Written by: Liu Honglin
Recently, many friends in the crypto have been asking me the same question: "I heard that Hong Kong is going to start reporting cryptocurrency information. Are my cryptocurrency assets held on overseas exchanges still safe? Will the mainland tax authorities know? Will I need to pay back taxes?"
This anxiety is not unfounded.
In 2025, global tax transparency is facing a "precise strike" against cryptocurrencies. As a legal practitioner deeply involved in Web3, Attorney Honglin will discuss CARF (Crypto Asset Reporting Framework), often referred to as the "Crypto CRS," and its implications for everyone's finances.
What is CARF?
Over the past decade, the traditional financial world has had a powerful tool called CRS (Common Reporting Standard). Simply put, if you are a Chinese citizen with deposits in overseas banks, the foreign banks will exchange your account information with the Chinese tax authorities.
However, CRS has a major loophole: it doesn't regulate cryptocurrencies. Previously, if you converted money into USDT and kept it in your wallet, or traded it on Binance or OKX, the tax authorities couldn't see it.
Now, the patch is here. CARF (Crypto-Asset Reporting Framework) was specifically designed to close this vulnerability.
Its core logic is: since you can't find a decentralized version of yourself, then find a "middleman" to serve you.
Who should file a report? Exchanges (CEX), OTC merchants, and even some token-issuing project teams.
What should I report? Your personal information (name, tax ID), how much cryptocurrency you bought, how much you sold, and which wallet address you transferred the cryptocurrency to.
This means that every transaction you make with compliant exchanges and service providers will be "naked" in the eyes of the tax authorities.
In the CARF era, the following behaviors will face extremely high tax exposure risks:
Stablecoin deposits and withdrawals (USDT/USDC): Don't assume that exchanging for stablecoins is safe. CARF explicitly requires reporting all exchanges between cryptocurrency and fiat currency, and between different cryptocurrencies (e.g., BTC to USDT). Each such exchange may be considered a "sale" under tax law, requiring you to calculate profits and losses and pay taxes accordingly.
Large OTC transactions: Previously, people were used to exchanging money offline through OTC marketplaces. In the future, Hong Kong will bring OTC merchants under regulation, and they will also be obligated to report information on large transactions.
DeFi and Airdrops: Although DeFi is more difficult to regulate, if the protocol has a clear "controlling party" (such as the project team retaining management rights), or if you participate in DeFi mining through a centralized exchange, the rewards will still be recorded.
Withdrawing cryptocurrency to a cold wallet: You might ask, "Can I just withdraw my cryptocurrency to a cold wallet and keep it locked up?" The answer is both yes and no. Exchanges must record your withdrawal action and the recipient's wallet address. If this cold wallet address interacts with fiat currency in the future (e.g., when you buy a house, a car, or convert it into cash through an exchange), the tax authorities can use on-chain analytics tools to trace back to your address and thus calculate your total historical balance.
A common misconception: "Cryptocurrency trading is illegal in mainland China, so you don't have to pay taxes?"
For mainland players, the reason for their interest in CARF is due to Hong Kong's recent actions. Although Hong Kong operates under the "one country, two systems" framework, it has long had established connections with the mainland regarding the exchange of tax information.
According to the consultation document released by the Hong Kong government at the end of 2024 and the beginning of 2025, the timetable is very clear:
2025-2026: Local legislation in Hong Kong to begin establishing taxation rules.
January 1, 2027: Recording officially begins. From this day forward, all your transaction data generated on licensed exchanges and OTC markets in Hong Kong will be recorded by the back-end system.
2028: The Hong Kong Inland Revenue Department will begin sending this data to tax authorities in other countries (including mainland China). In the future, Hong Kong will no longer be a tax haven, but rather a "transfer station" for tax information.
Many people think, "The government says Bitcoin trading is an illegal financial activity, so if they don't protect me, why should they collect taxes from me?"
From a lawyer's perspective: that's not necessarily true.
The core reason is that tax law looks at the "substance": in the eyes of tax law, no matter whether your source of income is legal (such as wages) or gray (such as cryptocurrency trading), as long as you make money (generate "income"), you have a tax obligation.
In addition, the mainland has been promoting "taxation based on data" in recent years. Previously, the tax authorities were unaware that you had overseas assets and could not manage them. Once CARF is implemented, Hong Kong will directly send your transaction data (for example: Zhang San, mainland ID number xxx, made a profit of 1 million USDT on a certain exchange in 2027) to the mainland tax authorities. Once the system compares the data, if you have not declared it, the warning light will immediately flash.
Three practical compliance tips
Panic is useless in the face of the increasing transparency surrounding cryptocurrency taxation, because compliance is an inevitable path for the Web3 industry, and taxation is a necessary part of compliance. From this perspective, this is a day that everyone has been eagerly anticipating.
To ensure a safer and more positive transition to cryptocurrency taxation, here are three rational compliance strategies.
Recommendation 1: Reassess your "tax residency status".
CARF exchanges information based on your "tax residency" status. If you hold a passport from a small country (such as St. Kitts or Vanuatu) but reside in Shanghai/Beijing long-term, with your life centered in mainland China, you are still considered a mainland Chinese tax resident. If you truly want to mitigate risk, you need substantial immigration planning—not just obtaining residency, but actually relocating to a cryptocurrency-friendly tax haven (such as Dubai or Singapore) to sever your tax ties with your original place of residence.
Recommendation 2: Asset inventory and historical separation
2027 marks the beginning of data collection. Before then, it's advisable to conduct a comprehensive inventory of your assets, distinguishing between "existing assets" and "new assets." For legacy issues involving substantial sums, it's recommended to consult a professional tax advisor to determine if a compliance filing or restructuring is necessary during the data exchange window. Don't wait until 2028 for data exchange to react reactively.
Recommendation 3: Say goodbye to unorthodox methods and embrace a compliant architecture.
For Web3 entrepreneurs and high-net-worth individuals: Avoid using personal accounts for large transactions. Consider holding assets through legal structures such as family trusts or offshore companies. While CARF can identify the "actual controller," a legitimate structure can help isolate some legal risks and provide room for tax planning. At the same time, stay away from underground banks. CARF is linked to anti-money laundering (AML) mechanisms; once the financial channels of underground banks are investigated, it's not just a matter of paying back taxes, but also involves criminal offenses.
The "wild west" era of Web3 is coming to an end. The arrival of CARF marks the formal entry of crypto assets into the global regulatory sphere.
For players in mainland China, "invisibility" is no longer an option; the future competition will be about compliance. Since we can't avoid it, we might as well put on our "bulletproof vests" in advance and protect our assets within the rules.
