China conducts synchronized audits of overseas income in four regions—how should Web3 practitioners respond?
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China conducts synchronized audits of overseas income in four regions—how should Web3 practitioners respond?
Web3 practitioners should pay attention to reporting overseas cryptocurrency asset income and make reasonable tax arrangements.
Navigating Web3 tides with focused insightsAuthor: FinTax
News Overview
From March 25 to 26, 2025, tax authorities in Hubei, Shandong, Shanghai, and Zhejiang provinces/municipalities of China simultaneously issued announcements within a 48-hour window, launching coordinated verification actions targeting the reporting of overseas income by Chinese residents. China formally committed in September 2014 to implement the Common Reporting Standard (CRS) for automatic exchange of financial account tax information (AEOI), and completed its first round of data exchanges with other CRS participating jurisdictions in September 2018. This included key countries such as the UK, France, Germany, Switzerland, and Singapore, as well as traditional tax havens like the Cayman Islands, British Virgin Islands (BVI), and Bermuda, covering core data such as account balances and investment returns. In this latest action, tax authorities across these four regions identified multiple typical cases, recovering unpaid taxes ranging from 127,200 to 1,263,800 yuan, applying a five-step enforcement approach: “notification and reminders,督促整改, interviews and warnings, formal investigation, and public exposure.”
FinTax Brief Commentary
1. Interpretation of Announcement Characteristics
This tax verification campaign exhibits two prominent features. The first is an expanded scope of scrutiny on overseas income, now extending to middle-class individuals. Unlike previous efforts focused primarily on high-net-worth individuals, the taxpayers involved in this round have moderate to upper-moderate asset and income levels. For example, one case disclosed by Zhejiang’s tax authority involved back taxes of 127,200 yuan. This shift indicates that mainland Chinese tax authorities are increasingly focusing on overseas income among the middle-income population.
The second feature is complementary coordination across the four regions’ verification scopes. On one hand, Zhejiang's private capital cross-border flows, Shanghai's offshore financial transactions, Shandong's traditional manufacturing overseas expansion, and Hubei's new manufacturing sectors collectively cover major scenarios through which middle-class individuals generate overseas income. On the other hand, the synchronized release of announcements across multiple regions may signal top-down unified directives, suggesting a transition from individual self-reporting of overseas income toward proactive, rigorous audits conducted by tax authorities.
2. How Does Mainland China Tax Residents’ Overseas Income?
Mainland China applies a global taxation principle to tax resident individuals—a principle established since the 1998 "Interim Measures for the Administration of Individual Income Tax on Overseas Income" and still in effect today. At the beginning of 2020, the Ministry of Finance and the State Taxation Administration issued the “Announcement on Policies Regarding Individual Income Tax on Overseas Income” (Announcement No. 3 of 2020 by the Ministry of Finance and the State Taxation Administration, hereinafter referred to as “Announcement No. 3”), further clarifying the tax treatment and administration of Chinese residents' overseas income. The foundation of the global taxation principle lies in safeguarding national tax sovereignty and achieving social equity. Based on this principle, mainland China’s requirements for taxing residents’ overseas income are generally as follows:
In terms of taxpayers, under the "Individual Income Tax Law of the People's Republic of China," an individual qualifies as a “Chinese tax resident” if they meet either of the following conditions: 1. Having a domicile in China: refers to individuals who habitually reside in China due to household registration, family ties, or economic interests; even those working or living abroad long-term may still be considered residents if they have not relinquished their hukou (household registration) or familial connections. 2. Residing in China for 183 days or more: individuals who accumulate 183 days or more of residence within a tax year (January 1 – December 31), regardless of whether they hold a domicile, are deemed residents.
Regarding taxable income scope, resident individuals must declare and pay individual income tax on all income derived both within and outside China under China’s Individual Income Tax Law. However, non-domiciled individuals who accumulate 183 days or more of residence in China during a tax year are exempt from paying individual income tax on income sourced outside China and paid by foreign entities or individuals, provided that in any of the preceding six years, they had less than 183 days of cumulative presence in China or were absent continuously for over 30 days.
3. Tax Implications for Web3 Practitioners
Announcement No. 3 specifies categories of taxable overseas income, including overseas comprehensive income (wages and salaries, labor service remuneration, manuscript fees, royalty income), business income, and other income (interest, dividends, bonuses, property transfer gains, property lease income, windfall income). While classification aligns largely with domestic income, calculation methods differ: for instance, overseas comprehensive income and overseas business income must be combined with their domestic counterparts for consolidated tax computation. In contrast, other types of overseas-sourced classified income are taxed separately and not merged with domestic income.
Tax treatment of crypto assets in mainland China currently involves numerous contentious issues. The following examples illustrate several common scenarios:
For commercially operated mining activities conducted continuously overseas, tax authorities may classify them as business income, allowing deductions for essential costs such as equipment and electricity—consistent with their capital-intensive and ongoing investment nature. However, when individuals engage in mining personally, tax classification becomes problematic: treating it as windfall income matches the randomness of earnings but leads to disproportionately high tax burdens due to disallowed cost deductions; alternatively, classifying it under property transfer gains faces challenges due to the lack of stable valuation benchmarks for crypto assets, making it difficult to reasonably determine appreciation amounts and potentially triggering disputes over tax calculations.
Another common scenario involves mainland Chinese residents earning profits from crypto asset trading, where determining commercial substance becomes critical. If there is a fixed operational base, hired team, and continuous trading activity, such behavior could be classified as business income. High-frequency traders face increased risk of being reclassified as conducting business operations, whereas ordinary investors typically pay tax only on capital gains, provided they can present complete cost documentation proving original asset values to avoid double taxation and excessive deemed profit rates.
4. What Should Mainland Web3 Practitioners Pay Attention To?
For overdue declarations or intentional concealment of overseas income, mainland Chinese tax authorities have established a tiered liability system. According to Articles 32 and 63 of the "Tax Collection and Administration Law," failure to file on time or submitting false declarations triggers escalating penalties including tax recovery, accumulated late-payment surcharges, administrative fines, and even criminal prosecution: starting the day after the statutory filing deadline expires, a daily surcharge of 0.05% of the unpaid tax accrues, creating significant financial pressure. For confirmed cases of tax evasion, in addition to full recovery of evaded taxes, fines ranging from 50% to five times the amount of underpaid taxes are imposed based on factors such as intent and complexity of concealment methods. If the case meets thresholds for criminal investigation, the matter will be referred to judicial authorities for criminal liability.
Against the backdrop of increasing global tax transparency and advancements in regulatory technology, tax issues surrounding cross-border crypto earnings warrant greater attention. Currently, Chinese tax authorities, leveraging tools such as CRS information exchanges, have achieved deep oversight into core data including overseas account balances and investment returns. Web3 practitioners should consider making reasonable tax arrangements while truthfully declaring and paying taxes. Particularly evident from the recently disclosed cases, the combined cost of late-payment surcharges and fines far exceeds the originally owed tax amount. Specifically, mainland Chinese Web3 practitioners can mitigate risks in two ways: first, by independently or with professional assistance reviewing past overseas income to determine potential tax liabilities and taking corrective measures; second, by continuously adjusting and updating their tax planning strategies to comply with relevant laws and regulations while minimizing overall tax burden.
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