For a long time, China has had a complicated relationship with the cryptocurrency industry, its government indecisive on the policies that have ranged from a total ban to investigating the utility of blockchain. Most recently, some local authorities have started to impose a hefty income tax on crypto.
Specifically, a number of crypto whales, miners, and other investors have said they were being audited by their local tax departments over personal income tax, starting in early 2022 and still awaiting the results, Colin Wu reported on January 25.
According to the report, this represents the implementation of a 20% personal income tax on investment profits or individual cryptocurrency investors and many Bitcoin (BTC) miners after several major domestic exchanges handed to the tax authorities extensive information about some of the whales’ transactions.
Differing stance on digital assets
Although this practice would imply that the Chinese government may have finally recognized the legal status of cryptocurrencies, the reality is more complex, with tax authorities and financial authorities having differing views on the legality of crypto.
In October 2021, China Tax News, a subsidiary of the State Administration of Taxation, published an article stating that the services previously provided by overseas exchanges to Chinese residents were “not expressly prohibited by law”, but imposing VAT, enterprise income tax, stamp duty, and other related taxes on the income they obtain from China.
At the same time, China has strict constraints on illegal financial activities in the form of digital currencies, but, within its current legal framework, it doesn’t prohibit individuals from holding the likes of Bitcoin, with the trading of virtual currencies defined as an “invalid civil act”, but not explicitly prohibited by law.
On the other hand, an article in the China Public Prosecutor’s Journal from November 2022, highlighted that the government had tightened its oversight of digital assets such as Bitcoin in recent years, citing substantial financial risks associated with them.
The taxation department has its own basis for taxation, according to a senior tax professional, as tax audits on whales have become stricter, and the tax authorities have recently launched investigations of the overseas income of high-net-worth individuals.
China’s complex crypto connection
More than nine years ago, China started to restrict the use of cryptocurrencies, primarily Bitcoin, by the country’s banks, but it has since unwittingly become a silent crypto whale, in part thanks to its restrictive measures, and has ranked as one of the top ten countries in crypto adoption.
Interestingly, the FTX bankruptcy filing has recently also revealed that mainland China accounted for the third highest share of customers of the crypto exchange, right after island tax havens such as the Caymans and the Virgin Islands.
In fact, China’s crypto possessions, the result of confiscating a large amount of Bitcoin and Ethereum (ETH) from the Plus Token scheme in 2019, are so massive, that the country could tear down the entire crypto market in seconds if it chose to.