Thread by @SinoGlobalCap

China Crypto Taxation Framework -- SW

On October 19, China Taxation News (中国税务报), a national economic newspaper under the State Administration of Taxation, published an article "Preventing Tax Risks Brought by Virtual Currency".

Context:
Chinese citizens are active in virtual currency trading. Due to the limitations of traditional regulatory methods, the risk of tax loss caused by virtual currency is worthy of in-depth study and discussion.

According to the article, starting from the principle of “the law is not retroactive”, the services previously provided by overseas exchanges to residents of China can be regarded as “not expressly prohibited”,

but it must be based on the income derived from China in accordance with China’s tax law, paying relevant taxes and fees including value-added tax, corporate income tax, and stamp duty.

According to previous trading volume and income of various virtual currency exchanges, the overall taxation scale of the exchange industry is quite considerable, while the taxation of other related industries needs to be further clarified.

The article shows that although China currently imposes strict restrictions on illegal financial activities in the form of virtual currencies, as it stands, it is difficult for Bitcoin and other virtual currency trading activities to cease immediately.

At the same time, within the current legal framework, China does not prohibit individuals from holding virtual currencies such as Bitcoin, and the trading of virtual currencies is defined as an "invalid civil act", but it is not explicitly prohibited by law.

From a tax perspective, as the article puts it, China should strengthen departmental collaboration and international multilateral regulatory cooperation for Chinese companies and residents participating in virtual currency transactions at home and abroad.

China should focus on preventing the illegal cross-border outflow of funds and the use of virtual currency to avoid taxation at home and abroad, and include virtual currency accounts in the exchange of tax-related information in financial accounts.

At the same time, China should improve the relevant property declaration and registration mechanisms with real-name registration and dynamic tracking of users who hold a large amount of virtual currency.

In judicial fields such as fines and confiscations, reorganization, mergers and acquisitions, bankruptcy liquidation, etc., it is necessary to clarify the handling of virtual currencies to avoid the loss of national taxes.

In addition, the tax department should actively cooperate with the central bank, financial supervision, market supervision,

public security and justice departments to severely crack down on the use of virtual currency in the underground economy, smuggling, money laundering, tax evasion and other illegal activities.

Here's Sino Take:

Since the PBOC had previously defined all crypto activities as illegal, taxation on these activities could indirectly imply legality.

In other words, taxation before there is a law invalidates the government’s stance as Chinese authorities had already defined crypto as illegal several times before the official PBOC notice.

In addition, the "China Tax News" also stated that within the current legal framework, China does not prohibit individuals from holding cryptocurrencies such as Bitcoin.

However, the trading of virtual currency is marked as "invalid civil action", which means that it is not expressly prohibited by law. This raises many questions about China's stance on crypto and the government's unclear crypto laws and internal inconsistencies.