Although the law has not yet been clearly defined, there are "capital gains" and other catch-all clauses in tax law, and there have been precedents of high-profit cryptocurrency traders being pursued for tax payments.

Compiled by: Wu Says Blockchain

This AMA is hosted by FinTax, with FinTax founder Calix and senior tax manager Simon sharing insights. Calix analyzed China's recent overseas income tax collection actions, focusing on their impact on Web3 practitioners and investors. He pointed out that the tax authorities in mainland China can cross-check residents' overseas income through CRS data, foreign exchange records, payment platforms, and other channels. The relevant tax collection work is gradually becoming more visible and systematic. Regarding cryptocurrency income, although the law has not yet been clearly defined, there are catch-all clauses such as "capital gains," and there have been precedents of high-profit cryptocurrency traders being pursued for tax payments. In the future, the tax risks associated with crypto assets cannot be ignored. Simon explained the criteria for determining "tax residents" and related tax exemption clauses, providing some advice for individual investors. The two also addressed practical issues such as how to comply with reporting on-chain labor compensation, the tax audit cycle, and the burden of proof.

The following content is a text summary; for the full audio, please listen to Xiaoyuzhou.

Is the tax collection action sudden?

Cat Brother: Calix, as I understand, since the beginning of this year, tax authorities in various provinces in mainland China have taken a series of tax inspection actions targeting individuals. Could you please introduce the relevant situation?

Calix: Specifically, starting from March or April of this year, tax bureaus in places like Shanghai, Zhejiang, Shandong, and Hubei have successively issued announcements requiring tax residents in China to pay taxes on their overseas income, along with penalty decisions. This is not a brand new policy or a sudden event — based on past experience, there are always cases each year where high-net-worth and high-income individuals are pursued for back taxes due to unreported overseas income. In the past, these cases were rarely made public or reported. The special aspect of this year is that information has started to be disclosed, media attention has increased, indicating that this round of tax collection has stronger "visibility" and systematic characteristics. For example, this year, tax authorities have published specific cases; although the amounts are not large, it is clearly intended to send a signal, reflecting an upgrade in the tax collection mechanism — based on specific risk indicators, using internal "five-step work methods," and conducting systematic assessments of individuals' overseas income.

From a deeper background perspective, two key factors have driven this action:

First, the tax authorities' collection technology and tax data analysis capabilities have significantly improved. In the past, they mainly relied on taxpayers to voluntarily report, but now they integrate information and use technology to bridge previously "isolated information" data, such as bank and foreign exchange records;

Second, the fiscal situation is under real pressure, which, although not convenient to discuss in detail, is also a driving force.

Currently, common targets for inspection include individuals investing in Hong Kong and U.S. stocks, and those cashing out overseas equity in internet companies. However, we believe that income from the cryptocurrency sector related to Web3 is also very worthy of attention and may become a focus in the future.

Do investors in Hong Kong and U.S. stocks need to pay taxes?

Cat Brother: Regarding the recent tax inspections, I noticed that some KOLs have posted that many friends around them have received calls from the tax authority, asking them to self-check and pay taxes on overseas income from 2021 to 2023. Although this income may not necessarily be related to the cryptocurrency sector, it is certainly related to Hong Kong and U.S. stocks. Some even stated clearly that using brokers like Tiger Brokers, Futu Securities, and Interactive Brokers Hong Kong would lead to inspections by the Chinese tax authority, collecting 20% income tax, and only counting profitable trades. Is this true?

Calix: Indeed, many KOLs have been discussing these situations recently. From the actual cases we have encountered, some of our clients have indeed been subjects of inspection from these scenarios, including inquiries through brokers and cryptocurrency clients. Currently, we see the main focus on three types of accounts: overseas stock accounts, overseas bank accounts, and family trusts.

According to public information, it is temporarily impossible to confirm whether the tax authority obtains data through brokers, but regardless of whether the information source comes from brokers, the essence is that the information from these overseas financial accounts is returned to the Chinese tax authorities through the CRS (Common Reporting Standard) exchange mechanism. Many people actually do not understand: under the CRS framework, as long as you are a Chinese citizen, your financial accounts overseas, including balances and key information, will be regularly summarized and returned to the Chinese tax authority.

The reason why people have not heard much about related inspection cases in the past is that the tax authority may not have had sufficient means or resources to utilize this data early on. However, in recent years, data analysis capabilities have significantly improved, and the tax authority has begun to actively analyze CRS data.

Therefore, whether the identification is through broker channels is not important. The key point is: as a Chinese tax resident, if your overseas assets and income are sufficiently "prominent," you are likely to come to the attention of the tax authority. In the long run, these types of overseas assets will inevitably face scrutiny and tax collection from the Chinese tax authorities.

Will the middle class also be inspected?

Cat Brother: If the high-income groups are currently the focus of the tax authority, will the overseas income of the middle class also attract the attention of the tax authority?

Calix: From several tax collection cases in our previous article, which had nearly 100,000 reads, the amounts involved are actually not large and can basically be categorized into what you refer to as the "middle class." To put it bluntly, high-net-worth individuals have stronger tax planning capabilities and higher amounts involved, while the middle class is more likely to be "exposed" in the tax system's view. The reason is that the middle class generally does not hire professional tax advisors or lawyers for planning; their overseas income often comes from salaries or labor compensation, and this income often needs to be remitted back to China through foreign exchange, leaving clear traces in bank statements and foreign exchange quotas. Currently, a very key observation indicator for the tax authority is the foreign exchange inflow and outflow records of personal accounts. For example: Have you used up your foreign exchange quota within a year? Are there multiple cross-border remittances? Is there frequent foreign exchange transactions among family members? If these data show abnormalities, the tax authority can basically determine that you may have income sources overseas. Therefore, it is unnecessary to discuss whether the middle class has become a focus; just from the perspective of information availability, the overseas income behavior of the middle class is more easily tracked in data, thus facing a higher risk of identification.

Has the cryptocurrency sector been included in the tax collection scope?

Cat Brother: What is the attitude of the Chinese tax authority towards income from the cryptocurrency sector? Will there be special attention to tax collection in this area?

Calix: This question is very interesting. In fact, our company initially chose to provide tax services in the cryptocurrency sector due to relevant actual cases. When I first started my business, providing tax compliance services in the cryptocurrency industry was not widely recognized in the community; many people thought "the cryptocurrency sector should not comply" and even found this direction strange and difficult to pursue. However, I insisted because early on, when I was the CFO of a U.S. listed company, a friend made over 100 million RMB by trading cryptocurrencies on an exchange, only to be targeted by the tax authority, not only being asked to pay back taxes but also facing hefty fines and late fees, making the entire process very painful. Therefore, I can clearly say that taxing cryptocurrency trading income is not unfounded; there are indeed many large tax inspection cases in reality. However, due to the relatively closed nature of this community, information dissemination is limited, and the outside world may not be aware. As for why we rarely see large-scale tax collection actions targeting cryptocurrencies, I believe the core issue is that the law has not yet clearly defined the nature of income from cryptocurrencies. If the tax authority does not have a clear legal framework, it is relatively difficult to implement comprehensive taxation. However, we must also note that the "Individual Income Tax Law" has catch-all clauses, such as "capital gains" and "other income," which can serve as the basis for taxation. The stage where Bitcoin broke through $100,000 has already released a huge wealth effect, and this industry has long become an important gathering place for high-net-worth individuals, which the tax authority will certainly not ignore. In Europe and the U.S., the tax rules for cryptocurrencies are relatively clear, specifying what taxes to pay under which circumstances, but whether they can be tracked and whether they are voluntarily reported is another matter. In contrast, China currently does not have a systematic tax collection framework. I believe the tax authority maintains very close technical attention, and some tax officials have a quite professional understanding of cryptocurrencies.

How does the tax authority identify overseas income?

Cat Brother: How do the tax authorities in mainland China know about the overseas income of residents? If I do not transfer my overseas income back to China or have it in a non-Chinese financial institution, will I not be taxed?

Calix: This question is actually not complicated; the core lies in the CRS framework. The CRS (Common Reporting Standard) proposed by the OECD has been adopted by many countries, and its core goal is to understand the asset status of domestic tax residents in overseas financial accounts to identify potential tax evasion behaviors. The information exchanged under the CRS mainly includes basic financial data of accounts, such as account balances and account holder identities. Chinese citizens with Chinese tax resident status theoretically have their account information in overseas financial institutions regularly exchanged back to the Chinese tax authorities. However, it is important to note that account balance data alone cannot directly lead to taxation. The tax authority also needs to combine specific sources and uses of funds to reconstruct the situation and communicate with taxpayers to reasonably confirm the tax items before completing tax collection. This means that the process is not automated; after data is captured, manual operations and evidence collection are still required. Of course, the U.S. is an exception; it has not joined the CRS system but has its own independent information exchange framework (FATCA). Although there is no CRS data exchange mechanism between China and the U.S., as far as I know, there may still be other channels to obtain some information, but the specific methods have not been publicly disclosed, and I cannot speculate on that here. Additionally, besides the CRS, the tax authority has also begun to rely on cross-border payment data, payment platform information, and fund flow records for indirect identification. For example, whether you frequently receive payments from abroad or have funds closely related to overseas business transactions can serve as auxiliary evidence to identify whether you have overseas income.

Finally, I would like to add: in the current context where "going global" has become the norm for enterprises, many companies with scale in China basically establish branches, accounts, or have certain revenues in Hong Kong or other overseas markets. Once there are large amounts of domestic fund flows, the tax authority can easily trace and identify whether they have overseas business income.

What to do if notified by the tax authority for inspection?

Cat Brother: If someone is notified to undergo a tax inspection, how long does the entire process typically take? Is there much flexibility for negotiation and concessions during this process? Could you share one or two related cases?

Calix: Generally speaking, from the time of receiving the notification to completing the initial inspection, the cycle is about two months; if the case enters the audit stage, the cycle may extend to six months. The specific duration depends on several factors: the level of cooperation between the tax authority and the taxpayer, the complexity of the case itself, and the direction of final communication and negotiation. These variables can lead to significant individual differences in each case. As for the negotiation space, we have indeed seen considerable fluctuations in many cases. For example, the tax authority may initially claim a higher amount for taxation, but during the subsequent process, through data review, they may find that part of the amount belongs to living expenses, debt repayment, or there are losses that have not been included in the calculation, all of which can significantly affect the final taxable amount. The actual tax amount can sometimes differ from the initial determination by more than 90%, depending on whether the information is sufficient and whether the evidence is in place. If the tax authority already has your financial account data, such as the amount deposited, withdrawal records, and account balance on a certain trading platform, they may be able to directly calculate your actual profit situation, including the invested principal and accumulated losses. However, if your fund flow is relatively complex, such as involving multiple accounts or frequent transactions with corporate accounts and diverse sources of funds, they may not be able to fully reconstruct the true situation. In this case, the tax authority will require you to explain the source and use of the funds yourself. For example: Is this money your income? Is it a transfer between your own accounts? Is it an investment or living expenses? You need to provide materials such as contracts, invoices, fund details, and transfer records to substantiate your claims. Only when this data is recognized by the tax authority can it serve as the basis for adjusting the tax base. Otherwise, if you cannot explain clearly, you may face the risk of being taxed based on "maximized profits."

How is tax residency determined?

Cat Brother: Is having Chinese nationality equivalent to being a Chinese tax resident?

Calix: Regarding the determination of tax residency, this is actually a technical issue that many clients ask about during consultations. Next, I will invite our senior tax manager at FinTax, Simon, to explain in detail.

Simon: Hello everyone, I am Simon. The concept of "tax resident" is very critical in China's individual income tax collection. Many clients often ask: If I am a Chinese national, does that mean I am definitely a Chinese tax resident? In fact, this is not the case; nationality and tax residency are not completely equivalent. Chinese tax law mainly determines whether a person is a Chinese tax resident based on two criteria: the "domicile standard" and the "days of residence standard."

First, the domicile standard: Even if you work or live abroad for a long time, if you have not formally renounced your Chinese nationality and your family members or main economic interests are still in China, the tax authority may determine that you have a "domicile" in China, thus considering you a Chinese tax resident.

Second, the days of residence standard: If you reside in China for more than 183 days within a certain tax year (i.e., from January 1 to December 31), even without a domicile, you may still be recognized as a Chinese tax resident. In our practical operations, we have encountered many cases like this: some clients stay abroad for a long time due to study, work, visiting relatives, or tourism, but when they return to China to live after completing these activities, the tax authority often recognizes China as their "habitual residence" based on their normalized life after returning, thus considering them Chinese tax residents.

How to report on-chain labor income?

Wayne: Hello everyone, I am Wayne. I would like to ask a practical question on behalf of a friend: He has recently entered this industry, engaging in on-chain related work, and does not participate in cryptocurrency trading; he only receives his salary in the form of USDT. He hopes to convert this USDT back to China using a Hong Kong card for future use in school or visa applications, and he also wants to comply with individual income tax reporting as proof of income.

However, he is a bit worried because this income is issued through corporate accounts like Backpack and BR, and then converted back to the mainland via the Hong Kong card. He has checked some information, including explanations on GPT, and some say this type of income is considered compensation issued by exchanges, which does not meet the nature of labor compensation, so he has been hesitant to withdraw. How should he handle this situation?

Calix: This is actually not complicated. If he receives USDT as a result of providing labor and fulfilling work responsibilities, it falls under the typical "labor compensation." The key points are: 1) Retain a complete labor contract or service agreement; 2) Keep records of the monthly issuance of USDT; 3) Maintain all on-chain transfer records, Hong Kong card deposit records, and remittance paths during the process of converting USDT to RMB, ensuring that the fund flow path can self-verify. As long as this information can corroborate each other and clarify the source and use of income, it can be reported as salary income in accordance with the law in China.

Wayne: If he previously received this salary in Hong Kong and paid taxes on it, can he deduct it in China?

Calix: Yes. If he has legally paid individual income tax in Hong Kong, then when he returns to China, this income will first be combined into the salary income under Chinese tax standards, and then the taxable amount will be calculated according to domestic tax law. If the calculation shows that he owes 20 yuan, and he has already paid 10 yuan in Hong Kong, then he only needs to pay an additional 10 yuan in China. This is allowed under the "foreign tax credit" mechanism in the Individual Income Tax Law, which avoids double taxation.

Wayne: So that means it would be best for him to have a formal labor contract as supporting documentation?

Calix: Yes, having a formal labor contract is ideal. If not, he can also supplement with other forms of contracts, work descriptions, service agreements, etc., to prove that it is "labor income." If the company is willing to cooperate and provide a statement, it will further help the tax authority recognize it.

Can tax residency be planned?

Cat Brother: This raises a follow-up question — can one plan their tax residency status through certain means?

Calix: There are indeed many strategies for this, depending on your goals and specific circumstances. Some methods are more complex, such as establishing a family trust; there are also some more basic paths, such as adjusting the days of residence.

For example, regarding family trusts, there is indeed some controversy over their tax treatment in China, but based on past practices, they have effectively played a role in tax planning under specific structures. Of course, how policies will evolve in the future is uncertain, so this method should be assessed based on specific situations. A relatively simple approach is to operate based on the standards for determining "tax residents" in Chinese tax law. For instance, the "183 days" rule and domicile determination standard mentioned by Simon earlier. If a person has been living abroad for a long time and has no actual economic ties or residence arrangements in China, theoretically, they can avoid being recognized as a Chinese tax resident through daily arrangements and reporting paths. I personally believe that Chinese tax law still lacks clear operational guidelines on the "cancellation of tax residency" mechanism. If a person has Chinese nationality or household registration but has been out of the country for many years and no longer has actual economic activities or income sources in China, they may theoretically no longer be recognized as a Chinese tax resident. For example, if you have been living in Singapore or Hong Kong for a long time, you should, in principle, pay taxes according to local tax laws, which would not be related to the mainland. However, in practice, there are significant differences, involving factors such as residence, income paths, and fund allocation, so it is advisable to plan based on individual circumstances. From a legal perspective, there is room for maneuver, but the key lies in having a clear strategy and compliant execution.

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