Written by: Lawyer Liu Honglin
Recently, many friends in the cryptocurrency community have been asking me the same question: "I heard that Hong Kong is going to start reporting cryptocurrency asset information. Is my cryptocurrency in overseas exchanges still safe? Will the tax bureau in mainland China know about it? Do I need to pay taxes?"
This anxiety is not unfounded.
In 2025, global tax transparency is set to face a "precise strike" targeting cryptocurrencies. As a legal practitioner deeply involved in Web3, today I will discuss the CARF (Crypto-Asset Reporting Framework), known as the "CRS for the cryptocurrency world," and what it means for each of our wallets.
What is CARF?
In the past decade, the traditional financial world has had a powerful tool called CRS (Common Reporting Standard). Simply put, if you are a Chinese citizen with deposits in overseas banks, foreign banks will exchange your account information with the Chinese tax bureau.
However, CRS has a significant loophole: it does not cover cryptocurrencies. Previously, if you converted your money into USDT and kept it in a wallet, or traded on Binance or OKX, the tax bureau could not see it.
Now, a patch has arrived. CARF is specifically designed to close this loophole.
Its core logic is: since we cannot find the decentralized you, we will find the "intermediaries" serving you.
Who needs to report? Exchanges (CEX), OTC merchants, and even some project teams that issue tokens.
What needs to be reported? Your identity information (name, tax number), how much cryptocurrency you bought, how much you sold, and which wallet address you transferred the cryptocurrency to.
This means that every transaction you make on compliant exchanges and service providers will be "naked" in the eyes of tax authorities.
In the CARF era, the following behaviors will face extremely high tax exposure risks:
Stablecoin inflows and outflows (USDT/USDC): Don’t think that converting to stablecoins means you’re in the clear. CARF clearly states that converting cryptocurrencies to fiat or exchanging one cryptocurrency for another (like BTC for USDT) must be reported. Each conversion may be considered a "sale" under tax law, requiring profit and loss calculations and tax payments.
Large OTC transactions: Previously, people were accustomed to finding offline OTC services to exchange money. In the future, Hong Kong will bring OTC merchants under regulation, and they will also be obligated to report information on large traders.
DeFi and airdrops: Although DeFi is relatively difficult to regulate, if a protocol has a clear "controlling party" (for example, if the project team retains management rights), or if you participated in DeFi mining through a centralized exchange, the earnings will also be recorded.
Withdrawing to cold wallets: You might say, "Can I just withdraw my cryptocurrency to a cold wallet and be safe?" Yes and no. Because exchanges must record your "withdrawal" action and the receiving wallet address. If this cold wallet address interacts with fiat in the future (for example, if you buy a house, a car, or cash out through an exchange), the tax bureau can use on-chain analysis tools to trace this address back to you, thus calculating your historical total.
A misconception: "Trading cryptocurrencies in mainland China is illegal, so I don’t have to pay taxes?"
For players in mainland China, the reason for paying attention to CARF is due to Hong Kong's recent actions. Although Hong Kong operates under "one country, two systems," it has long established a channel for tax information exchange with the mainland.
According to a consultation document released by the Hong Kong government at the end of 2024 to early 2025, the timeline is already very clear:
2025-2026: Local legislation in Hong Kong will begin to establish tax rules.
January 1, 2027: Officially start recording. From this day on, all transaction data generated at licensed exchanges and OTC in Hong Kong will be recorded by the backend system.
2028: The Hong Kong tax bureau will start sending this data to tax authorities in other countries (including mainland China). In the future, Hong Kong will no longer be a tax haven but a "transit station" for tax information.
Many friends feel, "The government has declared that Bitcoin trading is illegal financial activity, and since they don’t protect me, why should they collect taxes from me?"
From a lawyer's perspective, this may not be the case.
The core reason is that tax law looks at "substance": in the eyes of tax law, regardless of whether your income source is legal (like salary) or gray (like trading cryptocurrencies), as long as you make money (generate "income"), you have a tax obligation.
Additionally, in recent years, the mainland has been promoting "data-driven taxation." Previously, the tax bureau did not know about your overseas assets and could not regulate them. Once CARF is implemented, Hong Kong will directly send your transaction data (for example: Zhang San, mainland ID number xxx, earning 1 million U in a certain exchange in 2027) to the mainland tax bureau. The system will compare, and if you have not declared, the warning light will immediately turn on.
Three practical compliance suggestions
In the face of the wave of transparency in cryptocurrency taxation, panic is useless because compliance is an inevitable path for the Web3 industry, and taxation is a necessary part of compliance. From this perspective, this is somewhat a day everyone has been looking forward to.
To welcome cryptocurrency taxation more safely and joyfully, here are three rational compliance strategies.
Suggestion 1: Reassess your "tax residency status"
CARF exchanges information based on where you are a "tax resident." If you hold a passport from a small country (like St. Kitts or Vanuatu) but live long-term in Shanghai/Beijing, with your life centered in the mainland, you are still a tax resident of mainland China. If you want to truly isolate risk, you need to engage in substantial identity planning—not just obtaining a status, but genuinely relocating to tax-friendly regions for cryptocurrency (like Dubai or Singapore) to sever tax ties with your original residence.
Suggestion 2: Asset inventory and historical separation
2027 is the year of data collection. Before that, it is advisable to conduct a comprehensive inventory of your assets. For example, distinguish between "existing assets" and "incremental assets." For historical legacy issues, if the amounts involved are significant, it is advisable to consult a professional tax advisor to see if you need to utilize the window period for compliance declaration or structural adjustments. Don’t wait until 2028 when data is exchanged to respond passively.
Suggestion 3: Say goodbye to "wild paths" and embrace compliance structures
For Web3 entrepreneurs and high-net-worth individuals: stop using personal accounts for large transactions. Consider holding assets through legal structures like family trusts or offshore companies. Although CARF will penetrate to identify "actual controllers," a legitimate structure can help you isolate some legal risks and provide space for tax planning. At the same time, be sure to stay away from underground money houses. CARF is linked to anti-money laundering (AML) mechanisms; once the funding chain of underground money houses is investigated, it is not just a matter of back taxes, but also involves criminal offenses.
The "wild era" of Web3 is coming to an end. The arrival of CARF marks the formal entry of cryptocurrency assets into the global regulatory view.
For players in mainland China, "invisibility" is no longer possible; the future will be a competition of "compliance" capabilities. Since we cannot avoid it, we might as well put on our "bulletproof vests" in advance and protect our wealth within the rules.
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