If you make money from virtual currency, do you actually have to pay taxes?
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If you make money from virtual currency, do you actually have to pay taxes?
The taxation issue of virtual currency is essentially a process where a gray area gradually becomes clear.
Navigating Web3 tides with focused insightsWritten by: Lawyer Xiao Sa's Team
A few days ago, Lawyer Xiao Sa's Team received inquiries from friends regarding tax issues related to virtual currency. Summarized, it boils down to two questions: First, if I made money trading coins, do I actually need to pay tax in the Mainland? Second, if I keep the coins in Hong Kong (Thailand, Singapore, etc.), will I be safe, and will I be investigated in the future? Just so happens, Lawyer Xiao Sa's Team will discuss this matter in today's official account.
I. Tax Methods for Different Activities
The most common method is buying low and selling high to earn the difference. This is the simplest, calculated as income from property transfer. Subtract the selling price from the buying price, then deduct costs such as handling fees and on-chain Gas fees. Pay 20% tax on the remaining difference. For example, if you bought coins for 100,000 yuan and sold them for 150,000, you pay 10,000 yuan in tax on the 50,000 yuan difference. In the Mainland, there is no rule that the longer you hold, the lower the tax; holding for ten years still incurs this tax rate.
Mining is more complex and controversial. If an individual mines occasionally, declaring at 20% is generally fine. However, if you buy a large number of mining machines, build a mining farm, and hire people to mine daily, the tax bureau is likely to deem this as production and business operations, applying a progressive excess tax rate of 5% to 35%. Of course, costs such as electricity fees and mining machine depreciation can also be deducted.
For airdropped coins, you generally do not need to pay tax immediately upon receipt, as they have not been cashed out yet. However, if there is a clear market price at the time, it may also be counted as income from contingencies, taxed at 20%. When actually sold, realizing actual income, declaration is definitely required.
Earning rewards from staking or earning interest in DeFi currently has no clear guidance; it may be counted as interest or income from business operations. For small amounts, declaring as income from property transfer is generally fine; for large amounts, it is best to communicate with the competent tax authority in advance.
Crypto-to-crypto exchanges also require attention. Exchanging Bitcoin for Ethereum is deemed as selling Bitcoin first and then buying Ethereum in tax law; tax must be paid if money is made in the selling phase. A reminder here: you cannot calculate only the winning currencies; losses must also be included. Declare based on net income aggregated annually, otherwise you will overpay tax. The declaration period is from March 1st to June 30th each year, declaring overseas income on the Individual Income Tax APP or the Natural Person Electronic Tax Bureau. Of course, here Lawyer Xiao Sa's Team must remind all friends that voluntarily paying back taxes does not mean the act of crypto trading itself is compliant; these are two different matters.
Is Money Safe If Kept in Hong Kong?
A very realistic question is that many friends in the crypto community keep their coins in Hong Kong, one benefit of which is taxation. Hong Kong has no capital gains tax, nor estate tax or dividend tax. If an individual buys coins and holds them long-term, the money earned from selling them generally does not need to be taxed in Hong Kong, which is also one of the reasons Hong Kong attracts crypto assets.
Here Lawyer Xiao Sa's Team must remind all friends that if the trading frequency is particularly high, the trading volume is large, or this is done in an organized manner—for example, specializing in crypto trading, opening paid courses, or managing funds for others to collect management fees—the Hong Kong Inland Revenue Department may deem you as operating a business, and profits must be subject to Profits Tax. The tax rate for the first two million HKD of profits is 8.25%, and 16.5% for the excess part. The determination standard does not look only at the number of transactions; it will comprehensively look at whether there is a business organization and whether there is a systematic profit arrangement. Pure high-frequency trading does not necessarily constitute operating a business.
Other income types also require attention. If a company pays wages with cryptocurrency, employees must convert the market value at the time of receipt into HKD to pay Salaries Tax. If a company accepts cryptocurrency as payment for goods, it must also calculate taxable income based on the market value on the transaction date. Last year, Hong Kong also expanded incentives; gains from qualified funds trading virtual assets can enjoy exemption, and the tax-exempt scope for single family offices has also been extended to virtual assets, bringing in more institutional funds.
In the past, many people thought virtual currency was anonymous and the tax bureau could not find it, but this situation has actually changed recently. The Crypto-Asset Reporting Framework launched by the OECD, known as CARF, along with the upgraded CRS 2.0, is incorporating crypto assets into the global automatic exchange of tax information system. Simply put, in the future, your transaction data on exchanges will be automatically reported to the tax bureau of the country where you are a tax resident.
Traditional CRS only covers banks, trusts, insurance, etc.; exchanges are not included. CARF fills this gap. Intermediaries such as centralized exchanges and OTC traders all have reporting obligations. Crypto-to-fiat exchanges, crypto-to-crypto exchanges, and transfers must all be reported. Every exchange may count as a sale for tax purposes.
The UK, EU, and others will start exchanging in the first batch in 2027, while Hong Kong, Singapore, UAE, and others will start in the second batch in 2028. Hong Kong is already legislating, launching data collection in 2027 and formally exchanging with other jurisdictions in 2028. At that time, customer data from Hong Kong licensed exchanges will be exchanged to Mainland tax authorities via CARF.
Of course, some friends say I use decentralized wallets and do not complete identity verification on exchanges, so can I not be found? It is not so. As long as you transfer coins from the wallet to an exchange to cash out, the exchange will record your wallet address and identity. Combined with on-chain analysis tools, all previous transactions of this wallet can be traced back. Complete anonymity is difficult to achieve under current technical conditions.
CRS 2.0 also has several upgrade points worth noting: shell companies and trusts must be penetrated layer by layer to the actual controller; dual tax residents can no longer choose one place to declare; both sides must declare. These changes have a significant impact on clients doing cross-border asset allocation.
III. Handling Double Taxation Issues
Some friends ask if the classification of the same income differs between Hong Kong and the Mainland, will tax be paid on both sides. This depends on the situation. If tax has already been paid overseas, for example, Hong Kong deems it business profits and levies Profits Tax, or a US exchange withholds tax, a credit can be applied for when declaring in the Mainland. According to the principle of country-by-country but not item-by-item, the credit limit is the tax amount calculated according to Mainland tax law, and unused credits can be carried forward for five years.
But many clients have a misconception: if Hong Kong classifies your income as capital gains and does not levy tax at all, then the Mainland cannot grant a credit, because you have no paid tax to credit. This situation is not double taxation; it is Hong Kong not taxing and the Mainland taxing.
Conversely, if Hong Kong deems it business profits and levies 8.25% or 16.5% tax, and the Mainland levies 20% income tax on property transfer, this creates double taxation, and a credit can be applied for at this time. The tax burden difference caused by classification differences between the two places must be calculated clearly when planning. How the transaction structure is designed and how tax resident identity is arranged will all affect the final result.
Another issue to note is that if holding coins through a shell company in a low-tax region, not distributing profits for a long time, and unable to state a reasonable business purpose, the Mainland tax authority can adjust based on the anti-avoidance rules in Article 8 of the Individual Income Tax Law, deem it as distribution, and require back taxes plus late payment fees.
Since 2025, with the linkage of Golden Tax System Phase IV and CRS, inspections on cross-border income have tightened significantly across various regions. Hubei, Shandong, Shanghai, Zhejiang and other places have launched special actions; overseas securities, offshore dividends, and cross-border labor are all key focuses. A portion of high-net-worth clients in the crypto circle has already received tax risk warning messages.
Publicly notified cases are mostly about overseas stocks and offshore company dividends; the tax bureau's penetration capability for overseas financial assets is already very strong. There is a case in Hubei where the person involved, Mr. Sun, concealed 11 million in domestic dividends through a BVI shell company, paying back taxes plus late fees of over 1.4 million. In the Shandong case, trading US stocks through a Hong Kong broker was not declared, paying back over 1.2 million. The technical means used in these cases, applied to virtual currency, follow the same logic.
Here are a few practical suggestions for everyone.
First, transaction records must be kept well. Whether on an exchange or wallet, store the time, quantity, price, fees, and address changes for every transaction. After CARF is implemented, the tax bureau will have platform data; it will be troublesome if it does not match at that time.
Second, buy-sell differences are treated as income from property transfer; do not mistakenly declare as income from business operations. For mining, airdrops, staking, etc., if unsure, ask professionals in advance.
Third, handle historical issues proactively. For income not declared in previous years, it is recommended to contact the competent tax authority as soon as possible to supplement declaration.
Fourth, prepare for CARF compliance in advance. Hong Kong will start collecting data in 2027; there is still a time window. Before then, clarify historical transactions and consider whether to make a voluntary disclosure. The cost difference between proactive and passive is significant.
Final Words
The tax issue of virtual currency is essentially a process where a gray area gradually becomes clear. In previous years, many people held the mentality that the law does not punish the multitude, thinking they would not be caught. However, with the implementation of international regulatory frameworks, the maturity of on-chain analysis technology, and the enhanced data sharing capability of tax authorities, this space is narrowing.
Lawyer Xiao Sa's Team often tells friends: do not bet that regulation will not come, and do not bet that you are the lucky one. The property attribute of virtual currency is recognized under the Mainland legal framework; where there is income, there is a tax obligation; this general direction will not change. Hong Kong's tax advantages still exist, but after information transparency, the path of tax avoidance relying on information asymmetry will become narrower.
Everyone's trading model, holding structure, and tax resident identity are different, and the corresponding risks and handling methods are also different. If the asset scale is relatively large, or the transaction structure is relatively complex, it is recommended to find professionals in advance for a comprehensive review.
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