolu, and has exclusively authorized "Wu Says Blockchain" to reprint it. Please contact me for any commercial or non-commercial reprinting. Infringement will be pursued. The header image is from bitcoinist.