In the Web3 and digital asset sectors, teams expanding overseas and individual practitioners frequently encounter two questions:

● Domestic regulatory policy prohibits business activities related to virtual currency; does income generated from such activities still need to be taxed?

● If taxes have already been declared and paid and a tax payment certificate obtained, does that mean the business and the fund pathways are lawful and compliant?

The answer is that neither of these inferences can be sustained.

Financial regulation and tax administration may examine the same transaction, but they answer different questions.

The regulatory systemfocuses on whether a business can be carried out, by whom, and whether the settlement pathway touches financial and foreign exchange management rules;

the tax systemfocuses on who obtained what income, when it was obtained, and how it is valued and declared.

This article is aimed in particular at three categories of readers:

01 | Domestic remote practitioners

Practitioners who, within China, provide development, design or operational services to overseas Web3 projects;

02 | Overseas Startup Teams

Entrepreneurs who organize teams, pay remuneration and collect business payments through offshore entities;

03 | Digital Asset Holders

Individual holders who need to handle the liquidation of digital assets, bank inquiries or historical transaction records.

The three types of persons have different transaction structures, and the same set of answers cannot be applied to all of them.

I. The Two Most Dangerous Misconceptions

Misconception One: Because regulation does not permit it, the relevant income is not subject to tax

The fact that a business is prohibited or restricted does not automatically extinguish tax obligations that have already arisen in accordance with the law.

Whether tax is payable must still be determined by reference to the specific tax category and statutory conditions: whether the income is attributable to an individual or an enterprise, why the income arose, whether the income is sourced within or outside the territory, when it was obtained, how it is converted into RMB, and through what method it should be declared.

Article 8 of the Implementing Regulations of the Individual Income Tax Law provides that the forms of individual income include cash, in-kind goods, negotiable securities and other forms of economic benefits. Tokens with market value may in principle fall within the scope of tax law assessment, and it cannot be concluded that there is no income merely because the tokens have not been converted into RMB.

However, receiving tokens does not mean that in all circumstances tax must be calculated immediately and in full at the same time and under the same tax category.

For example, the same receipt of a token into a wallet may arise from employment or engagement, independent provision of services, business operations, disposal of assets, or may be a loan, return of principal, or an internal transfer between accounts of the same actual controller. The reason for acquisition, resident status, whether rights have been determined, whether the price can be reliably measured and the corresponding costs will all affect the tax category, the timing of recognition and the tax basis.

Therefore, neither the proposition that "no withdrawal means no income" nor the proposition that "receiving tokens requires immediate payment of tax on the full amount of service remuneration" is a rigorous conclusion.

Misconception 2: Because tax has already been paid in full, the business and the fund pathways are lawful

A tax payment certificate proves that the relevant tax has been declared and paid; it does not prove that the business model, source of funds, or settlement channel is lawful and compliant.

A sum of income may require individual income tax treatment under law, but whether the corresponding business constitutes illegal financial activity relating to virtual currency, and whether the funds involve irregular foreign exchange conversion, illegal payment settlement, or proceeds of criminal activity, must still be assessed separately under financial regulation, foreign exchange administration, anti-money laundering, and criminal law.

For example, the fact that an individual has provided genuine services and received remuneration does not mean that every step—payment in virtual currency, off-exchange conversion, or subsequent return of funds—meets regulatory requirements. Conversely, the existence of risk in the settlement pathway does not by itself lead to the conclusion that remuneration for the underlying services is necessarily tax-exempt.

It should also be noted that a tax authority accepting a declaration or issuing a tax payment certificate does not amount to a confirmation of the legality of the transaction model. Banks, foreign exchange administration departments, and judicial authorities will still make separate assessments based on the transaction background, source of funds, manner of conduct, subjective knowledge, and evidence.

Therefore, "whether tax is payable" and "whether the conduct is lawful and compliant" cannot be merged into a single question.

For transactions that have already occurred, the correct sequence is not to ask first "at what rate should tax be paid," nor to use a tax payment certificate to prove that the entire process was compliant; rather, it is first to reconstruct the business facts: who contracted with whom, who actually provided the services, from where the tokens entered which wallet, how they were subsequently converted into fiat currency, and into whose bank account the funds ultimately entered. If the facts are not reconstructed, both regulatory and tax assessments are prone to deviation.

II. Regulation and taxation are two separate assessment systems

The regulatory system asks: can this business be carried out?

On February 6, 2026, the People's Bank of China and seven other departments issued the Notice on Further Preventing and Addressing Risks Relating to Virtual Currency and Other Matters (Yin Fa [2026] No. 42). The Notice reiterates that virtual currency does not have the same legal status as legal tender, is not legal tender, and should not and cannot be circulated or used in the market as currency.

Under the Notice, carrying out the following virtual currency-related business within the territory constitutes illegal financial activity:

● Exchange between legal tender and virtual currency;

● Exchange between virtual currencies;

● Buying and selling virtual currency as a central counterparty;

● Providing information intermediation and pricing services for virtual currency transactions;

● Token issuance and financing, and transactions in financial products related to virtual currency.

The notice also provides that overseas entities and individuals may not, in any form, unlawfully provide virtual currency-related services to domestic entities. Where domestic entities or individuals, while knowing or being reasonably expected to know that an overseas entity is unlawfully providing such services, still provide assistance, relevant liability shall be pursued in accordance with law; where a crime is constituted, criminal liability shall be pursued in accordance with law.

This means that the platform being located overseas, the servers being located overseas, the contract being governed by foreign law, or final settlement being received in foreign currency cannot, on their own, prove that the relevant model complies with the regulatory requirements of mainland China.

A specific assessment must still be made based on facts such as the service recipients, the location of core personnel and operations, marketing and solicitation, technical support, exchange arrangements, and fund settlement pathways.

Regulatory assessment likewise cannot be simply equated with criminal assessment. The current regulatory documents do not provide that the mere holding of virtual currency is itself a crime. Whether a specific transaction entails administrative or criminal liability depends on whether there are circumstances such as business-oriented exchange, payment settlement, illegal fundraising, fraud, money laundering, involvement of illicit funds, or knowingly providing assistance.

Civil validity likewise requires a separate assessment. Article (19) of Notice No. 42 provides that where investment in virtual currency, real-world asset (RWA) tokens and related financial products violates public order and good morals, the relevant civil juristic acts are void, and losses arising therefrom shall be borne by the parties themselves. This means that, in the event of losses or transaction disputes, the parties may not necessarily obtain the same judicial protection as in ordinary lawful investments. However, whether an act is void and how losses are to be borne must still be assessed in light of the purpose of the transaction, the manner of conduct and the specific evidence.

Therefore, when discussing a Web3 business, at least three questions must be kept separate: whether it is permitted from a regulatory perspective, whether the contract can obtain protection from a civil perspective, and whether it touches upon the elements of a specific crime from a criminal perspective. None of the three can be replaced by the outcome of tax payment.

The tax system asks: what exactly is the income obtained?

Tax analysis generally requires verifying five questions in sequence:

  1. whether the income belongs to an individual or an enterprise;
  2. whether it constitutes employment, independent services, business operations, or disposal of assets;
  3. whether the income is sourced domestically or overseas;
  4. at what point the income is obtained, and whether there is a withholding agent;
  5. how to value the income, deduct costs, and complete filing.

Even where virtual currency is received in the same way, different underlying business reasons may lead to different tax treatment.

If a substantive employment relationship exists between an individual and a project party, the relevant benefits may be treated as wages and salaries; if an individual independently provides development, design, consulting, or operational services, this may involve remuneration for personal services, or may involve income from business operations depending on whether the services are provided on a continuing business basis; if the matter constitutes disposal of personal assets, further research is required to determine whether the rules on income from transfer of property apply.

The common market assertion that "virtual currency gains are uniformly taxed at 20%" is not rigorous.

Guoshuihan [2008] No. 818 addresses the specific scenario in which an individual acquires virtual currency from players through the internet and resells it at a markup; it expressly provides that the income is taxed as income from transfer of property and that, where the original value cannot be evidenced, the competent tax authority shall determine it.

The "virtual currency" referred to when that document was issued primarily concerned online games and similar scenarios. Whether and how it applies to crypto assets such as Bitcoin and stablecoins still requires assessment in light of the nature of the asset, the reason the income arose, the specific transaction facts, and the position of the competent authorities; a uniform 20% tax rate cannot be concluded merely because the name contains the words "virtual currency."

Different tax categories entail not only different tax rates but also different calculation methods and filing procedures. Wages and salaries and remuneration for personal services are generally included in comprehensive income; income from business operations is calculated on the basis of annual revenue less costs, expenses, and losses; income from transfer of property is calculated on the balance of the income from a single transfer less the original value of the property and reasonable expenses. Describing a payment as a "reward," "revenue share," or "settlement" in an article or on a platform cannot substitute for characterization under tax law.

The source of income cannot be determined solely by the location of the payer. Income derived by an individual from providing services within China is generally treated as income sourced within China; where income genuinely qualifies as foreign-source income, a resident individual must still file as required and, where the conditions are met, address the credit for foreign income tax already paid. Therefore, "payment by an overseas client" and "foreign-source income" cannot be directly equated.

III. How to assess and distinguish three typical scenarios

Scenario 1: The individual is within China and provides development or operational services for an overseas project

The fact that the payer is overseas does not mean the income is necessarily foreign-source income.

Under the Implementing Regulations of the Individual Income Tax Law, income derived from providing services within China by reason of holding office or employment, performance of a contract, or otherwise is treated as income sourced within China. The determination of the source of income depends primarily on the place where the services are actually provided, rather than solely on where the client, platform or payment account is located.

However, the category of income requires further assessment:

● Where there is ongoing management, work arrangements and personal subordination, the income may constitute wages and salaries;

● Where the individual independently completes a project and is paid on a per-transaction basis, the income may constitute remuneration for personal services;

● Where the characteristics of continuous business operation and input of organizational resources are present, the rules on business income also need to be examined.

Where settlement is made in tokens, it is also necessary to determine when the rights have vested, when the assets can be controlled, and what price is used for conversion into RMB. A balance displayed in a platform backend, token unlocking, entry into a personal wallet and final exchange into fiat currency are different factual milestones and cannot be treated uniformly.

It is necessary to focus on retaining the service contract, work deliverables, project communication records, settlement statements, the time the tokens were obtained, wallet records and the basis for valuation. The above materials should together explain: why the asset was obtained, who paid for it, what service it corresponds to, and when it was obtained.

Scenario 2: An individual disposes of virtual currency held and obtains fiat currency

The amount credited in fiat currency cannot be directly equated with taxable income.

For tax purposes, at least the following must first be established:

● Whether the asset was originally acquired by purchase, or acquired through the provision of services, business operations, or other reasons;

● Whether income was already recognized and declared at the preceding stage;

● Whether the rules for income from transfer of property apply to the current disposal;

● Whether the original value of the property and reasonable expenses can be evidenced;

● Whether the fiat currency credited includes a return of principal or value that has already been declared.

If an individual first acquires tokens through the provision of services and subsequently converts the tokens into fiat currency, two stages may be involved: "receiving remuneration" and "disposing of assets." Whether the RMB value already recognized at the preceding stage can serve as the original value of the property at the subsequent stage requires an assessment in light of the acquisition vouchers, general tax law rules, and the treatment by the competent tax authority.

Overseas platform statements and on-chain records are not inherently invalid, but the probative value of a single screenshot is usually limited. Platform details should be corroborated against purchase payment records, wallet ownership, transaction hashes, bank statements, and prior declaration materials.

Guoshuihan [2008] No. 818 provides that where an individual cannot provide vouchers concerning the original value of the property, the competent tax authority shall determine the original value of the property. Therefore, "without an invoice, tax is necessarily calculated on a zero-cost basis" is not a uniform rule, but incomplete materials will significantly increase the risk that costs are not fully recognized, that supplementary explanations are required, and that back taxes and late payment surcharges arise.

At the same time, fiat currency settlement also requires separate attention to counterparty, source of funds, foreign exchange pathways, and bank account risks. The typical cases published in 2023 by the Supreme People's Procuratorate and the State Administration of Foreign Exchange concerned specific conduct such as using virtual currency as a medium to effect, for others and according to a fixed model, the conversion of value between RMB and foreign currency. This cannot be simply equated with all individual cash-out conduct, but it highlights the risks of illegal foreign exchange trading, account facilitation, and funds connected to a case.

Completing tax payment will not eliminate problems that may exist in the settlement channel itself.

Scenario 3: A domestic team conducts Web3 business through an offshore entity

Establishing a company offshore, using offshore servers, or signing offshore contracts does not automatically insulate against PRC mainland regulatory risk.

A look-through review is required:

● Whether the actual controller, core personnel, and principal operating activities are located onshore;

● Whether the products or services are directed at onshore entities;

● Whether marketing, solicitation, technical support, or settlement assistance exists onshore;

● Whether token issuance, exchange, matching, market making, or related financial products are involved;

● Whether revenue should be attributed to the offshore entity, the onshore enterprise, or individuals;

● How remuneration, service fees, and shareholder returns for onshore personnel are arranged;

● Whether cross-border receipt and payment, foreign exchange, and tax filing channels match the actual business.

For example, business receipts paid into a founder's personal wallet do not automatically become personal income merely because an on-chain address is used; however, if corporate and personal assets are commingled over the long term, this will also increase the difficulty of explaining revenue attribution, cost substantiation, and the nature of the funds.

Likewise, the genuine existence of an offshore entity does not mean that marketing, technical, or payment settlement assistance provided by an onshore team is automatically compliant. The entity structure, personnel arrangements, service recipients, and fund flows must each be reviewed separately.

Such matters typically involve corporate structure, contracts, employment, foreign exchange, individual income tax or corporate income tax at the same time. What truly needs to be resolved is not a single tax rate, but whether the business, contracts, assets and fund records can be matched with one another.

It is also necessary to distinguish between corporate business and personal income. The receipt of business payments by an offshore company does not mean that such payments necessarily belong to the founder personally; likewise, the entry of corporate funds into a personal wallet or personal account does not mean that they can be directly characterized as personal income based solely on the amount received. It is necessary to verify collection-on-behalf arrangements, shareholder loans, remuneration, dividends, expense reimbursements or other legal relationships, and to keep corporate assets and personal assets relatively distinct.

For domestic teams, the method of remuneration payment also needs to be reviewed. Where a PRC employment relationship applies, wages shall be paid in legal tender in accordance with law. Whether an offshore entity and domestic personnel form an employment relationship, a service relationship or another cooperative relationship will affect the contractual arrangements, employment liabilities, tax categories and withholding obligations.

IV. Before handling, prepare these four categories of materials

Whether a digital asset transaction can be clearly explained ultimately depends on whether the materials are complete and whether different materials can corroborate one another.

  1. Business and contract materials

Including service contracts, employment or cooperation agreements, platform rules, orders, work deliverables, delivery records and transaction confirmation documents.

These materials mainly answer: why the business occurred, what the parties agreed, what services or assets the income corresponds to, and to whom the rights and obligations belong.

If the contract title is inconsistent with actual performance, tax and regulatory analysis will still return to the real business rather than looking only at the contract title.

  1. On-chain and platform materials

Including wallet addresses, transaction hashes, platform deposit and withdrawal records, account registration information, transaction details, token unlock records and changes in asset balances.

These materials mainly answer: where the assets were obtained, when they entered a disposable state, which wallets or platform accounts they passed through, and who actually controls the relevant accounts.

On-chain records can prove the movement of assets, but generally cannot by themselves prove wallet ownership, the reason for a transaction, or the identity of the counterparty; they need to be used in conjunction with contracts, chat records, and real-name account materials.

  1. Bank and funds materials

These include fiat currency deposit and withdrawal records, payer information, explanations of third-party payments on behalf of another, exchange records, and cross-border settlement vouchers.

Such materials are mainly used to verify the counterparty, the funds path, the reasons why the payer and the contracting party are not the same, and who ultimately obtained the fiat currency.

If the same funds pass through multiple individual accounts or there are frequent third-party payments on behalf of another, the commercial reasons and actual relationships should be explained in advance; the nature of the funds cannot be explained solely by relying on transfer remarks.

  1. Tax and valuation materials

These include historical filing records, tax payment vouchers, prices at the time of acquisition, valuation working papers, records of original cost and expenses, and proof of taxes already paid overseas.

Such materials mainly answer: under which tax category the income was filed, when it was recognized, what price was used for conversion into RMB, how the cost was formed, and whether there is any foreign tax credit.

For stablecoins as well, it is not appropriate to treat them directly as "1 coin equals 1 US dollar" without analysis. The quantity, time of acquisition, price source used, currency of denomination, and RMB conversion method should be retained.

More materials are not necessarily better. The key is that the contract, assets, funds, and tax materials can correspond to one another in terms of entity, time, quantity, and amount.

For example, if the contract provides that Company A is to pay remuneration, but the on-chain tokens come from an unfamiliar address, and the fiat currency is paid in installments from multiple individual accounts, this does not automatically mean the transaction is false, but a reasonable explanation needs to be provided through materials such as platform settlement, third-party payment on behalf of another, or wallet ownership. Bank records alone without a contract, or an on-chain hash alone without being able to prove who controls the wallet, will both make it difficult to complete tax and regulatory characterization on their own.

Materials should also be retained in their original form as far as possible. For platform export files, emails, chat records, wallet addresses, transaction times, and bank receipts, it should be avoided to keep only cropped screenshots. When organizing historical transactions, ledgers may be prepared, but the ledgers should be traceable back to the original vouchers; tables prepared after the fact cannot be used to replace original evidence.

Do not conceal the true business by fabricating contracts, inventing transactions, or changing the names of payments. Inconsistencies in the facts not only fail to resolve the problem but may instead increase tax, regulatory, and dispute risks.

Conclusion

In handling virtual currency and Web3 transactions, the core task is not to first look for an applicable tax rate, but to complete a two-tier review: first, in light of the jurisdiction, participating entities, customer scope, nature of the business, and fund settlement pathways, determine whether the business can be lawfully carried out; second, identify who obtained what kind of income and when, and determine the nature of that income, the tax timing, the cost basis, the fair value, and the filing obligations. Regulatory compliance and tax compliance are interrelated, but they cannot substitute for each other.

Completing tax payment cannot replace compliance review, and regulatory restrictions do not automatically produce a tax-exempt effect.

If you are currently handling remuneration for overseas projects, liquidation of digital assets, account risk controls, or the organization of historical transaction records, you may first prepare the four categories of materials according to the checklist in this article. The specific tax characterization and compliance risks need to be determined separately after the complete transaction chain has been reconstructed.

This article discusses general legal and tax issues only from the perspective of mainland China and does not constitute formal legal or tax advice for any specific transaction.