A Hong Kong company completed a software development project for an overseas client. Under the contract, the client did not pay by bank transfer but instead paid USDT directly into the company's digital wallet.
The project has been delivered and the USDT has been received, but the company has not converted the tokens into Hong Kong dollars, so naturally this income does not appear in its bank account.
When preparing the accounts at year-end, the owner began to struggle with the following questions:If what was received is only USDT, does it count as the company's income? If the tokens have not been sold, can tax reporting wait until they are converted into cash? The client is also overseas—can this money be treated asoffshore profitsHow should this be handled?
These questions appear to revolve around USDT, but what they actually involve are the basic rules on corporate revenue recognition, holding of digital assets and Hong Kong profits tax. The fact that USDT has not been converted into cash does not mean the company may omit bookkeeping or tax reporting. However, receiving USDT does not necessarily mean the company must pay Hong Kong profits tax on this income.
Tax reporting and tax payment are two different matters. What truly needs to be clarified is why the company received this USDT, when the income should be recognized, and whether the relevant profits fall within the charge to Hong Kong profits tax.
01 Does a Hong Kong company's receipt of USDT count as operating revenue?
If the USDT is consideration paid by a client for goods or services, revenue should generally be recognized in accordance with the relevant accounting and tax rules, and the nature of the income will not change merely because the payment method differs.
Assume a Hong Kong company develops software for a client, and the parties agree that the service fee will be paid in USDT. After the company completes the project, the client transfers USDT to the designated wallet as agreed.
In this transaction, the client is in fact paying remuneration for software development services. Whether the client settles in Hong Kong dollars, US dollars or USDT, the commercial nature of the underlying transaction does not change.
In paragraph 51 of Departmental Interpretation and Practice Notes No. 39 on the Inland Revenue Ordinance, the Hong Kong Inland Revenue Department expressly states that enterprises may accept cryptocurrency as payment from customers and may also use cryptocurrency to purchase goods, and that the relevant sales and purchase amounts should reflect the market value of the cryptocurrency accrued at the time of the transaction.[1]
Therefore, a company cannot merely record how many USDT it received; it must also determine the transaction amount in accordance with the applicable rules and reflect that amount in the corresponding accounting records.
However, there is a distinction here that is easily overlooked:The receipt of USDT in a wallet does not necessarily mean that the company has earned operating revenue.
For example, capital contributed by shareholders to the company, loans received by the company, amounts collected on behalf of other entities, or transfers of assets between the company's own wallets may all generate records of coin receipts, but such transactions do not necessarily constitute operating revenue.
In determining whether a given amount of USDT constitutes the company's income, the key question is not how much the wallet balance has increased, but what transaction the asset corresponds to, who is entitled to it, and what economic benefit the company has thereby obtained.
02 If USDT has not been converted into Hong Kong dollars, can tax reporting wait until the coins are sold?
Generally, recognition of revenue from the underlying business cannot be deferred merely because the USDT has not yet been converted into cash.
Some business owners are accustomed to judging income by bank statements: money is treated as truly received only when it reaches the bank account; if it is still in a digital wallet, they consider that they merely hold an asset and that there is temporarily no need for tax treatment.
However, recognition of enterprise revenue is generally not determined in this way.
According to Departmental Interpretation and Practice Notes No. 1 of the Hong Kong Inland Revenue Department, the computation of assessable profits is generally based on generally accepted accounting principles, with necessary adjustments made in accordance with tax law. Under the accrual basis, an enterprise may already be required to recognize the relevant revenue even if the payment has not yet actually been received.[2]
Two matters must also be kept separate here.
One matter is that the company provides services and receives USDT as consideration. This involves recognition of revenue from the existing business.
Another matter is that, after receiving USDT, the company continues to hold it, or sells or exchanges it at some future time. This involves the accounting and tax treatment of subsequent changes in the value of the digital asset and of its disposal.
For example.
Assume a Hong Kong company completes a software development service and recognizes service revenue of HKD 1 million under the applicable accounting rules. The company does not exchange the USDT it receives immediately, and after some time the proceeds of the eventual exchange amount to only HKD 980,000.
The company cannot, merely because the eventual exchange proceeds are HKD 980,000, directly restate the previously recognized service revenue of HKD 1 million as HKD 980,000.
The subsequent difference of HKD 20,000 requires a separate determination of its accounting treatment and tax implications in light of the nature of the asset, the purpose of holding it, the actual transactions and the applicable rules.
Conversely, if the USDT appreciates during the holding period, the resulting subsequent gain also cannot simply be conflated with the original service revenue.
It should also be noted thatoperating revenue is not equal to assessable profits, and still less to the tax ultimately payable. The enterprise's operating costs, deductible expenses and other tax adjustments may all affect the final tax amount.
Therefore, whether revenue needs to be recognized, and when it should be recognized, cannot be determined solely by when the USDT is sold. As for the specific filing obligations and the amount of tax payable, these need to be determined in light of the company's complete operating circumstances.
03 If the client is overseas, is the USDT received exempt from Hong Kong profits tax?
The fact that a client is located outside Hong Kong does not mean that the relevant profits are necessarily offshore profits.
For software development companies providing cross-border services, this is often a more important issue than the method of payment collection.
For example, a Hong Kong company enters into a contract with a US client, the project is completed through remote delivery, and the service fee is settled in USDT. The company does not use a Hong Kong bank account to receive payment, and the client has never been to Hong Kong.
Do these facts mean that the company can directly determine that the relevant income constitutes offshore profits and is not subject to Hong Kong profits tax?
The answer is not that simple.
Hong Kong profits tax adopts the territorial source principle. Generally speaking, only profits that meet the relevant charging conditions and arise in or are derived from Hong Kong fall within the scope of profits tax, but certain specific income is also subject to special tax rules.
As for determining the source of profits, the Hong Kong Inland Revenue Department's Departmental Interpretation and Practice Notes No. 21 emphasize the need to examine what activities the taxpayer actually carried out to earn the relevant profits and where those activities were carried out.[3]
For service fee income, the place where the relevant services are actually performed is usually an important factor in the determination.
Take the software development company as an example again. If the contract is signed by the Hong Kong company, but the actual development team works in mainland China on a long-term basis, and project management, technical development, testing and delivery are respectively completed by personnel in different regions, it is necessary to further analyze which activities generated the relevant profits and where those activities actually took place.
If the services are partly performed in Hong Kong and partly performed outside Hong Kong, the issue of profit apportionment may also arise. If the contract also includes transactions of other natures, such as software licensing or transfer of intellectual property rights, they should also be assessed separately according to their actual content.
Therefore, it cannot be determined merely on the basis that the client is outside Hong Kong, the contract is denominated in US dollars, or the USDT did not enter a Hong Kong bank account, that the relevant profits are necessarily not subject to tax.
Even if an enterprise considers the relevant profits to be offshore profits, it cannot therefore disregard its tax reporting obligations.
The completion instructions for profits tax returns issued by the Inland Revenue Department of Hong Kong, China, require that where an enterprise asserts that its profits are offshore profits and therefore not chargeable to tax, it should state its reasons and be able to provide supporting evidence when required by the tax authority.[4]
In addition, if the company's actual operating team has long been located in mainland China, the corporate tax, individual tax and other compliance issues that may arise in mainland China should also be assessed.
The fact that a particular amount of profits tax is not payable in Hong Kong, China does not mean that tax obligations will necessarily not arise in other jurisdictions.
04 USDT is transferred into the boss's personal wallet: is it company income or personal income?
In actual business practice, there is another situation that is more complex than a company directly receiving crypto assets.
The contract was signed by the Hong Kong, China company, and the project was also undertaken by the company, but when the client made payment, the boss, for convenience, provided his own personal wallet address.
Afterwards, this wallet was also used to pay company expenses, to conduct personal digital asset transactions, and occasionally other fund transfers also occurred.
Over time, what originally appeared to be a simple receipt of payment may give rise to a series of questions: does this USDT belong to the company or to the boss personally? Was the boss merely collecting payment on behalf of the company, or had he already received some kind of payment from the company? Are the assets subsequently transferred out business expenditures of the company, or personal transactions?
These questions cannot be answered simply on the basis of whose name the wallet is registered in or who holds the private key.
On-chain records can prove the flow of digital assets between different addresses, but generally cannot by themselves prove which contract or which service this money corresponds to, or in what capacity the recipient acquired the assets.
If a company has consistently used the boss's personal wallet to collect business payments without creating clear records of collection on behalf of the company and internal bookkeeping, then at the time of audit, tax filing or bank verification of the source of funds, it will often take more time to explain the ownership of the assets and the nature of the transactions.
Under section 51C of the Inland Revenue Ordinance of Hong Kong, China, persons carrying on a business there should keep relevant business records sufficient to ascertain the assessable profits, and such records must generally be kept for at least seven years.[5]
For companies that receive payment in USDT, in addition to contracts, invoices and service-delivery materials, they should also properly retain the receiving wallet address, transaction hash, time of receipt, the relevant valuation basis and subsequent records of fund flows.
Where collection through a personal wallet is involved, it should also be possible to explain the collection arrangement and the fund relationship between the company and the individual.
After all,every transfer on the blockchain can leave a record, but such records do not automatically explain the legal relationship behind the transaction.
05 What should be done now where USDT received in the past was not recorded in the accounts?
If a company has used USDT to receive payment in the past, but some income was not fully recorded in the accounts, or was recorded only after conversion into fiat currency, does this necessarily mean that a tax violation has already occurred?
That conclusion cannot be drawn directly.
Whether there is any omission in reporting needs to be determined in light of the nature of the business, the timing of revenue recognition, historical accounting records, tax materials already submitted, and the tax rules of the corresponding year.
For enterprises with historical USDT receipts, what is more important than rushing to move wallet assets or making a few catch-up accounting entries is first to reconstruct the transaction facts clearly.
One may start from the business and check the contract, customer, service content and delivery status corresponding to each receipt, clarify which company the income actually belongs to, and where the relevant business activities were completed.
Then check the fund records to confirm the receiving address, transaction time, amount of USDT, valuation basis and subsequent destination of the assets. If a personal wallet was used for receipt, the collection relationship and the individual's fund flows also need to be verified separately.
Finally, compare these materials with the company's accounting records, audit materials and historical profits tax filings to determine whether accounting adjustments, corrected filings or supplementary explanations to the tax authorities are required.
Companies that have already received a profits tax return should complete the filing as required; where the conditions for chargeability are met but a return has not yet been received, attention should also be paid to the provisions of the Inland Revenue Ordinance regarding voluntary notification to the Inland Revenue Department.
It should be emphasized that the fact that a company has previously received USDT does not necessarily mean that it has already breached tax requirements. Whether additional tax is payable, and in what amount, cannot be calculated simply on the basis of the wallet balance or the total value of historical on-chain transactions.
If an enterprise, in addition to accepting USDT as payment for its own business, also carries out exchange, custody, transfer and other activities on behalf of other entities, this may involve regulatory requirements different from those applicable to ordinary business receipts and requires separate analysis.
Tax filing and other business compliance issues should be assessed separately.
Concluding remarks
For a Hong Kong company receiving USDT, what truly requires attention is not whether the coins have been sold, but what business the payment corresponds to, whether the income needs to be recognized, and whether the relevant profits fall within the scope of profits tax chargeability.
A customer's payment in USDT does not automatically change the nature of service income; the fact that assets have not entered a bank account does not, of itself, defer income recognition. Likewise, the fact that a customer is located overseas, or that the enterprise ultimately incurs no profits tax payable, does not mean that accounting records and applicable filing obligations may be disregarded.
For enterprises that settle transactions using digital assets over the long term, whether contracts, actual operations, wallet funds and accounting and tax records can be reconciled with one another is often more important than simply calculating how much USDT was received.
Particularly where personal wallets are used to receive payments, cross-border teams perform obligations, or historical income records are incomplete, it is advisable to sort out the transaction facts and asset ownership as early as possible, and then assess tax filing and compliance solutions in light of the specific business.
References:
[1] Inland Revenue Department of Hong Kong, China: Departmental Interpretation and Practice Notes No. 39 (Revised) (DIPN 39), March 2020, paragraph 51.
[2] Inland Revenue Department of Hong Kong, China: Departmental Interpretation and Practice Notes No. 1 (Revised) (DIPN 1), September 2020, the relevant parts concerning the accrual basis and income recognition.
[3] Inland Revenue Department of Hong Kong, China: Departmental Interpretation and Practice Notes No. 21 (Revised) (DIPN 21), July 2012, the relevant parts concerning source of profits, service fee income and apportionment of profits.
[4] Inland Revenue Department of Hong Kong, China: Notes for Completion of Profits Tax Return BIR51.
[5] Inland Revenue Department of Hong Kong, China: Record Keeping of Business Records, pursuant to section 51C of the Inland Revenue Ordinance.
[6] Inland Revenue Department of Hong Kong, China: Notification to the Inland Revenue Department of Chargeable Matters.
Disclaimer: This article provides general legal and tax information only and does not constitute legal or tax advice in respect of any specific transaction. Specific treatment should be determined in light of the business facts, applicable accounting standards and the tax rules of the relevant jurisdictions.
