Tax compliance has become a mandatory course for every investor!
Introduction
In recent years, more and more people have obtained considerable returns through crypto asset transactions, but many are still wondering: do the profits earned in anonymous wallets or decentralized exchanges need topay taxIs that so?
To state the conclusion directly: if you are aChinese tax resident, then regardless of the channel through which the crypto asset returns are obtained, in principlethey should all be declared and taxed to the Chinese tax authorities in accordance with the law。
How is "Chinese tax resident" defined?
Under the Individual Income Tax Law of the People's Republic of China, an individual who meets any of the following conditions is a Chinese tax resident:
1. Having a domicile within the territory of China
Domicile: refers to an individual who habitually resides within the territory of China by reason of household registration, family, primary economic interests, or other such grounds.
If yourhousehold registration or the center of your family lifeis in China, or your primaryliving, work, and economic tiesare in China, you may be deemed a tax resident even if you are frequently abroad.
2. Cumulative residence in China for 183 days or more within a single tax year
This is a cleartime-based standardEven if you are a foreign national, as long as within one year you havewithin the territory of Chinacumulatively resided for183 days, you are also a Chinese tax resident.
Mankun Reminder:
Whether you are deemed a tax resident on the basis of"domicile"or"length of residence",once the conditions are met, you must lawfully declare and pay tax to China on your worldwide income (including both domestic and overseas income).
Why are gains from crypto assets also subject to tax?
Many people believe that because crypto assets are restricted in China, the related gains are also "not subject to tax". This is a common misconception. Taxation focuses on whether you have gains, not on whether those gains come from an encouraged industry.
1. What is the nature of crypto assets?
Under the Notice on Preventing Bitcoin Risks (Yin Fa [2013] No. 289) issued by the People's Bank of China and four other ministries and commissions, the Announcement on Preventing the Risks of Token Issuance and Financing issued by the People's Bank of China and six other ministries and commissions on September 4, 2017, and the Notice on Further Preventing and Handling the Risks of Speculation in Virtual Currency Trading issued by the People's Bank of China and nine other ministries and commissions on September 24, 2021, virtual currency may not circulate as currency, but its property attributes as a "virtual commodity" have not been denied. In other words, the law recognizes it as a tradable form of property.
2. What are the corresponding tax rules?
The Official Reply of the State Administration of Taxation on the Issue of Levying Individual Income Tax on Income Obtained by Individuals from Buying and Selling Virtual Currency Through the Internet (Guo Shui Han [2008] No. 818) expressly provides that income obtained by an individual from buying and selling virtual currency through the Internet constitutes "income from the transfer of property" and individual income tax shall be paid in accordance with the law.
3. Conclusion and tax rate
Accordingly, regardless of which type of crypto assets you buy or sell, so long as the transaction generates gains, such gains constitute "income from the transfer of property," and individual income tax shall be paid in accordance with the law at a rate of 20%.
In short:Taxation does not distinguish between industries; it looks only at gains. Profits from crypto asset transactions constitute income from the transfer of property and must be reported and subject to individual income tax at 20%.
Do transactions in anonymous wallets and on DEXs also need to be reported?
Some investors believe that usingdecentralized wallets(such as MetaMask) or trading ondecentralized exchanges(such as Uniswap) is untraceable by tax authorities due to anonymity. However, in the current regulatory and technological environment, this belief carries significant risk.
1. The fund repatriation stage can still be traced
The vast majority of investors will ultimately still convert crypto assets throughOTCorcompliant platformsinto fiat currency and transfer it into domestic bank accounts.
Once funds enter the banking system, they enter the supervisory purview of the tax authorities. In particular, transactions of relatively large amounts and high frequency can easily trigger banks' risk management systems and thereby attract the attention of the tax authorities.
2. International tax information exchange mechanisms have become routine
China has joinedthe CRS (Common Reporting Standard for Automatic Exchange of Financial Account Information in Tax Matters), achieving automatic exchange of tax information with more than one hundred countries worldwide. If you have accounts at overseas exchanges or banks, the relevant account information may very likely have already been exchanged back to the Chinese tax authorities.
3. "Golden Tax Phase IV" has strengthened data supervision capabilities
The "Golden Tax Phase IV" system, through technologies such as big data and AI, has achievedtax, banking, customs, and market regulationand other multi-department networked data. The system can automatically compare declared personal income against actual consumption and asset positions, and once a clear discrepancy is identified, it will trigger atax alert。
Therefore, even if the transaction occurs on-chain or overseas, as long as the ultimate proceeds enter your name in some form or are used for living consumption, there is a risk that the tax authorities will discover it and require supplementary tax payment.
What are the consequences of failing to declare income from crypto assets?
Ifthe tax authorities discover undeclared income from overseas crypto assets, you may face the following legal consequences:
1. Supplementary tax payment and late payment fees
The tax authorities will order you to pay the tax due but unpaid, and will impose a late payment fee of 0.05% per day (approximately 18.25% annualized) in accordance with Article 32 of the Tax Collection and Administration Law of the People's Republic of China; the longer the delay, the greater the accumulated amount.
2. Exposure to tax fines
If it is determined that you "failed to file a tax return," a fine of up to RMB 2,000 may be imposed; in relatively serious circumstances, a fine of more than RMB 2,000 and up to RMB 10,000 may be imposed.
If it is determined to constitute“tax evasion”(failure to file a return despite notice, or filing a false return), a fine of not less than 50% and not more than five times the amount of tax unpaid or underpaid may be imposed.
3. Possible criminal liability
If the amount of tax evaded is relatively large and accounts for 10% or more of the tax payable, and the taxpayer still fails to pay after the tax authority has lawfully issued a notice demanding payment, the conduct may constitute the crime of tax evasion, giving rise to criminal liability.
Mankun Tip:
Failing to declare income from crypto assets may appear “concealed,” but in fact carries multiple risks, ranging from substantial late-payment penalties and large fines to possible criminal liability.We recommend proactive and compliant declaration to avoid subsequent legal and financial risks。
Mankun Recommendations
If you have previously obtained gains through trading crypto assets, particularly wherefunds have been repatriated to domestic accounts, Mankun lawyers recommend that you:
1. Proactively organize transaction records
We recommend that you organize, as far as possible,a clear transaction history, including thetime, quantity, priceand other information of purchases and sales, and in particular retain evidence capable of proving the "cost" of the assets, such as bank transfer records, exchange transaction details, on-chain transaction hashes, etc.
The more complete the cost evidence, the more accurate the calculation of taxable income, and the more reasonable the tax burden.
2. Consider voluntary reporting or self-review
- If you have not yet received a notice from the tax authority, you may, through the"Individual Income Tax"APP or on theNatural Person Electronic Tax Bureau websiteFile the declaration.
- According to the rules, the declaration should be submitted to the competent tax authority at the place whereyour employing entityis located; if you have no employing entity, you may handle it with the tax authority at the place ofyour household registration、your habitual residenceoryour main source of incomehandle the matter with the tax authority of the place where [the entity] is located.
- If you have receivedreminders from the tax authority by SMS, telephone or other means, please cooperate actively, truthfully explain the source of the funds, and prepare transaction records and other relevant supporting materials.
3. Retain all transaction records
Develop the long-term habit ofsaving transaction screenshots, wallet addresses, transfer records, exchange statementsand other materials. These are not only the basis for calculating tax but also key evidence for explaining and proving the authenticity of transactions during a tax review.
4. Plan reasonably on the premise of compliance
If you trade frequently or in large amounts, you may consider tax planning within the scope permitted by law, for example, managing assets through compliant structures or lawfully applying tax treaties. It is advisable to consult a professional tax lawyer or accountant during this process to ensure the plan is sound and feasible.
Conclusion
In today's world where the digital economy and globalization are intertwined, tax compliance has become a required course for every investor. Although the world of crypto assets carries a "decentralized" character, tax obligations do not disappear as a result.
Proactively understanding regulations, truthfully declaring income and properly retaining records are not only a respect for the law but also long-term protection for your own assets and credit security.
If you have questions about crypto asset taxation or need assistance, you may seek professional support as early as possible to ensure you move steadily forward on the track of compliance.
About the Lawyer
Xu QianPartner at Mankun Law Firm. A partner at Mankun Law Firm with sixteen years of legal practice experience, focused since the start of his career on criminal defense, corporate legal counsel, and criminal-civil intersection matters, with a solid theoretical foundation in law and extensive criminal defense experience in new economic crime cases, novel internet crime cases, and financial crime cases. Committed to providing clients with professional and efficient legal support and safeguarding their lawful rights and interests.
Jin WeilinLaw Clerk at Mankun Law Firm. Bachelor of Laws from the University of Birmingham and Master's degree in Intellectual Property from City University of Hong Kong. With a multi-jurisdictional educational background, he has long been dedicated to researching legal risk prevention and compliance framework development in the Web3 industry, monitoring regulatory policies and judicial practice concerning digital collectibles, cryptocurrencies, and DeFi in major jurisdictions worldwide, and providing practical support for the compliant development of Web3.
About Mankun
Founded in 2015, Mankun Law Firm is a boutique law firm in China focused on the Web3 new economy and deeply engaged in the blockchain industry. Mankun's team members possess diverse and distinctive industry backgrounds, coming from well-known legal service institutions, state judicial organs, internet technology companies, crypto asset institutions, blockchain industry think tanks, and other organizations.
Based on a deep understanding of the new economy, continuous attention to and research on policies and regulations, and extensive practical experience, the Mankun team is adept at providing comprehensive legal services from the perspectives of business models and legal practice to new economy enterprises in Web3, blockchain, AI, NFT, digital collectibles, crypto funds, crypto payments, DeFi, real-world assets (RWA), GameFi, and other sectors, including business structure design, project investment and financing, transaction planning, business compliance, resolution of complex civil and commercial disputes, prevention and management of criminal-law-related risks, and criminal defense.
Mankun Law Firm is headquartered in Shanghai and has branch offices in Hong Kong, Silicon Valley in the United States, Shenzhen, Hangzhou, Zhengzhou, Chengdu, and other locations. In response to the global compliance development needs of Web3 industry clients, Mankun has established local offices in major global crypto finance cities and selected local professional blockchain service partners to provide clients with legal and compliance services that offer global breadth and China depth.
