The "Wild West" era of Web3 is coming to an end.
Recently, many friends in the crypto community have been asking me the same question: "I heard that Hong Kong is starting to report crypto asset information. Are my crypto assets held on overseas exchanges still safe? Will the mainland Chinese tax authorities find out? Do I need to pay back taxes?"
This anxiety is not unfounded.
In 2025, global tax transparency is ushering in a "precision strike" targeting cryptocurrencies. As a legal practitioner deeply engaged in Web3, Attorney Hong Lin is here to discuss the Crypto-Asset Reporting Framework (CARF), often referred to as the "Crypto CRS," and what it truly means for everyone's financial well-being.
What is CARF?
Over the past decade, the traditional financial world has wielded a powerful tool known as the Common Reporting Standard (CRS). Simply put, if you are a Chinese citizen holding deposits in overseas banks, foreign banks will exchange your account information with the Chinese tax authorities.
However,the CRS had a significant loophole: it did not cover cryptocurrencies.Previously, if you converted funds into USDT and stored them in a wallet, or traded on platforms such as Binance or OKX, these activities were invisible to tax authorities.
Now, a patch has arrived. The Crypto-Asset Reporting Framework (CARF) is specifically designed to close this loophole.
Its core logic is: since decentralized individuals cannot be directly identified, regulators will target the "intermediaries" serving them.
Who must file reports? Centralized exchanges (CEXs), over-the-counter (OTC) traders, and even certain token-issuing project teams.
What information is reported? Your identity details (name, tax identification number), the quantity of coins purchased and sold, and the wallet addresses to which you have withdrawn your crypto assets.
This means that in the future, every transaction you conduct on compliant exchanges and with service providers will be fully transparent to tax authorities.
In the CARF era, the following activities will face extremely high risks of tax exposure:
Stablecoin Deposits and Withdrawals (USDT/USDC):Do not assume that converting to stablecoins exempts you from reporting. CARF explicitly stipulates that exchanges between crypto assets and fiat currencies, as well as exchanges between different crypto assets (e.g., swapping BTC for USDT), must be reported. Each swap may be treated as a "sale" under tax law, requiring the calculation of gains or losses and the payment of applicable taxes.
Large-Scale OTC Transactions:In the past, many individuals accustomed to offline OTC transactions to convert funds. In the future, Hong Kong will bring OTC traders under regulatory oversight, obligating them to report information regarding large-scale traders.
DeFi and Airdrops:Although decentralized finance (DeFi) presents regulatory challenges, if a protocol has identifiable "controllers" (e.g., project teams retaining administrative privileges), or if you participate in DeFi mining through centralized exchanges, such yields will likewise be recorded.
Withdrawals to Cold Wallets:You might ask, "Can I simply withdraw my crypto assets to a cold wallet and remain inactive?" The answer is both yes and no. Exchanges are required to record the act of "withdrawal" and the recipient's wallet address. Once this cold wallet address interacts with fiat currency at any point in the future (for example, when purchasing real estate or vehicles, or cashing out through an exchange), tax authorities can use on-chain analysis tools to trace the address back to you, thereby calculating your total historical tax liability.
A Misconception: "Crypto trading is illegal in mainland China, so I don't need to pay taxes?"
For participants in mainland China, the reason for paying attention to CARF is Hong Kong's imminent actions. Although Hong Kong operates under the "One Country, Two Systems" principle, channels for the exchange of tax information between Hong Kong and mainland China have long been established.
According to consultation papers released by the Hong Kong Government from late 2024 to early 2025, the timeline is already very clear:
2025–2026: Hong Kong will enact local legislation and begin establishing taxation rules.
January 1, 2027: Formal record-keeping begins. From this date onward, all transaction data generated on licensed exchanges and through OTC channels in Hong Kong will be recorded by backend systems.
2028: The Hong Kong Inland Revenue Department will begin transmitting this data to tax authorities in other jurisdictions (including mainland China). In the future, Hong Kong will no longer serve as a tax haven, but rather as a "hub" for tax information exchange.
Many people believe: "The state has declared Bitcoin trading an illegal financial activity. Since it does not protect me, why should it collect taxes from me?"
From a legal perspective, the situation is not necessarily so straightforward.
The core reason lies in the fact that tax law focuses on "substance." Under tax law, regardless of whether your income source is lawful (such as wages) or falls into a gray area (such as crypto trading), as long as you generate profit (i.e., realize "income"), you have a tax obligation.
Furthermore, mainland China has been promoting "tax administration through digitalization" in recent years. Previously, tax authorities were unable to regulate overseas assets because they were unaware of their existence. Once CARF is implemented, Hong Kong will transmit your transaction data (e.g., "Zhang San, mainland ID number xxx, realized a profit of 1 million USDT on a certain exchange in 2027") directly to mainland tax authorities. Upon system comparison, if you have not declared this income, an immediate red-flag warning will be triggered.
Three Practical Compliance Recommendations
In the face of the wave of transparency in cryptocurrency taxation, panic is unhelpful. Compliance is an inevitable path for the Web3 industry, and taxation is a necessary component of compliance. From this perspective, this development is, to some extent, long-awaited by the community.
To welcome the advent of cryptocurrency taxation more safely and positively, we offer three rational compliance strategies.
Recommendation 1: Reassess Your "Tax Residency Status"
CARF information exchange is based on your status as a "tax resident" of a particular jurisdiction. If you hold a passport from a small nation (such as St. Kitts or Vanuatu) but reside long-term in Shanghai or Beijing, with your center of life in mainland China, you remain a tax resident of mainland China. If you wish to genuinely isolate risk, you must engage in substantive identity planning—this involves not merely obtaining citizenship or residency status, but genuinely relocating to jurisdictions with favorable crypto tax regimes (such as Dubai or Singapore) to sever tax ties with your original place of residence.
Recommendation 2: Asset Inventory and Historical Segmentation
2027 marks the first year of data collection. Prior to this, it is advisable to conduct a comprehensive inventory of your assets, distinguishing between "existing assets" and "newly acquired assets." For historical issues involving significant amounts, it is recommended to consult professional tax advisors to determine whether compliant declarations or structural adjustments should be made during the window period. Do not wait until data exchange begins in 2028 to respond passively.
Recommendation 3: Abandon "Unregulated Practices" and Embrace Compliant Structures
For Web3 entrepreneurs and high-net-worth individuals: Avoid using personal accounts for large-scale fund transfers. Consider holding assets through legal structures such as family trusts or offshore companies. Although CARF will pierce through to identify "beneficial owners," legitimate structures can help isolate certain legal risks and provide room for tax planning. Additionally, you must strictly avoid underground banking. CARF operates in conjunction with anti-money laundering (AML) mechanisms; once funding chains involving underground banks are investigated, the consequences extend beyond back taxes to include potential criminal liability.
The "Wild West" era of Web3 is coming to an end.The arrival of CARF signifies that crypto assets have officially entered the scope of global regulatory oversight.
For participants in mainland China, "invisibility" is no longer possible; the future will depend on "compliance" capabilities. Since evasion is not an option, it is better to put on your "bulletproof vest" in advance and protect your wealth within the bounds of the rules.
