How to Respond?

Author: FinTax

During this discussion, the global regulatory compliance heat for crypto assets continues to rise, with countries strengthening tax information exchange and tracking for on-chain assets, overseas accounts, and cross-border transactions. In this discussion, Calix and William combined their cross-border tax practical experience and on-chain business experiences to discuss hot topics such as global tax compliance for crypto assets, tax arrangements, and regulatory games. The two discussants also shared their visions for an ideal Web3 tax system in the future and discussed the tax logic in various scenarios such as exchange compliance, DeFi, mining, and airdrops, using real cases.

Who Should Cross-Border Income Be Taxed To?

Calix: I would like to start with a "soul question." You are also involved in mining, and the company sometimes issues bonuses in cryptocurrency. How do you usually fulfill your tax obligations for this type of income?

William: This is a very practical question. I strongly agree with a point you mentioned earlier: since we are enjoying the infrastructure and business environment provided by a certain country or region, fulfilling tax obligations is reasonable. However, the reality is not that simple. Our company's clients are distributed across multiple markets in North America, Europe, the Middle East, etc., and this income relies on conditions provided by multiple locations, making it difficult to attribute it entirely to one place.

Although I mainly deal with U.S. clients, and most of the income comes from the U.S. market, it is actually hard to determine who this tax should be paid to.

Overall, I have the willingness to pay taxes, but for this type of income, it is indeed not easy to clarify who the money should go to. After all, the formation of this income does not solely depend on where I am located.

Calix: I think your answer indeed touches on the key point. Web3 projects are inherently cross-national and cross-regional, making it difficult to accurately attribute income to a specific location. Economic activities are related to customer sources and are closely tied to the platforms, networks, and infrastructure used. Therefore, the question of who should ultimately pay this tax is indeed worth exploring in depth.

To be honest, although I have been working in tax-related fields for many years, I have also been confused by this issue. According to current tax laws, I might be a tax resident of the mainland and may also have tax obligations in Singapore, but my business mainly targets North America, and sometimes I receive compensation through a Hong Kong company. If I strictly follow tax laws, the answer may seem clear on the surface, but determining what is more reasonable is indeed worth pondering. For Web3 practitioners, these discussions often exceed the scope that traditional tax frameworks can fully cover.

William: Exactly, I think the core issue is that the evolution of the global tax regulatory system is indeed struggling to keep pace with the development of technology and the industry. Regulation has been trying to catch up, but industry changes and technological innovations are always ahead. This state of being "chased" may persist for a long time, and there will always be a dynamic balance between regulation and the industry.

Case Discussion: Tax Supplement for Individual Cryptocurrency Trading in Mainland China

Calix: Recently, there have been two hot topics in the Chinese Twitter community, one of which is an announcement from the Zhejiang Tax Bureau stating that an individual was required to pay back taxes due to cryptocurrency trading. Later, we learned through some channels that this was actually after CRS information exchange, where the tax bureau discovered an unusual balance in his overseas bank account and required him to explain the source of the funds. He explained that this part was investment income, thus needing to pay back taxes, and this investment happened to involve cryptocurrency.

For me, this kind of case is not surprising, as it is my area of expertise, so I find it quite normal and representative. William, you have been working on on-chain projects like DeFi and mining; what do you think of this case?

William: It is indeed very representative. We had actually judged early on that cryptocurrency trading would eventually fall under the tax scope. But when this happens in real life, especially for many Chinese people, the impact is still quite significant. Traditional DeFi or some purely on-chain activities have always been difficult to regulate, often relying on user compliance. In the past, there have indeed been some regulatory barriers that led tax authorities to lack strong enforcement over these relatively niche, decentralized, and hard-to-trace on-chain activities.

I think the reason this is happening so "timely" now is also related to other trends in the industry. Recently, there have been many reports indicating that some U.S. stock investors have received notifications via text or phone calls asking them to pay back taxes, indicating that regulators are beginning to more closely track individuals' overseas income, with overseas securities investment being the first entry point.

The logic behind this is also clear: the intersection between U.S. stocks and the crypto space is growing. From Robinhood to Asian brokers like Tiger Brokers and Futu, and even Guotai Junan International, many brokerages are dealing with crypto assets, making it increasingly difficult to separate U.S. stocks from crypto assets. Once we look at overseas income comprehensively, checking U.S. stocks easily brings the crypto space into view, especially since the scale of crypto assets is no longer small.

Moreover, this "stock-coin combination" is not a short-term phenomenon. For example, in the U.S., some companies are trying to tokenize U.S. stocks; in Asia, conversely, they are putting crypto assets into listed companies to drive stock prices, obtain premiums, and boost secondary market performance. This combination is driven by interests, whether it is "stocks turning into coins" or "coins being packaged as stocks," which will further strengthen the connection between the two, naturally making "taxing cryptocurrency trading" inevitable.

Overall, the crypto asset and stock market are highly intertwined, and as this trend continues to develop, the tax issues surrounding cryptocurrency trading will become increasingly rigid, leaving less room for avoidance.

Calix: This perspective is indeed quite novel; I hadn't thought deeply from the "stock-coin linkage" angle before. After all, for stock investments, people are already accustomed to where the money is earned and where to pay taxes, whether it is capital gains tax or business income from quantitative investments, the framework is relatively clear.

But when it comes to cryptocurrency, some regions, especially the mainland, indeed have ambiguous areas regarding "whether to pay taxes and what taxes to pay." However, looking at the evolution of stocks and tokens, this line of reasoning is indeed enlightening and reminds everyone that this is a new issue that requires long-term attention.

The Long-Term Game Between Regulation and Tax Avoidance

William: Based on your years of frontline tax practical experience, now that this has been initiated, do you think some people will start to avoid cryptocurrency due to concerns about tax risks? Or will there still be people who, despite the risks, try to find ways to evade taxes or simply not report taxes and continue to operate heavily in the crypto space? What impact will this have on the overall industry direction?

Calix: This is a very typical practical issue. I have always believed that regulation and "anti-regulation" have always existed; this is not only a characteristic of the crypto space but also traditional industries. For tax authorities or any regulatory agency, they certainly hope to collect the taxes owed as completely as possible; from the taxpayer's perspective, regardless of the region, everyone hopes to legally minimize taxes or reduce tax burdens, and these two demands are inherently opposed.

From my experience, this dynamic is very much like a contradiction engraved in human nature, always moving forward in a cycle of conflict, balance, conflict, and re-balance. Especially in recent years, regulatory measures have become increasingly diverse, and technological means have become more digitalized. Take the mainland as an example; the tax regulatory capacity has indeed improved rapidly in recent years, and the level of information technology is also increasing. However, at the same time, tax avoidance methods are also evolving. In the early days, it might have been just cash transactions, hiding income, and money laundering; what I mean by "tax avoidance" here refers to non-compliant tax evasion.

Later, with the emergence of cryptocurrency, for some taxpayers, it provided a new operational space. For a considerable period, cryptocurrencies were indeed difficult for tax authorities to track. Even if some regulatory agencies had on-chain tracking capabilities, the enforcement often lacked sufficient strength, so some people indeed tasted the "sweetness" during this period.

But the core of the future still depends on scale. For example, in the early days of the crypto space (2013 to 2017), many large mining farms and miners actually paid great attention to financial and tax compliance; compliance was the bottom line of operations. However, there were also large-scale players willing to take risks to evade taxes, and these two situations have always coexisted.

From a trend perspective, the early "wild" phase had a low emphasis on compliance, but as we move to today, more large institutions will prioritize compliance. After all, in mainstream markets like Hong Kong, Singapore, and Europe and the U.S., regulatory agencies, especially tax authorities, are gaining a deeper understanding of crypto assets, and this is an irreversible trend.

As for individual investors, such as retail investors or Web3 project employees, whether they can comply depends more on the actual amount. If the scale is too small, completing some necessary reporting actions is usually sufficient. Law enforcement also needs to consider the cost-benefit ratio; unless there are some "demonstrative" typical cases, like the recent discussion on Twitter about "paying back tens of thousands in taxes," the amount is not large, but it has a certain warning effect.

So overall, large institutions will only place greater emphasis on compliance because it is a prerequisite for sustainable operation; while individual C-end participants, like in the real world, are fundamentally still directly related to the amount involved.

The Boundary Between Improper Income and Asset Compliance

William: I think there is also a very interesting point here. Many people feel that paying taxes, to some extent, is a way to prove the legitimacy of property or income. But in the crypto space, to put it bluntly, there are quite a few "scams," which, in legal terms, are some improper financial operations. These actions can also yield high returns. So if these people pay taxes as required, does that mean they are, in a sense, "laundering" essentially improper money through tax payments? This question might be a bit sensitive; what do you think?

Calix: This is a great question, and I often think about this boundary myself. I believe that whether or not to pay taxes can at most prove that tax obligations have been fulfilled, but it cannot fundamentally prove that the funds are legal in a broader sense. If a sum of money simultaneously violates other financial regulatory laws, such as SEC regulations, or involves fraud or other financial illegal activities, even if taxes are paid, it does not affect other regulatory agencies' penalties and tracing of the source of these funds.

For example, if the funds are involved in money laundering, organized crime, or gray areas, touching upon international anti-money laundering regulations, or if someone in Hong Kong violates local customs or financial regulations, then paying taxes in Hong Kong cannot simply be understood as that money is no longer "dirty money." Tax compliance and the legality of funds are two legal dimensions that cannot be simply equated.

William: I agree. I would like to add that I have always felt that the issue of "tax" should have been discussed earlier because one must first acknowledge that an asset is legal before discussing taxation. If the nature of this money cannot even be effectively confirmed, it cannot even be considered a quantifiable asset, and naturally, there is no talk of reporting and paying taxes.

In the overall environment in China, this area has always been quite ambiguous, mainly because many times the legality of assets has not been fully confirmed, making it difficult for people to establish a habit of paying taxes, and regulation also struggles to truly advance. However, looking at the global context, especially in most developed countries and regions, the legality of crypto assets has become relatively clear. As long as the legal status is determined, local tax authorities will require this portion of income to fulfill tax obligations.

For many Chinese people, if this money is confirmed as taxable overseas income, it is theoretically difficult to completely bypass it. The timing of this occurrence is also related to the gap in international systems. In the past, people believed that on-chain activities had technical barriers and strong concealment, making it difficult for regulators to track, leading to a sense of "illusion." However, a very obvious trend now is the development of RegTech (regulatory technology). It is continuously enhancing the information mastery and data analysis capabilities of regulatory agencies, and many service companies are also providing support, which will largely bridge the information gap between regulation and the industry.

Tax Planning Space for Enterprises and Individuals in the Crypto Space

William: I would like to ask you a practical question. Since it is actually very difficult for ordinary users to completely "avoid" this tax, is there still a possibility to do some tax planning through compliant means? From your practical experience, how much tax planning space do enterprises and individuals have in the crypto space?

Calix: I will start with a rather "heart-wrenching" conclusion on this topic: for most ordinary people, the space for tax planning is actually very limited. The main reason is that ordinary people's income sources are relatively singular, mainly consisting of salaries, bonuses, or some small allowances, all of which are fully recorded on the company side. Once the company reports truthfully, individuals find it hard to have any additional "optimization" room.

So for ordinary individuals, what they can do more is to fully utilize the preferential policies already present in the local tax laws, such as exemptions, child support, elderly support, marriage deductions, etc. Effectively applying these basic deductions and solidly completing the necessary compliance reporting is already considered the "optimal solution."

William: Yes, it does sound like the space is limited.

Calix: However, the situation is different for high-net-worth individuals or enterprises. Their income forms and structures are usually more complex, with diverse sources and larger transaction scales, leading to more cross-border tax matters. This diversity and complexity naturally bring more operational space.

In simple terms, different types of income are subject to different tax rates and taxation methods. For example, salaries are taxed at full amounts, while capital gains or dividend income often have relatively more favorable tax rates or exemption conditions. Additionally, the differences in tax systems between different regions, such as the mainland, Hong Kong, Singapore, the U.S., or Canada, are quite obvious, and there may be "arbitrage opportunities" in cross-border arrangements.

Moreover, don't forget that whether in a civil law system or a common law system, the underlying tax laws are expressed through texts, which often leave some "gray areas." For high-net-worth individuals and large institutions, they have sufficient resources and professional advisory teams to research and utilize these spaces to maximize tax optimization within the legal limits.

This is also why I have always felt that the middle class is one of the hardest-hit groups: their income appears not low, working hard in companies or large firms, earning hundreds of thousands a year and often working overtime, but their income structure is singular, operational space is limited, and tax-saving room is minimal; in contrast, high-net-worth individuals and large institutions earn more and have more operational tools.

So regardless of the country, the middle class is usually a key focus group for tax authorities — their income exceeds sensitive thresholds, but they lack sufficient resources to legally hedge, making them the most easily "precisely targeted" in enforcement.

Potential Tax Obligations and Optimization Space for Mining, Airdrops, DeFi, etc.

William: Calix, you just mentioned the issue of income structure, which I find very interesting. In the past, people's income sources were indeed relatively singular, mainly salaries and bonuses. However, the crypto space has provided many middle-class and ordinary people with more diverse income channels, such as mining, airdrops, staking, and DeFi earnings. For example, a mining machine might only cost $2,000, and buying a few can be affordable for the middle class, making it a small "business" operation. This new income brings complexity; can you briefly introduce what tax obligations might be involved with different forms?

Calix: I think it might be more beneficial to discuss "how to pay taxes" directly, but let's also consider whether there are some legal spaces within these activities. Although this topic is indeed sensitive, I believe it can still be briefly discussed.

Many ordinary people see their income forms as diversified, but from a tax perspective, the core issue is: the income subject is generally still yourself, without the multi-layered structures of trusts, companies, or funds to disperse the tax burden. For example, mining is generally recognized as business income in most regions; airdrops, if simply received but not disposed of, typically do not trigger tax obligations temporarily. Only when converted to fiat currency or exchanged for other coins, generating actual gains, do they need to be reported. Staking or DeFi earnings can be classified as capital gains in some jurisdictions, and capital gains tax rates are usually lower than business income, with some regions not even imposing them.

So there is indeed "reasonable definition" space here, such as whether certain high-tax business income can be reasonably interpreted as capital gains or other preferential tax rate income types according to local tax laws. But this premise is that the tax law leaves gray areas, and enforcement cannot fully and accurately track on-chain activities. Otherwise, once the data is traceable, the space will shrink significantly.

Therefore, essentially, it is unrealistic for ordinary people to engage in large-scale tax planning because all income is under their name, making it easy to be classified as business income or high-tax categories. Relatively speaking, activities like airdrops and forks, if local policies allow, may be treated as low-tax or deferred. Many people will study how to reasonably convert high-tax portions into categories with lower tax rates and better treatment, which requires looking at whether local laws leave enough space and whether the operations are compliant.

Practical Considerations for Digital Nomad Identity Planning

William: I would like to follow up on one point: there are quite a few people in the crypto space who call themselves "digital nomads." In the past, I might not have paid much attention, thinking that as long as they don't engage in illegal operations, reporting taxes in their home country is sufficient. But do you think more people will actively change their tax residency to a certain overseas region in the future? For example, wanting to use bilateral tax agreements to achieve "I pay taxes in Singapore, so I don't have to pay in the mainland." Will this path become a more popular legal planning direction for many?

Calix: This is actually a relatively legitimate idea, using different tax jurisdictions to reasonably arrange and lower overall tax burdens. However, I also want to remind you that regardless of where you report taxes, you must keep good records of inflows and outflows, transaction records, and other materials, which can serve as key evidence during tax inquiries to avoid unnecessary troubles. Moreover, there is now a global CRS (Common Reporting Standard) mechanism, making it difficult to completely "hide" information in the long term. From a broader trend perspective, cross-border identity planning is worth considering, but in any case, documentation and records must be complete, and what needs to be reported must be reported truthfully.

I would like to add one more point. Taking Singapore as an example, I recently had a friend who asked a similar question. He works in Singapore, and his income is settled in USDT or fiat currency, and he pays taxes normally there. He asked whether he still needs to report back in the mainland. His situation is that he spends less than 183 days a year in the mainland.

From the perspective of mainland tax law, whether an individual constitutes a tax resident is primarily based on the "183 days" standard, but in more detailed regulations and practices, factors such as nationality, household registration, and primary social relationships will also be considered. If these connections are all in the mainland, even if the person is overseas, they may still be regarded as a Chinese tax resident and need to complete a full tax settlement to offset already paid taxes. Moreover, whether you hold a Singapore EP (Employment Pass), PR (Permanent Resident), or another type may also affect the outcome. There is no fixed template for these situations; it must be analyzed on a case-by-case basis.

William: So even if you haven't spent a full 183 days in the mainland in a year, you can't simply assume that you are completely "safe."

Calix: Right, things are not that absolute. In international tax, there is a "tie-breaker rule," which looks at your family relationships, economic interests, daily life trajectories, and other factors to determine the primary tax residence.

William: Yes, many people tend to overlook this point. Even if someone is overseas, with a visa or identity also overseas, if their main family and social connections are still in the mainland, according to the "tie-breaker rule," they are often still recognized as a Chinese tax resident, so this part must be particularly noted.

Visions for the Future Tax System for Crypto

Calix: Finally, I would like to ask a more open question, which can also serve as a conclusion to this discussion.

From your personal perspective, as someone who has been deeply involved in the crypto space for many years, what kind of tax system do you think would be more friendly to Web3 users? Or, what is your ideal and most anticipated tax model?

William: This question carries some of my personal views and does not represent any company's position.

I have always resonated with the concept of "sovereign individuals," which is a crypto-native idea, and I am somewhat idealistic, agreeing with the possibility of "Network State" mentioned by Vitalik and others. I believe that at some point in the future, this form will slowly sprout in some corner of the world and may even become an irreversible trend.

As time goes on, the infrastructure that humanity relies on may increasingly shift from the physical world to the digital world. For me, currently, about 80% is still at the physical level, and 20% is digitalized, but in the future, the impact of digital infrastructure on everyone will certainly exceed that of the traditional physical environment.

Just like in the past, the internet community often said, "hardware is free, software is charged," there were once manufacturers that gave away phones for free, but content and services were charged long-term. I think the future may be similar: the "hardware" part of the physical world may bear a lighter burden, while what truly requires continuous payment will be the "services" in the digital world.

From this perspective, I strongly agree with a point you mentioned earlier: the blockchain infrastructure relies on physical resources such as electricity, networks, and chips. Miners and nodes consume these resources to provide network services, and the money they earn should bear most of the tax responsibilities to the physical world. For C-end individuals, they enjoy the digital services provided by these nodes and miners, so they pay "service fees" to the network through Gas fees, which are then used by miners and nodes to fulfill tax obligations to the real world.

So in my ideal model, it would likely be a two-layer structure:

The first layer: infrastructure providers (miners, nodes) pay taxes to the physical world;

The second layer: individual users indirectly pay fees to the network through Gas fees, which the network then feeds back into the real-world tax system.

As a result, in the future, as the proportion of human digital expenditures continues to increase, the direct tax burden on the physical world will gradually decrease, while the blockchain network will resemble a self-governing micro-tax system, fulfilling corresponding real obligations through Gas mechanisms and distribution structures.

Calix: I think this is a very imaginative and forward-looking idea. I also believe that with the development of the crypto industry, it will certainly carry an increasingly large asset volume and that the deep integration with traditional finance will accelerate. In the future, it may replace some parts of traditional finance that are inefficient and lack transparency, and at that time, it will inevitably require matching new legal systems and regulatory frameworks.

Many of the viewpoints you shared today are very enlightening. As we conduct our current business, we also need to think more about what might happen in the future and even try to promote some changes. I would like to add a point regarding RWA (Real World Assets); currently, many assets on-chain are essentially achieved through layers of packaging, nesting, and contract mapping, and the on-chain and off-chain remain quite separated. However, this may just be a transitional phase. In the future, if the legal system is more complete, asset information will be more directly and transparently on-chain, and those complex nests may gradually disappear.

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