Author: FinTax

Despite the increasing maturity of cryptocurrency payment technology, the exchange between fiat currency and cryptocurrency (i.e., "deposit and withdrawal") remains a core aspect that Web3 investors cannot avoid. As cryptocurrencies have not yet become mainstream payment tools, the value of crypto assets in investors' wallets or exchange accounts can only be limited to specific scenarios if they cannot be smoothly converted into fiat currency. However, deposit and withdrawal are directly related to the safety of funds. In a situation where risks such as account freezing and fraud are omnipresent, how to choose safe and reliable deposit and withdrawal channels and conduct comprehensive risk prevention before, during, and after transactions is a question every Web3 investor must consider.

1. Compliant Platforms: The Preferred Path for Safe Deposit and Withdrawal

1.1 Why Choose Compliant Platforms

Among the many deposit and withdrawal channels, compliant platforms have become the preferred choice for investors due to their safety and reliability, offering the following advantages:

(1) Regulatory Endorsement: Compliant platforms typically hold licenses such as MSB (Money Services Business) or VASP (Virtual Asset Service Provider), indicating that they have passed regulatory scrutiny and are under continuous supervision. This not only constrains the platform but also provides a guarantee for its credibility.

(2) Anti-Money Laundering Measures: Compliant platforms must adhere to anti-money laundering (AML) regulations and implement strict fund screening mechanisms to reduce the risk of user accounts being frozen due to the inflow of illicit funds.

(3) Transparent Banking Partnerships: Compliant platforms usually disclose their partner banks, allowing for public oversight, while also conducting strict audits of the banks' qualifications and safety measures to ensure the security of fund custody.

(4) Risk Management: Compliant platforms intercept illegal funds through technical means and internal risk control systems, preventing them from becoming conduits for money laundering or fraud.

Of course, due to compliance regulatory requirements, investors must inevitably undergo KYC (Know Your Customer) certification when setting up accounts and conducting withdrawal operations on compliant platforms, and they must wait for a certain review period. Although this brings some inconvenience to investors, it can be seen as a compromise between the overall safety of the platform and the convenience of users, with long-term benefits outweighing the drawbacks.

Outside of compliant platforms, KOLs (Key Opinion Leaders) on platforms like X and Telegram often claim to have channels for withdrawals, and their pages are filled with examples of investors successfully withdrawing funds. However, it is important to note that these channels provided by KOLs are closer to over-the-counter trading and essentially belong to a P2P model.

Compared to withdrawals from compliant platforms, this KOL private contact P2P model carries higher risks—KOLs guarantee their credibility and reputation but lack third-party oversight. When investors transfer crypto assets from their wallets to a KOL's wallet, they can only rely on the KOL to convert it into fiat currency based on trust. If the KOL's financial chain encounters problems and investors cannot detect it in time, they may find it difficult to recover their assets. In contrast, compliant platforms are subject to oversight by national and regional regulatory agencies and often have strong financial backing, making them evidently superior in terms of safety and security compared to P2P withdrawal channels. Therefore, compliant platforms remain the preferred method for the vast majority of crypto investors for deposit and withdrawal.

1.2 How to Identify Compliant Platforms

After understanding the advantages of withdrawing from compliant platforms, how should one identify and select compliant platforms? Currently, there are a certain number of licensed platforms and companies engaged in deposit and withdrawal services, with some platforms even applying for financial licenses from remote regions, countries, or small nations to compete for customers in this market. The sheer number of platforms can often overwhelm investors. In fact, identifying compliant platforms can be done in the following four steps: check licenses, review KYC, audit custody, and observe signals.

(1) Check Licenses: Legitimate platforms operate with licenses, and relevant license information is generally disclosed on the official website. If the official website does not provide this information, investors can first identify the local regulatory agency and then verify it on the relevant regulatory website.

(2) Review KYC: Legitimate platforms typically clarify the KYC and user identity verification processes as well as their privacy policies. If a platform claims to be exempt from KYC and certification, it likely poses significant risks.

(3) Audit Custody: Fund custody should be transparent. Some legitimate compliant platforms disclose the names of their partner banks and custodians, providing a basis for investors and users to verify the platform's reliability.

(4) Observe Signals: There are also some dangerous signals that can help users quickly identify risks, such as platforms requiring users to transfer their USDT to personal accounts or third-party intermediaries promoting ways to bypass risk controls with high returns. These signals generally indicate that the platform or service provider may not be compliant.

1.3 How to Handle Disputes with Platforms

Regardless of the method used for withdrawals, investors cannot completely avoid the risk of disputes. Although the probability of disputes arising from compliant platform withdrawals is lower than that of other channels, this probability can never be zero. So, how should ordinary investors handle disputes with platforms? First, users should consistently retain various transaction receipts during their daily use and trading activities to leave a trace of their activities, making it easier to provide evidence in case of disputes. Second, in terms of rights protection communication, users should save communication records with customer service in the form of screenshots or recordings, especially noting the ticket number, communication time, and content. Finally, when the official dispute resolution process within the platform fails to meet their demands, users can submit the dispute to the corresponding regulatory agency for complaint, which is another reflection of the advantages of compliant platforms.

2. KYC: The "Firewall" of Compliant Platforms

KYC, or "Know Your Customer," is a widely used procedure and practice in financial services, commercial transactions, and cybersecurity, primarily aimed at verifying customer identity, assessing customer risk, and ensuring the legality and security of transactions to prevent financial crimes and fraud. KYC is the most important concept in the compliant deposit and withdrawal process and is one of the procedures that most compliant platforms require for user certification. The importance of KYC to compliant platforms is reflected in two aspects: from a regulatory perspective, the presence or absence of KYC measures is an important basis for regulatory agencies to determine whether a platform is compliant. Currently, major global regulatory agencies have included virtual asset service providers in the anti-money laundering regulatory framework. If a platform fails to fulfill its anti-money laundering obligations, it may face severe penalties from regulatory authorities. Previously, the U.S. SEC imposed hefty fines on a leading exchange for such reasons. From the platform's operational perspective, KYC is also a risk control measure that can prevent the inflow of illegal funds related to black market activities and terrorist financing, thereby avoiding the freezing of user accounts.

Concerns about information leakage risks during the KYC process have raised worries among some investors. However, the principle of "minimum collection" of user information has become the primary guideline followed by most compliant platforms during the information collection process. Regulations in various jurisdictions, represented by the EU GDPR, also impose regulatory requirements on platforms regarding the handling of user data. In addition, compliant platforms like OSL Pay implement technical measures such as end-to-end encryption to ensure the security of user information: under end-to-end encryption, user documents and facial data are fully encrypted during transmission and storage, making it impossible for hackers to access the original information; de-tagging processing separates users' identity information from transaction records, reducing the risk of data leakage. In terms of management processes, platforms also implement access control measures—internal personnel unrelated to KYC users are prohibited from viewing collected user data, achieving internal user data isolation. Finally, compliant platforms also conduct third-party audits to check whether their data is stored legally and compliantly. For compliant platforms, maintaining user information security aligns with the platform's interests, and while obtaining user information for KYC certification, the platform also takes various measures to ensure that this private information is not leaked.

3. Taxation: Compliance Obligations After Withdrawal

3.1 Why is Taxation Necessary?

After investors withdraw funds through compliant platforms, questions arise regarding whether they need to pay taxes and how to do so. Theoretically, regardless of the type of investor, they must address tax compliance issues in their respective countries and regions. In practice, tax authorities can often obtain tax-related information about tax residents through various channels. For example, when investors withdraw funds from compliant platforms, they generally receive cryptocurrency in their bank accounts under their names. If the bank is within the CRS (Common Reporting Standard) framework, when users receive fiat currency, the bank or other relevant financial institutions will report information such as account balances back to the tax resident's country, which may prompt the tax authority in that country to inquire about the source and method of the suddenly increased deposits in the account. Since the vast majority of investors belong to at least one tax resident country, facing tax authority investigations and bearing tax obligations is almost unavoidable. The notion that "trading cryptocurrencies does not require paying taxes" is not valid; decentralization does not mean exemption from tax obligations. To protect their rights, Web3 investors can not only cultivate a proactive attitude towards taxation and actively respond but also retain as many documents and transaction records related to Web3 gains and losses as possible to address potential inquiries from tax authorities.

3.2 What Taxes May Be Involved: Examples from Hong Kong and Singapore

When discussing the taxes that may be involved after compliant withdrawals, it ultimately returns to the tax nature of cryptocurrencies. Although regulations vary by country, cryptocurrencies are generally classified as a separate asset category in most cases. Therefore, the types of taxes related to cryptocurrencies mainly depend on how they are obtained and accumulated. The following briefly analyzes the types of taxes that tax residents in Hong Kong and Singapore may need to pay after compliant withdrawals.

Hong Kong is a typical territorial tax jurisdiction, taxing only income sourced from Hong Kong, a principle that applies to most taxes, including profits tax and salaries tax. Unlike most countries and regions, Hong Kong only levies capital gains tax on commercial activities and does not impose it on individual investors. For overseas income, Hong Kong has established an offshore exemption mechanism. The Hong Kong Inland Revenue Department (IRD) has issued specific regulations to guide residents on tax matters related to cryptocurrencies. Additionally, according to the IRD's "Interpretation and Practice Notes No. 39 (Revised)" (DIPN39), cryptocurrencies are categorized into three main types: payment tokens, security tokens, and utility tokens, each with different tax treatment. For example, if a security token is issued, the income is generally considered capital in nature; if a utility token is issued and the source of income is in Hong Kong, it is generally subject to tax.

Therefore, when Web3 investors in Hong Kong withdraw funds through compliant platforms, they need to distinguish the behavior of obtaining income for tax purposes: if it is a commercial activity (such as long-term, continuous mining), the income may be subject to profits tax; if the relevant income can be classified under capital gains tax, it may not be taxable; if an individual receives a salary, such as being paid in USDT, there may also be a salaries tax obligation after withdrawal. As for the tax system in Singapore, it is fundamentally similar to that of Hong Kong, meaning it does not impose capital gains tax on individual investors and taxes business activities, etc., so the tax obligations after withdrawal are also quite similar and will not be elaborated further. It can be said that the cryptocurrency assets themselves do not have a direct correlation with taxes; most countries do not establish new tax categories specifically for them. How to pay taxes after compliant withdrawals primarily depends on which existing taxable income category the relevant income is closer to.

It is important to note that if investors' income comes from commercial mining or other business activities, they should pay special attention to the total cost deductions, as the methods of generating costs and allowable deductions differ for each type of tax. Taking Hong Kong as an example, income generated from mining is generally considered business income rather than capital gains. In this case, costs related to the mining business, such as electricity costs, personnel costs, office costs, server costs, etc., can be deducted from pre-tax profits if certain conditions are met. If investors ultimately cannot enjoy capital gains tax exemption, they may also consider whether they can benefit from Hong Kong's offshore exemption. However, if claiming offshore exemption, investors may need to respond to official inquiries to prove the legitimacy of their tax exemption claims.

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