Expert Analysis: Offshore Income Tax Backlog Becomes Hot Topic—Are Crypto Whales at Risk? What to Do If Facing an Audit?
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Expert Analysis: Offshore Income Tax Backlog Becomes Hot Topic—Are Crypto Whales at Risk? What to Do If Facing an Audit?
Although the law has not yet clearly defined it, there are catch-all provisions in tax law such as "income from property transfer," and precedents already exist where individuals with high profits from cryptocurrency trading have been retroactively taxed.
Navigating Web3 tides with focused insightsCompiled by: Wu Shuo Blockchain
This AMA was hosted by FinTax, with Calix, founder of FinTax, and Simon, Senior Tax Manager, sharing insights. Calix analyzed China's recent back-tax enforcement actions targeting overseas income, focusing on their impact on Web3 professionals and investors. He pointed out that mainland tax authorities can cross-verify residents' overseas income through CRS data, foreign exchange records, payment platforms, and other channels, making tax administration increasingly visible and systematic. Regarding cryptocurrency income, although the law has not yet clearly defined its nature, catch-all clauses such as "income from property transfers" exist in tax law, and there have already been precedents of individuals being retroactively taxed for high profits from trading cryptocurrencies. The future tax risks associated with crypto assets cannot be ignored. Simon explained the criteria for determining "tax residency" and related tax exemption provisions, offering practical advice for individual investors. Both also addressed practical issues such as how to compliantly report on-chain labor income, tax audit cycles, and burden of proof.
The following is a textual summary. For the full audio, please listen on Xiaoyuzhou.
Was the back-tax campaign sudden?
Cat Brother: Calix, from what I understand, since the beginning of this year, tax bureaus across various provinces in mainland China have launched a series of tax audits targeting individuals. Could you please share some details about these developments?
Calix: Specifically, starting around March and April this year, tax bureaus in regions including Shanghai, Zhejiang, Shandong, and Hubei began issuing public notices requiring Chinese tax residents to pay back taxes on overseas income, accompanied by penalty decisions. This isn't actually a new policy or sudden event—based on past experience, every year there are cases of high-net-worth or high-income individuals being required to pay back taxes due to unreported overseas income. In the past, such cases were rarely disclosed or reported. What's different this year is that information is now being made public, attracting media attention, indicating that this round of enforcement is more "visible" and systematic. For example, this year, specific cases have been publicly released by tax authorities. While the amounts involved aren't huge, they clearly serve as warning signals, reflecting an upgrade in enforcement mechanisms—using specific risk indicators and internal methods like the "five-step approach" to systematically evaluate individuals' overseas income.
From a deeper perspective, two key factors are driving this campaign:
First, tax authorities have significantly improved their tax administration technology and capabilities in analyzing tax-related data. Previously, they mainly relied on voluntary taxpayer reporting, but now they integrate information and use technical tools to connect previously isolated data silos, such as bank and foreign exchange records.
Second, fiscal pressures are real—though this point is difficult to elaborate on, it remains one of the driving forces.
Currently, common targets include those who invest in Hong Kong or U.S. stocks and those who monetize equity from overseas internet companies. However, we believe that Web3-related crypto earnings are also highly noteworthy and may become a key focus in the future.
Do investors using Hong Kong and U.S. stock brokers need to pay taxes?
Cat Brother: Regarding the recent tax audits, I've noticed some KOLs posting that many of their friends have received calls from local tax bureaus demanding self-inspection and back-payment of taxes on overseas income from 2021–2023. Although this income may not necessarily be crypto-related, it definitely involves Hong Kong and U.S. stocks. Some even claim explicitly that if you use brokers like Tiger Brokers, Futu Securities, or IBKR Hong Kong, you will be audited by Chinese tax authorities, subject to a 20% income tax, and only profitable trades will be counted. Is this true?
Calix: Indeed, many KOLs have recently discussed these situations. Based on actual cases we’ve encountered, among our clients, there are indeed individuals targeted from these scenarios, including those consulting through brokers or crypto investors. Currently, we see three main types of accounts under scrutiny: overseas stock accounts, overseas bank accounts, and family trusts.
Based on public information, we cannot currently confirm whether tax authorities obtain data directly from brokers. But regardless of the source, the root cause lies in the fact that information from these overseas financial accounts is transmitted back to Chinese tax authorities via the CRS (Common Reporting Standard) mechanism. Many people don’t realize that under CRS, as long as you are a Chinese national, your overseas financial account balances and key information are periodically aggregated and sent back to the Chinese tax bureau.
The reason such audit cases weren’t widely known before is that in earlier years, tax authorities may not have had sufficient resources or tools to utilize this data. But in recent years, their data analysis capabilities have significantly improved, and they have started actively analyzing CRS data.
Therefore, it doesn’t matter whether brokers are used as the identification channel. The key point is: as a Chinese tax resident, if your overseas assets and gains are sufficiently "visible," you are likely to come under the radar of tax authorities. In the long term, such overseas assets will inevitably attract attention and regulation from Chinese tax authorities.
Will middle-class individuals also be audited?
Cat Brother: If high-income, high-net-worth individuals are currently the primary targets of tax authorities, will middle-class individuals’ overseas income also be monitored?
Calix: From several back-tax cases featured in our previous article, which received nearly 100,000 views, the amounts involved were not particularly large and generally fall within what you’d call the “middle class.” Frankly speaking, high-net-worth individuals often have stronger tax planning capabilities and higher tax exposure, whereas middle-class individuals are actually more likely to be “exposed” in the tax system’s view. The reason is that middle-class individuals usually don’t hire professional tax advisors or lawyers for planning. Their overseas income often comes from salaries or labor compensation, which typically needs to be transferred back to China through foreign exchange channels, leaving clear traces in bank statements and FX quotas. One critical indicator currently used by tax authorities is personal foreign exchange transaction records. For example: have you fully used up your annual FX quota? Are there multiple cross-border wire transfers? Are there frequent FX transactions among family members? If these data show anomalies, tax authorities can reasonably infer that you may have overseas income sources. So rather than debating whether the middle class is a priority target, from the standpoint of data availability, middle-class overseas income activities are easier to track and thus face higher identifiability risks.
Has the crypto industry been included in tax scope?
Cat Brother: What is the stance of Chinese tax authorities toward crypto-related income? Will they pay special attention to tax collection in this area?
Calix: This is an interesting question. In fact, our company initially chose to provide tax and financial services in the crypto space precisely because of real-world cases. When I first started my venture, providing tax compliance services for the crypto industry wasn't widely accepted within the community. Many people believed “crypto shouldn’t comply,” finding the idea strange and difficult. But I persisted because early in my career, while serving as CFO at a U.S.-listed company, a friend made over 100 million RMB trading crypto on exchanges and was subsequently targeted by tax authorities—not only required to pay back taxes but also hit with heavy fines and penalties, going through an extremely painful process. So I can clearly say: taxing crypto trading income is not baseless; there are indeed numerous real cases involving large-scale tax audits. It's just that due to the relatively closed nature of the community and limited information dissemination, outsiders may not know. As for why we rarely see large-scale crypto tax enforcement actions, I believe the core issue is that the legal framework hasn’t yet clearly defined the nature of crypto income. Without a clear legal basis, it’s difficult for tax authorities to implement comprehensive taxation. However, we should note that China’s Individual Income Tax Law contains catch-all clauses such as “income from property transfer” and “other income,” which can serve as grounds for taxation. The phase where Bitcoin surpassed $100,000 has already unleashed massive wealth effects. This industry has become a major hub for high-net-worth individuals, and tax authorities certainly won’t ignore it. In Western countries, crypto tax rules are relatively clear, specifying exactly what taxes apply in which scenarios—though tracking compliance and voluntary reporting remain separate challenges. By comparison, China currently lacks a systematic tax framework. I believe tax authorities are maintaining close technical monitoring, and some officials have quite professional understanding of cryptocurrencies.
How do tax authorities identify overseas income?
Cat Brother: How do mainland Chinese tax authorities learn about mainland residents’ overseas income? If I don’t repatriate my overseas income to China or keep it in non-Chinese financial institutions, will I still be taxed?
Calix: This isn’t complicated—the core is the CRS framework. The OECD’s CRS (Common Reporting Standard) has been adopted by many countries, aiming to track domestic tax residents’ overseas financial accounts to detect potential tax avoidance. The information exchanged under CRS mainly includes basic financial data such as account balances and holder identities. In theory, account information of Chinese nationals or individuals with Chinese tax residency held at overseas financial institutions is regularly shared back with Chinese tax authorities. However, it’s important to note that account balance data alone cannot directly trigger taxation. Authorities must reconstruct the source and purpose of funds, communicate with taxpayers, and reasonably determine applicable tax categories before completing tax assessment. This means the process isn’t fully automated; after data capture, manual verification and evidence gathering are required. Of course, the U.S. is an exception—it hasn’t joined CRS but instead uses its own independent information-sharing framework (FATCA). Although there’s no CRS data exchange between China and the U.S., from what I understand, other channels might still allow partial information access, though the specifics haven’t been publicly disclosed, so I won’t speculate here. Additionally, beyond CRS, tax authorities are now also leveraging cross-border payment data, payment platform information, and fund flow records for indirect identification. For instance, frequent receipt of overseas payments or fund flows closely tied to overseas business can serve as supporting evidence of overseas income.
One final point: with corporate "going global" becoming commonplace, many sizable domestic companies now establish branches, accounts, or generate revenue in Hong Kong or other overseas markets. Once there are substantial domestic fund flows, tax authorities can easily trace and verify whether overseas business income exists.
What to do after receiving a tax audit notice?
Cat Brother: Suppose someone is notified for a tax review—how long does the entire process typically take? Is there much room for negotiation or compromise during this process? Could you share one or two relevant cases?
Calix: Generally, from notification to preliminary review completion, the cycle takes about two months. If the case enters formal audit, it may extend to six months. The exact duration depends on several factors: cooperation level between tax authorities and the taxpayer, case complexity, and the trajectory of communication and negotiation. These variables make each case highly individualized. As for negotiation flexibility, we’ve seen many cases with significant variation. For example, tax authorities might initially propose a high tax amount, but later, upon data review, find part of the funds belong to living expenses, debt repayment, or overlooked loss offsets—all of which could substantially reduce the final taxable amount. The gap between actual tax paid and initial assessment can sometimes exceed 90%. The key lies in whether information is complete and evidence sufficient. If tax authorities already have access to your financial account data—such as deposit and withdrawal records and account balances from a trading platform—they may directly calculate your actual profit, including principal invested and cumulative losses. But if your fund pathways are complex—e.g., money moving across multiple accounts, frequent transactions with corporate accounts, or diverse funding sources—they may not fully reconstruct the real picture. In such cases, authorities will ask you to explain the source and use of funds. For example: is this money your income? Is it just inter-account transfers? Is it investment or living expense? You’ll need contracts, invoices, fund details, and transfer records to substantiate your claims. Only when tax authorities accept these documents can they serve as a basis for adjusting the tax base. Otherwise, failure to provide a clear explanation may result in tax liability being assessed based on "maximum possible profit."
How is tax residency determined?
Cat Brother: Does holding Chinese nationality automatically make someone a Chinese tax resident?
Calix: Determining tax residency is actually a technical matter, frequently asked by clients. Let me invite Simon, Senior Tax Manager at FinTax, to explain this in detail.
Simon: Hello everyone, I’m Simon. The concept of “tax residency” is crucial in China’s individual income tax system. Many clients often ask: since I hold Chinese nationality, am I automatically a Chinese tax resident? Actually, no—nationality and tax residency are not entirely equivalent. Chinese tax law primarily uses two criteria to determine whether someone is a Chinese tax resident: the “residence standard” and the “days-of-presence standard.”
First, the residence standard: even if you live or work overseas long-term, if you haven’t formally renounced Chinese nationality and your family or main economic interests remain in China, tax authorities may consider you to have a “residence” in China, thus treating you as a Chinese tax resident.
Second, the days-of-presence standard: if you reside in China for 183 days or more within a tax year (January 1 to December 31), you may be deemed a Chinese tax resident even without a formal residence. In practice, we’ve seen many such cases: clients who stayed abroad for extended periods due to study, work, visiting relatives, or tourism, but upon returning to China and resuming regular residence, tax authorities often认定 their habitual place of abode remains in China, thus considering them Chinese tax residents.
How to report on-chain labor income?
Wayne: Hello everyone, I’m Wayne. I’d like to ask a practical question on behalf of a friend: he recently entered the industry, working on-chain jobs without participating in trading, simply receiving a salary in USDT. He wants to convert these USDT via a Hong Kong bank account into mainland China for future education or visa applications, and also wishes to file compliant individual income tax returns as income proof.
However, he’s concerned because the income is paid through corporate accounts like Backpack or BR, then transferred via Hong Kong bank account back to the mainland. After researching—including checking GPT explanations—he found some opinions stating such income, issued by exchanges, doesn’t qualify as labor compensation, so he’s hesitant to withdraw funds. How should he handle this situation?
Calix: This isn’t complicated. If he receives USDT as genuine compensation for labor and fulfilling job duties, it clearly qualifies as “labor remuneration.” The key points are: 1) retain a complete employment contract or service agreement; 2) keep records of monthly USDT disbursements; 3) preserve all on-chain transfer records, Hong Kong account receipts, and remittance paths when converting USDT to RMB, ensuring the entire fund flow forms a verifiable closed loop. As long as these documents mutually corroborate each other and clearly explain the income source and usage, this can be legally declared in China as wage income for individual income tax purposes.
Wayne: If he previously paid taxes on this income in Hong Kong, can he get a credit in China?
Calix: Yes. If he has already legally paid individual income tax in Hong Kong, upon returning to China, this income will first be consolidated into his total salary income under Chinese tax rules, and tax will be recalculated according to domestic tax law. For example, if the calculated tax liability is 20 yuan and he already paid 10 yuan in Hong Kong, 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, designed to prevent double taxation.
Wayne: That means having a formal employment contract as supporting documentation would be best?
Calix: Yes, a formal employment contract is ideal. If not available, other forms such as supplementary contracts, job descriptions, or service agreements can also be provided to prove it’s “labor-derived income.” If the company is willing to issue an official statement, it would further help gain recognition from tax authorities.
Can tax residency be planned?
Cat Brother: This leads to another question—can one plan or optimize their tax residency status through certain means?
Calix: There are indeed various strategies, depending on your goals and specific circumstances. Some are complex, such as setting up a family trust; others are simpler, like adjusting days of presence.
For example, family trusts have certain controversies regarding domestic tax treatment, but in practice, under specific structures, they have served effective tax planning functions. Of course, future policy changes are uncertain, so this method should be evaluated case by case. A relatively simpler approach is to operate based on the criteria for “tax residency” under Chinese tax law—such as the “183-day rule” and residence determination standard mentioned by Simon earlier. If someone lives overseas long-term and has no actual economic ties or residential arrangements in China, theoretically they can avoid being classified as a Chinese tax resident through proper daily arrangements and reporting. Personally, I believe China’s tax law still lacks clear operational guidance on “canceling tax residency.” In theory, someone who holds Chinese nationality or hukou but has lived abroad for years without economic activity or income in China might no longer be considered a Chinese tax resident. For instance, if you live long-term in Singapore or Hong Kong, you should be subject to local tax laws, unrelated to mainland China. However, actual implementation varies greatly, involving factors like residence, income paths, and fund allocation—so personalized planning is recommended. Legally, such space exists; the key is having a clear strategy and compliant execution.
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