Expert analysis: Paying back taxes on overseas income has become a hot topic. Are there risks for big crypto holders? What to do if you encounter an audit?

Editor | Wu Blockchain

This AMA was hosted by FinTax, with sharing from FinTax founder Calix and senior tax manager Simon. Calix analyzed China's recent overseas income tax supplementation action, focusing on its impact on Web3 practitioners and investors. Calix pointed out that mainland China's tax authorities can cross-verify residents' overseas income through CRS data, foreign exchange records, and payment platforms, with related tax collection work gradually becoming more explicit and systematic. Regarding cryptocurrency income, although the law has not yet clearly defined it, tax laws contain catch-all clauses like "income from property transfer", with precedents of high-profit crypto traders being追缴 for taxes. Future crypto asset tax risks cannot be ignored. Simon explained the standards for determining "tax residency" and related tax exemption clauses, providing some advice for individual investors. They also responded to practical issues such as how to compliantly report on-chain service income, tax audit cycles, and burden of proof.

Below is a text summary, please listen to the full audio:

Xiaoyuzhou:

https://www.xiaoyuzhoufm.com/episode/682b6692457b22ce0d8443f8

Youtube:

https://youtu.be/G1lcHA40E1U?si=4esydrdE80OjqU1F

Is the Tax Supplementation Action Sudden?

Cat Bro: Calix, from my understanding, tax departments in various provinces of mainland China have launched a series of tax investigations targeting individuals this year. Can you introduce the relevant situation?

Calix: Specifically, from March and April this year, tax bureaus in places including Shanghai, Zhejiang, Shandong, and Hubei successively issued notices requiring Chinese tax residents to supplement taxes on their overseas income, accompanied by fine decisions. This is actually not a completely new policy or sudden event - from past professional experience, there are always cases of high net worth and high-income individuals being required to supplement taxes for unreported overseas income. Previously, these cases were rarely made public or reported. What's special this year is that information has started to be disclosed, media attention has increased, showing that this round of tax collection has more "explicit" and systematic characteristics. For example, this year tax authorities published specific cases. Although the amounts are not large, they clearly intend to send signals, reflecting an upgrade in tax collection mechanisms - using specific risk indicators and internal "five-step work methods" to conduct systematic assessments of individuals' overseas income.

From a deeper background perspective, two key factors have driven this action:

First, tax authorities' tax collection technology and tax-related data analysis capabilities have significantly improved. In the past, they mainly relied on taxpayers' active reporting, but now they integrate information and use technical means to break through originally isolated data islands, such as bank and foreign exchange records;

Second, fiscal pressure is a realistic factor, though this is not convenient to elaborate on.

Currently, common subjects of investigation include those investing in Hong Kong and US stocks, and those realizing overseas equity of internet companies. However, we believe that Web3-related crypto income is equally worth attention and may become a key focus in the future.

Calix: This is an interesting issue. Actually, our company initially chose to provide tax and financial services in the crypto industry based on real-world cases. When I first started my business, providing tax and compliance services for the crypto industry was not mainstream, and many people thought "the crypto industry should not be compliant" and even found this direction strange and difficult. But I persisted because early in my career, when I was a CFO at a US-listed company, a friend made over 100 million yuan by trading on an exchange, and was then targeted by the tax bureau, required to pay back taxes and faced high fines and late fees, which was an extremely painful process. So I can clearly say that taxing crypto trading income is not baseless, and there are indeed many large-scale tax investigation cases in reality. It's just that due to the relatively closed nature of this circle and limited information dissemination, the outside world may not be aware. As for why we rarely see large-scale taxation actions for cryptocurrencies, I believe the core issue is that there's no clear legal definition of the nature of crypto income. Without a clear legal framework, it's difficult for tax authorities to comprehensively levy taxes. However, we should note that the Individual Income Tax Law has a catch-all clause, such as "property transfer income" and "other income" that can serve as taxation basis. Bitcoin breaking through $100,000 has released a huge wealth effect, and this industry has long become a gathering place for high-net-worth individuals. Tax authorities will certainly not ignore this. In Europe and the US, crypto tax rules are quite clear, with specific regulations on what taxes to pay in different scenarios, though tracking and voluntary reporting are another matter. Compared to this, China currently lacks a systematic taxation framework. I believe tax authorities are maintaining very close technical attention, and some tax officials have a quite professional understanding of cryptocurrencies.

How do tax bureaus identify overseas income?

Cat Brother: How do mainland Chinese tax authorities know about mainland residents' overseas income? If I don't transfer my overseas income back to the country or keep it in a non-Chinese financial institution, will I be taxed?

Calix: This issue is not complicated, and the core lies in the CRS framework. The OECD's Common Reporting Standard (CRS) has been adopted by many countries, with the core goal of understanding the overseas financial account assets of domestic tax residents to identify potential tax avoidance. The information exchanged through CRS is mainly basic financial account data, such as account balance and account holder identity. Financial account information for Chinese nationals with Chinese tax residency will theoretically be regularly exchanged back to Chinese tax authorities. However, it's important to note that account balance data alone cannot directly trigger taxation. Tax authorities still need to reconstruct specific fund sources and purposes, communicate with taxpayers, and reasonably confirm tax categories before completing tax collection. This means the process is not automatically executed and requires manual work and evidence gathering. Of course, the US is an exception, not joining the CRS system but having its own independent information exchange framework (FATCA). Although China and the US don't have a CRS data exchange mechanism, there may still be other channels to obtain partial information, but specific methods are not publicly disclosed. Additionally, besides CRS, tax authorities now also rely on cross-border payment data, payment platform information, and fund flow records for indirect identification. For example, whether you frequently receive overseas payments or have fund flows highly associated with overseas business can become auxiliary evidence for identifying potential overseas income.

Lastly, in the current context where corporate "going overseas" has become normal, many domestic companies with scale basically establish branch offices or accounts in Hong Kong or other overseas markets with certain revenues. Once there are large domestic fund flows, tax bureaus can definitely trace and identify whether a company has overseas business income.

Calix: This is actually not complicated. If he obtains USDT indeed due to labor provision and fulfilling work responsibilities, it belongs to typical "labor remuneration". The key points are: 1) Retain a complete labor contract or service agreement; 2) Keep records of monthly USDT distribution; 3) Completely preserve all on-chain transfer records, Hong Kong card receipt records, and remittance paths when converting USDT to RMB, ensuring the fund flow path can be self-evidently closed loop. As long as these materials can corroborate each other and clarify the source and purpose of income, it can be declared as wage income for individual income tax in China.

Wayne: So if he previously received this salary in Hong Kong and has paid taxes, can it be offset in China?

Calix: Yes. If he has legally paid personal income tax in Hong Kong, this income will first be merged into wage income under Chinese tax standards, then calculated according to domestic tax law. If the calculation shows a tax of 20 yuan, and he has already paid 10 yuan in Hong Kong, he only needs to pay an additional 10 yuan domestically. This is the "overseas tax credit" mechanism allowed by the Individual Income Tax Law, avoiding double taxation.

Wayne: That means it's best to have a formal labor contract as supporting evidence?

Calix: Correct. A formal labor contract is ideal. If not, other forms of contracts, job descriptions, or service agreements can be supplemented to prove "labor income". If the company is willing to provide a statement, it will be more helpful for tax authorities to recognize.

Can tax identity be planned?

Cat Brother: A question can be extended here - can tax resident status be planned through some methods?

Calix: This issue actually has many strategies, depending on your purpose and specific circumstances. Some methods are complex, like establishing a family trust; some are more basic, such as adjusting days of residence.

Taking family trust as an example, its tax treatment in mainland China does have some controversy, but from past practices, it has indeed played an effective tax planning role under specific structures. Of course, how future policies will evolve is uncertain, so this method must be judged based on specific situations. A relatively simple approach is to operate based on the "tax resident" identification standards in Chinese tax law. For instance, the "183-day" rule and residence determination standards Simon mentioned earlier. If a person has been living abroad long-term, with no actual economic interest connection or residence arrangement in mainland China, theoretically, they can avoid being identified as a Chinese tax resident through daily arrangements and declaration paths. I personally believe that Chinese tax law still lacks clear operational guidelines for "tax resident cancellation". If a person, although holding Chinese nationality or household registration, has been abroad for many years and no longer has actual economic activities or income sources in China, theoretically they might no longer be identified as a Chinese tax resident. For example, if you live long-term in Singapore or Hong Kong, you should theoretically pay taxes according to local tax laws, unrelated to mainland China. However, actual operations vary greatly, involving factors like residence, income paths, and fund allocation, so it's recommended to plan specifically according to individual circumstances. From a legal perspective, space does exist, with the key being whether there's a clear strategy and compliant execution.