Web3 Compliance Insights: Do Crypto Earnings Need to Be Taxed?
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Web3 Compliance Insights: Do Crypto Earnings Need to Be Taxed?
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Navigating Web3 tides with focused insightsAuthor: FinTax
At the time of this discussion, global regulatory compliance scrutiny on crypto assets continues to intensify. Countries are progressively enhancing tax information exchange and tracking of on-chain assets, overseas accounts, and cross-border transactions. In this conversation, Calix and William draw upon their respective cross-border tax expertise and on-chain operational experiences to discuss pressing topics such as global tax compliance for crypto assets, tax planning, and the ongoing regulatory tug-of-war. The two also share their visions for an ideal future Web3 tax system and analyze real-world cases involving tax implications across various scenarios including exchange compliance, DeFi, mining, and airdrops.
To Whom Should Cross-Border Income Be Taxed?
Calix: Let me start with a "soul-searching" question. You're involved in mining and your company sometimes pays bonuses in cryptocurrency. For income like that, how do you typically fulfill your tax obligations?
William: That's a very real question. I strongly agree with a point you previously raised: since we benefit from the infrastructure and business environment provided by certain countries or regions, fulfilling tax obligations is only reasonable. But reality isn't that simple. Our clients span North America, Europe, the Middle East, and other markets—this income relies on conditions provided across multiple jurisdictions, making it difficult to attribute entirely to any single location.
Although I mainly serve U.S. clients and earn most of my income from the American market, determining exactly which jurisdiction should receive this tax remains unclear.
Overall, I'm willing to pay taxes, but for this type of income, deciding where the money should go isn't straightforward. After all, the generation of this income doesn't solely depend on my physical location.
Calix: Your answer hits the nail on the head. Web3 projects are inherently international and decentralized; income can't be precisely attributed to one specific place. Economic activity depends not only on client origins but also on the platforms, networks, and infrastructure used. So, who ultimately deserves to collect this tax is indeed a complex issue worth deep exploration.
To be honest, despite years working in taxation, I've always had my own uncertainties about this. Under current tax laws, I might be considered a tax resident of mainland China, possibly also subject to tax obligations in Singapore, yet my business primarily targets North America, and sometimes compensation flows through a Hong Kong entity. While strict legal compliance may offer apparent answers, determining what’s truly fair requires deeper thought. For Web3 practitioners, these discussions often exceed the boundaries of traditional tax frameworks.
William: Exactly. The core issue is that the evolution of the global tax regulatory system struggles to keep pace with technological and industrial advancements. Regulators continuously try to catch up, but industry changes and technological innovations always stay ahead. This state of being “chased” will likely persist long-term, maintaining a dynamic balance between regulation and industry.
Case Study: Tax Back-Payment for Crypto Trading by Individuals in Mainland China
Calix: Recently, two topics have been trending among Chinese-speaking users on Twitter. One involves an announcement from Zhejiang's tax authority stating that an individual was required to pay back taxes due to crypto trading. Through certain channels, we learned that after CRS (Common Reporting Standard) information exchange, the tax bureau discovered unusual balances in his overseas bank account and requested an explanation of fund sources. He clarified that the funds came from investment gains, including crypto investments, thus triggering tax liabilities.
This case doesn’t surprise me—it’s within my professional domain—so I find it normal and highly representative. William, you’ve been deeply involved in on-chain projects like DeFi and mining. What’s your take on this case?
William: Indeed, it's highly representative. We anticipated early on that crypto trading would eventually fall under taxation. However, when it actually happens close to home, especially for many Chinese individuals, the impact is significant. Traditional DeFi or purely on-chain activities have historically been hard to regulate, often relying on user self-compliance. Past regulatory barriers meant tax authorities lacked strong enforcement capabilities over relatively niche, fragmented, and hard-to-trace on-chain activities.
I believe the reason this is happening now is linked to broader industry trends. Recently, numerous reports indicate that some U.S. stock investors received text messages or calls demanding back-tax payments, signaling regulators are tightening surveillance on personal foreign income—with overseas securities investment being the first entry point.
The logic behind this is clear: the intersection between U.S. stocks and crypto is growing. From Robinhood to Asian brokers like Tiger Brokers and Futu, even Guotai Junan International, many financial institutions are engaging with crypto assets. The connection between equities and crypto has become inseparable. Once regulators begin comprehensively reviewing foreign-sourced income, examining U.S. stocks naturally brings crypto into view—especially given the substantial scale of crypto assets today.
Moreover, this "stock-crypto integration" isn't temporary. In the U.S., companies are exploring tokenizing equity shares; in Asia, conversely, crypto assets are being injected into listed companies to boost stock prices, gain premiums, and drive secondary market performance. These integrations are driven by profit incentives—whether "stocks turning into tokens" or "crypto entering stocks"—which further strengthen ties between the two domains, inevitably making "paying taxes on crypto trading" unavoidable.
In summary, crypto assets and stock markets are now deeply intertwined. As this trend progresses, tax obligations related to crypto trading will become increasingly rigid, leaving less room for avoidance.
Calix: This perspective is quite novel—I hadn’t deeply considered the "stock-crypto linkage" angle before. For stock investments, people are accustomed to knowing where profits were earned and where taxes apply. Whether capital gains or business income from quantitative trading, the framework is relatively clear.
But with cryptocurrencies, certain regions—particularly mainland China—still face ambiguity regarding whether taxes are due and what kind they are. Yet, observing the evolution of stock and token-based businesses, this line of reasoning is insightful and serves as a timely reminder that this is a critical long-term issue requiring sustained attention.
The Long-Term Game Between Regulation and Tax Avoidance
William: Based on your extensive hands-on tax experience, now that this precedent has been set, do you think people will start avoiding crypto out of fear of tax risks? Or will others continue operating aggressively in the crypto space, attempting to evade taxes—or even skip reporting altogether? What impact might this have on the industry’s direction?
Calix: This is a classic real-world dilemma. I’ve always believed that regulation and resistance to regulation coexist—not just in crypto, but across traditional industries too. Tax authorities naturally aim to collect every possible dollar owed, while taxpayers universally seek ways to legally minimize their tax burden. These opposing interests are inherently contradictory.
From my experience, this dynamic resembles a fundamental human conflict—constantly cycling through tension, balance, renewed tension, and re-balancing. Especially in recent years, regulatory methods have diversified, and tools have become increasingly digital. Take mainland China: tax oversight capabilities have rapidly improved, along with信息化 levels. At the same time, tax avoidance techniques continue evolving. Early tactics included cash transactions, hidden income, and money laundering—the latter referring here to illegal tax evasion.
Then came cryptocurrencies, offering new avenues for some taxpayers. For a considerable period, crypto was notoriously difficult for tax agencies to track. Even if some regulators possessed on-chain tracing abilities, actual enforcement often lacked strength, allowing some individuals to reap short-term benefits during this window.
But the key determinant going forward is scale. In the early days of crypto (2013–2017), many large mining farms and miners prioritized financial and tax compliance—it was a foundational principle. Yet, there were also major players willing to risk noncompliance. Both models have coexisted.
Trends show that early "wild west" phases placed low emphasis on compliance, whereas today, more large institutions prioritize it above all. Particularly in mainstream markets like Hong Kong, Singapore, Europe, and the U.S., regulators—especially tax authorities—are gaining deeper understanding of crypto assets. This shift is irreversible.
For individual investors—retail traders or Web3 project employees—compliance largely depends on transaction size. Small-scale activities may only require basic reporting. Enforcement must consider cost-benefit ratios unless high-profile "demonstration cases" emerge, such as the widely discussed Twitter case of someone paying tens of thousands in back taxes—an amount not huge, but symbolically significant.
Overall, large institutions will only increase their focus on compliance, as it's essential for sustainable operations. Meanwhile, individual retail behavior mirrors the real world: fundamentally tied to the magnitude of financial exposure.
The Boundary Between Illicit Income and Asset Compliance
William: There’s another fascinating point. Many feel that paying taxes somehow legitimizes property or income. But frankly, in crypto, there are plenty of "rug-pull" schemes—in legal terms, questionable financial practices—that generate high returns. If those involved pay taxes accordingly, does that effectively "launder" inherently illegitimate funds? This question may be sensitive—what’s your view?
Calix: Excellent question—one I frequently ponder. Paying taxes proves fulfillment of tax duties, but cannot alone establish the broader legality of funds. If money violates other financial regulations—such as SEC rules—or involves fraud or financial crimes, paying taxes doesn’t shield it from penalties or追溯 by other regulators.
For example, if funds relate to money laundering, organized crime, or gray-area activities breaching international anti-money laundering standards—or if someone in Hong Kong violates local customs or Monetary Authority regulations—paying taxes in Hong Kong doesn’t automatically make the money "clean." Tax compliance and fund legitimacy are distinct legal dimensions—they shouldn’t be conflated.
William: I agree. Let me add: I’ve long believed the topic of "taxation" should be brought forward earlier because recognizing an asset as legitimate must precede any discussion of taxation. If an asset’s status isn’t clearly established, it can't even be treated as a quantifiable property, making declaration and payment irrelevant.
In China’s overall context, this area remains ambiguous, largely because asset legitimacy itself hasn’t been fully acknowledged. This makes developing tax habits difficult and hinders regulatory progress. Globally, however—especially in most developed nations—crypto asset legality is already well-defined. Once legal status is confirmed, local tax authorities demand compliance on associated income.
For many Chinese individuals, if income is definitively classified as foreign taxable income, completely avoiding reporting becomes theoretically near-impossible. The current timing reflects gaps in international systems. Previously, people assumed blockchain’s technical barriers and opacity protected them, fostering a sense of "illusion." But a clear trend now is the rise of RegTech (regulatory technology), steadily improving regulators’ data access and analytical capabilities. Numerous service providers support this, significantly narrowing the information gap between regulators and the industry.
Tax Planning Opportunities for Enterprises and Individuals in Crypto
William: Let me ask a practical question. Since average users can hardly fully "avoid" these taxes, are there still opportunities for compliant tax planning? Based on your experience, how much tax optimization space exists for enterprises and individuals in crypto?
Calix: Let me give a rather blunt conclusion: for most ordinary people, tax planning options are extremely limited. The main reason is that individual income sources are usually simple—primarily salaries, bonuses, or minor allowances—all thoroughly documented at the corporate level. Once employers report accurately, individuals have little room left for further "optimization."
Thus, for typical individuals, the best they can do is fully utilize existing tax incentives in their jurisdiction—such as tax-free thresholds, child support deductions, elder care credits, or marital exemptions. Effectively leveraging these basic reductions and ensuring solid, compliant filings already represent the "optimal solution."
William: Yes, sounds like very limited room indeed.
Calix: But for high-net-worth individuals or enterprises, the situation differs. Their income forms and structures are typically more complex, diverse in origin, larger in volume, and involve more cross-border tax considerations. This complexity naturally creates greater maneuverability.
In short, different income types face varying tax rates and treatment—for instance, salary is taxed at full marginal rates, while capital gains or dividend income often enjoy preferential rates or exemptions. Layered with inter-jurisdictional tax differences—between mainland China, Hong Kong, Singapore, the U.S., or Canada—significant disparities in system design and tax burdens create potential "arbitrage spaces" in cross-border arrangements.
Also remember: whether civil law or common law systems, tax laws are text-based, often leaving interpretive "gray zones." High-net-worth individuals and large institutions possess sufficient resources and expert advisory teams to explore and exploit these spaces, optimizing tax liability within legal boundaries.
This is why I believe the middle class is among the most burdened groups: incomes appear decent, achieved through hard work at companies or tech giants, with annual packages reaching hundreds of thousands and frequent overtime—but their income structure is singular, offering minimal flexibility and almost no tax-saving leeway. By contrast, the wealthy and large institutions earn more and wield far more tools.
Hence, in nearly every country, the middle class tends to be a primary tax scrutiny target—earning above sensitive thresholds yet lacking sufficient resources for legal tax mitigation, making them easiest to "precisely target" during enforcement.
Potential Tax Liabilities and Optimization for Mining, Airdrops, DeFi, and Other Earnings
William: Calix, your point about income structure is fascinating. Traditionally, income sources were simple: salary and bonus. But crypto offers many middle-class and ordinary people diversified income streams—mining, airdrops, staking, DeFi yields, etc. A $2,000 miner is affordable for many—owning several units is like running a small "enterprise." These bring new complexities. Could you briefly explain the potential tax obligations across different income forms?
Calix: Instead of directly discussing "how to pay taxes," let me briefly touch on whether there are legitimate spaces for optimization—though this topic is sensitive, I believe it's worth mentioning.
While ordinary people now have more varied income sources, the core tax challenge remains: the income earner is usually still oneself, without layered structures like trusts, corporations, or funds to distribute tax liability. For example, mining is generally treated as business income in most jurisdictions; airdrops typically don’t trigger immediate tax liability if unclaimed or unused—only upon conversion to fiat or exchange for other assets, when realized gains occur, does reporting become necessary. Staking or DeFi yields may qualify as capital gains in some jurisdictions—often taxed lower than business income, and in some places, not taxed at all.
Thus, there is indeed space for "reasonable classification"—for example, interpreting certain high-taxed business income as capital gains or other favorable categories under local tax law. But this requires gray areas in legislation and incomplete on-chain traceability in practice. Otherwise, once data becomes fully visible, such space shrinks dramatically.
Ultimately, large-scale tax planning isn't realistic for ordinary individuals, as all income is registered under their personal name, easily classified as business income or high-tax categories. Relatively speaking, events like airdrops or forks, if permitted locally, might qualify for low-tax or deferred treatment. Many study how to legitimately convert high-tax items into lower-rate categories—depending heavily on whether local laws provide flexibility and whether actions remain compliant.
Practical Considerations in Digital Nomad Identity Planning
William: Let me follow up: many in crypto now identify as "digital nomads." Some previously didn’t care, assuming lawful operations and domestic tax filings sufficed. But do you think more people will proactively shift to overseas tax residency? For example, leveraging bilateral tax treaties to claim, “I paid taxes in Singapore, so I don’t need to pay again in mainland China.” Will this become a popular legal planning route?
Calix: This is indeed a valid strategy—legitimately using different tax jurisdictions to reduce overall tax burden. But I’d caution: regardless of where you file, always retain records of deposits, withdrawals, and transactions. These serve as crucial evidence during tax inquiries, helping avoid unnecessary complications. Moreover, with the global CRS (Common Reporting Standard) mechanism in place, complete "concealment" of financial data is increasingly difficult. Overall, cross-border identity planning is viable, but documentation must be thorough, and required disclosures made truthfully.
Let me add: take your example of Singapore. Recently, a friend asked a similar question. He works in Singapore, earning income in USDT or fiat, paying taxes locally. He wondered: must he still declare in mainland China? He spends fewer than 183 days annually in mainland China.
Under mainland tax law, the key criterion for tax residency is the "183-day rule," but finer regulations and practice also consider nationality, household registration, and primary social ties. If these connections remain in China, one could still be deemed a Chinese tax resident—even while abroad—requiring full annual reconciliation and credit for taxes already paid. Additionally, the type of Singaporean status held—EP (Employment Pass), PR (Permanent Residency), or otherwise—may influence outcomes. There’s no one-size-fits-all formula; each case demands individual analysis.
William: So even if one stays in mainland China for fewer than 183 days per year, it’s not automatically "safe."
Calix: Correct. It’s not absolute. In international taxation, the "tie-breaker rule" examines family ties, center of economic interests, and daily life patterns to determine primary tax residence layer by layer.
William: Yes, many overlook this. Even with overseas presence and visas, if family and social anchors remain in China, under the "tie-breaker rule," one often remains classified as a Chinese tax resident. This aspect requires careful attention.
Envisioning the Future of Crypto Taxation
Calix: Finally, I’d like to pose a more open-ended question—perhaps a fitting conclusion to our dialogue.
From your personal perspective, as a long-time crypto practitioner or user, what kind of tax system would be most friendly to Web3 users? Or, what ideal tax model do you personally envision and hope for?
William: This reflects my personal views, not representing any company.
I've long resonated with the crypto-native concept of the "sovereign individual" and lean toward idealism, supporting possibilities like the "Network State" mentioned by Vitalik Buterin. I believe that at some point, this model will quietly emerge somewhere in the world, potentially becoming an unstoppable trend.
Over time, the infrastructure humanity relies on may increasingly shift from the physical to the digital realm. For me, perhaps 80% remains physical today, 20% digital—but in the future, digital infrastructure will exert greater influence on individuals than traditional physical environments.
Just as the internet industry once said, "hardware is free, software is charged," with manufacturers giving away phones while monetizing content and services long-term, I suspect the future may follow suit: the "hardware" component of the physical world may carry lighter burdens, while ongoing payments will increasingly target "services" within the digital world.
From this angle, I strongly agree with a point you previously made: blockchain infrastructure relies on physical resources like electricity, network, and chips. Miners and nodes consume these to provide network services, so they should bear most tax responsibilities toward the physical world. End users, meanwhile, consume these digital services provided by nodes and miners, primarily paying "service fees" indirectly via Gas fees, with miners and nodes fulfilling tax duties in the real world.
So in my ideal model, there would be a two-tier structure:
First tier: Infrastructure providers (miners, nodes) pay taxes to the physical world;
Second tier: Individual users pay fees indirectly through mechanisms like Gas fees, which then feed back into the real-world tax system via network-level distribution.
As humanity’s digital spending share grows, direct physical-world taxation could gradually decline, while blockchain networks themselves evolve into self-governing micro-tax systems, using Gas mechanisms and allocation structures to meet corresponding real-world obligations.
Calix: I find this vision highly imaginative and remarkably forward-thinking. I also believe that as the crypto industry evolves, it will handle ever-larger asset volumes and integrate more deeply with traditional finance at an accelerating pace. It may eventually replace inefficient, opaque segments of traditional finance, necessitating new legal systems and regulatory frameworks.
Your insights today have been profoundly inspiring. As we conduct our current work, we must continually anticipate future developments and even strive to drive positive change. I’d like to add one thought on RWA (Real World Assets): currently, asset tokenization mostly relies on layered packaging, nesting, and contract mapping, keeping on-chain and off-chain realms quite separate. But this may just be transitional. With better legal frameworks, asset data could become more directly and transparently integrated on-chain, gradually eliminating today’s complex intermediaries.
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