Web3 practitioners should pay attention to the declaration of overseas cryptocurrency asset income and take reasonable tax arrangements.

Author: FinTax

News Overview

From March 25 to 26, 2025, tax authorities in Hubei, Shandong, Shanghai, and Zhejiang provinces in China simultaneously issued announcements within 48 hours, launching a concentrated review of the overseas income declaration issues for residents in China. In September 2014, China officially committed to implementing the automatic exchange of financial account tax information standards (AEOI) under the CRS framework, and in September 2018, it completed the first information exchange with other CRS participating countries (regions), covering major countries such as the UK, France, Germany, Switzerland, Singapore, as well as traditional tax havens like the Cayman Islands, British Virgin Islands (BVI), and Bermuda, including core data such as account balances and investment income. This time, the tax departments in the four regions of China identified multiple typical cases, with recovery amounts ranging from 127,200 yuan to 1,263,800 yuan, and adopted a five-step working method of "notification, urging rectification, warning interviews, case investigation, and public exposure" to promote rectification.

FinTax Brief Comment

1. Interpretation of Announcement Characteristics

This tax review presents two distinct characteristics. The first characteristic is the expansion of the review targets for overseas income, now focusing on the middle-class group. Unlike previous regulations that primarily monitored the overseas income of high-net-worth individuals, the taxpayers in this review have asset scales and income levels that fall within the upper-middle-income range. For example, in a typical case published by the Zhejiang tax department, the amount of tax owed was 127,200 yuan. This shift indicates that tax authorities in mainland China have begun to pay attention to the overseas income of the middle-income group.

The second characteristic is the coordinated and complementary review scope among the four tax departments. On one hand, the cross-border flow of private capital in Zhejiang, offshore financial transactions in Shanghai, traditional manufacturing going abroad in Shandong, and new manufacturing in Hubei essentially cover the mainstream scenarios of overseas income for the middle class. On the other hand, the simultaneous release of review announcements by multiple regions may imply a higher-level unified directive, indicating that the previous individual "voluntary declaration" of overseas income will gradually transform into strict substantive audits by tax authorities.

2. How does mainland China tax residents' overseas income?

China implements a global taxation principle for tax resident individuals, a principle established since the introduction of the "Interim Measures for the Collection and Management of Individual Income Tax on Overseas Income" in 1998 and still in use today. In early 2020, the Ministry of Finance and the State Administration of Taxation issued the "Announcement on Individual Income Tax Policies Related to Overseas Income" (Announcement No. 3 of 2020, hereinafter referred to as "Announcement No. 3"), which further clarified the tax treatment and collection management of overseas income for Chinese residents. The foundation of the global taxation principle lies in maintaining national tax sovereignty and achieving social equity. Based on this principle, the requirements for taxing residents' overseas income in mainland China are roughly as follows:

For taxpayers, according to the "Individual Income Tax Law of the People's Republic of China," individuals meeting any of the following conditions are recognized as "Chinese tax residents": 1. Having a domicile in China: Refers to individuals who habitually reside in China due to household registration, family, or economic interests, and even if they work or live abroad for a long time, as long as they have not given up their household registration or family ties, they may still be recognized as residents. 2. Residing in China for 183 days or more: Individuals who accumulate 183 days of residence in a tax year (January 1 to December 31) are considered residents, even if they do not have a domicile.

Regarding the scope of taxable income, residents are required to declare and pay individual income tax on all income obtained from both within and outside China according to the Chinese individual income tax law. However, if a non-domiciled individual accumulates 183 days of residence in China within a tax year, but has not accumulated 183 days of residence in any of the previous six years or has a single departure exceeding 30 days, the income sourced from outside China and paid by foreign entities or individuals is exempt from individual income tax.

3. Taxation Possibilities for Web3 Practitioners

Announcement No. 3 clarifies the types of taxable overseas income, which can be divided into comprehensive income sourced from outside China (salary income, labor remuneration income, manuscript income, royalty income), business income, and other income (interest, dividends, property transfer income, property leasing income, occasional income). The classification standards are basically consistent with domestic income, but there are differences in tax calculation methods: for example, overseas comprehensive income and overseas business income should be combined with domestic comprehensive income and domestic business income to calculate the taxable amount, while other classified income sourced from outside China should not be combined with domestic income and should be calculated separately.

The tax treatment of cryptocurrency assets in mainland China still has many controversial points. The following are a few common scenarios for illustration:

For commercial mining activities that operate continuously overseas, tax authorities may regard them as business income, allowing the deduction of necessary costs such as equipment and electricity, which aligns with their capital-intensive and continuous investment characteristics. However, if miners operate as individuals, the tax classification becomes problematic: if treated as occasional income, it fits the randomness of the income but results in a disproportionately high tax burden due to the inability to deduct costs; if classified as property transfer income, the lack of stable valuation benchmarks for cryptocurrency makes it difficult to reasonably determine the appreciation portion, leading to potential tax disputes.

Another common situation is when residents in mainland China obtain income through cryptocurrency trading, where the determination of commercial substance becomes key. If there is a fixed location, a hired team, and continuous trading, it may be recognized as business income. High-frequency traders face the risk of being classified as business income, while ordinary investors typically only pay tax on the appreciation portion but need to provide complete cost documentation to prove the original value of the property, thereby avoiding double taxation and excessively high deemed profit rates.

4. What should mainland China Web3 practitioners pay attention to?

In response to overdue declarations or intentional concealment of overseas income, tax authorities in mainland China have established a clear legal responsibility system. According to Articles 32 and 63 of the "Tax Collection and Administration Law," taxpayers who fail to declare on time or make false declarations will face a progressive penalty system involving tax recovery, accumulation of late fees, administrative penalties, and even criminal penalties: starting from the day after the statutory declaration deadline, a late fee of 0.05% of the overdue tax will be added daily, creating significant financial pressure; for verified tax evasion behaviors, in addition to full recovery of taxes owed, a tiered fine of 50% to five times the amount of tax owed will be imposed based on factors such as subjective malice and complexity of concealment methods; if the amount involved reaches the standard for criminal prosecution, it will be transferred to judicial authorities for criminal liability.

In the context of global tax transparency and regulatory technology upgrades, the tax issues related to cross-border income from cryptocurrency assets deserve more attention. Currently, Chinese tax authorities have achieved in-depth supervision of core data such as overseas account balances and investment income through means such as CRS information exchange. Web3 practitioners may consider making reasonable tax arrangements and declaring taxes truthfully. Particularly, based on several cases disclosed this time, the costs of late fees and penalties for subsequent payments far exceed the original taxes owed. Specifically, Web3 practitioners in mainland China can take two approaches to mitigate risks: first, they can independently or with the help of professionals review their past overseas income situations, determine whether taxable income has been generated, and take remedial measures; second, they can continuously adjust and update their tax arrangements to minimize their tax burden while complying with relevant laws and regulations.

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