Global Encryption Asset Tax Regulation Trends and Response Strategies

Recently, the regulatory compliance of encryption assets has been heating up globally. Countries are increasingly strengthening the tax information exchange and tracking of on-chain assets, overseas accounts, and cross-border transactions. This article will explore hot topics such as global tax compliance, tax arrangements, and regulatory games of encryption assets, combining practical cross-border tax experiences and on-chain business experiences. It will also share visions for an ideal Web3 tax system in the future and discuss the tax logic in various scenarios such as exchange compliance, DeFi, mining, and airdrops, using real cases.

Tax Jurisdiction of Cross-Border Income

Web3 projects inherently possess the characteristics of being transnational and cross-regional, making it difficult to accurately attribute income to a specific location. Economic activities are closely related not only to the sources of clients but also to the platforms, networks, and infrastructure used. Therefore, the question of who should ultimately pay the taxes on such income is indeed a matter worthy of in-depth discussion.

For Web3 practitioners, these discussions often exceed the scope that traditional tax frameworks can fully cover. The pace of evolution in the global tax regulatory system struggles to keep up with the advancements in technology and industry. Regulators have been attempting to catch up, but changes in the industry and technological innovations always stay ahead. This state of being "chased after" may persist for a long time, with a dynamic balance always existing between regulation and the industry.

Encryption Asset Tax Case Analysis

Recently, an announcement from the Zhejiang Taxation Bureau has sparked widespread discussion. An individual was required to pay back taxes due to cryptocurrency trading, which was actually triggered by the CRS information exchange after the tax bureau discovered abnormal balances in their overseas bank account. This case is highly representative and reflects that regulators are starting to more closely track individuals' overseas income.

The intersection between the US stock market and the cryptocurrency space is growing larger. From Robinhood to Asian brokers like Tiger Brokers and Futu, even Guotai Junan International, many brokerage firms are dealing with encryption assets. Once a comprehensive review of foreign income is required, it will be easy to include the cryptocurrency space in the scope just by examining the US stock market. Moreover, the scale of encryption assets is already significant, and this trend makes "trading cryptocurrencies will incur taxes" unavoidable.

The Long-Term Game of Regulation and Tax Evasion

Regulation and "anti-regulation" have always coexisted, which is not only a characteristic of the cryptocurrency space but also applies to traditional industries. For tax authorities or any regulatory body, they certainly hope to collect the taxes due as completely as possible; meanwhile, from the perspective of taxpayers, regardless of the region, everyone wishes to legally minimize their tax burden or reduce their tax liability. These two demands are inherently contradictory.

From a trend perspective, the early "wilderness" stage had a low emphasis on compliance, but as we move towards today, more large institutions are prioritizing compliance. For individual investors, such as retail investors or Web3 project employees, the ability to comply largely depends on the actual amount of money involved. Overall, large institutions' emphasis on compliance will only increase, as it is a prerequisite for sustainable operation; while for individual consumers, similar to the real world, it is fundamentally still directly related to the amount of money involved.

The Boundary Between Illicit Income and Asset Compliance

Whether to pay taxes or not can at most prove the fulfillment of tax obligations, but it cannot fundamentally prove that the funds are legal in a broader sense. If a sum of money simultaneously violates other financial regulatory rules, such as those related to the SEC, or involves fraud or other financial illegal activities, even if the taxes are paid, it does not affect the penalties and investigations from other regulatory agencies regarding the source of these funds.

Tax compliance and the legality of funds are two separate legal aspects and cannot be equated simply. One must first acknowledge that an asset is legal before discussing taxation. If the nature of the funds cannot even be effectively confirmed, it cannot even be considered as a quantifiable property, and naturally, there is no discussion of declaration and taxation.

Tax Planning Space in the Cryptocurrency Market for Enterprises and Individuals

For most ordinary people, the space for tax planning is actually very limited. Ordinary people's sources of income are relatively single, mainly consisting of salaries, bonuses, or some small subsidies, all of which are fully recorded by the company. Once the enterprise truthfully declares, individuals find it difficult to have any additional "optimization" room.

However, the situation is different for high-net-worth individuals or enterprises. Their income types and structures are usually more complex, with diverse sources and larger transaction scales, along with more cross-border tax-related matters. This diversity and complexity naturally bring about more operational space. Different income types are subject to different tax rates and taxation methods, and when combined with the differences in tax systems between different regions, there may be available "arbitrage opportunities" in cross-border arrangements.

Potential Tax Obligations and Optimization Opportunities for Mining, Airdrops, DeFi, and Other Earnings

The cryptocurrency sector has provided many middle-class individuals and ordinary people with a more diversified income channel, such as mining, airdrops, staking, and DeFi yields. However, from a tax perspective, the core issue is that the income entity is generally still the individual, without the multi-layered structures like trusts, companies, or funds to disperse the tax burden.

Mining is generally recognized as business income in most regions; airdrops, if simply received but not disposed of, typically do not trigger tax obligations temporarily. Only when they are converted to fiat currency or swapped for other coins, resulting in actual gains, do they need to be reported. Staking or DeFi earnings can be considered capital gains in some jurisdictions, and capital gains tax rates are usually lower than business income tax rates; some regions do not levy them at all.

Realistic Considerations for Digital Nomad Identity Planning

It is worth considering the direction of reasonably utilizing different tax jurisdictions to reduce the overall tax burden. However, no matter where you file taxes, it is essential to keep good records of deposits, withdrawals, and trading activities, as these materials can serve as key evidence during tax inquiries to avoid unnecessary trouble. Moreover, there is currently the CRS (Common Reporting Standard) mechanism globally, making it difficult to completely "hide" information in the long term.

From the perspective of mainland tax law, whether an individual constitutes a tax resident is primarily based on the "183 days" standard. However, in more detailed regulations and practical operations, factors such as nationality, household registration, and primary social relationships are also considered. If these connections are all in the country, even if the person is overseas, they may still be regarded as a Chinese tax resident and will need to complete the full tax return to deduct any taxes already paid.

In international taxation, there is a "tie-breaker rule" that considers factors such as family relationships, economic interests, and daily life trajectory to determine the primary tax residence. Even if a person is overseas, with visas or identities abroad, if the main family and social ties remain in the country, according to the "tie-breaker rule", they are often ultimately recognized as a tax resident of China.

Imagination of Future Encryption Tax System

The infrastructure that humanity will depend on in the future may increasingly shift from the physical world to the digital world. For many people, it may currently be 80% on the physical level and 20% digitalized, but in the future, the impact of digital infrastructure on everyone will certainly surpass that of the traditional physical environment.

In an ideal model, it could be a two-layer structure:

1. Infrastructure providers (miners, nodes) pay taxes to the physical world;
2. Individual users indirectly pay fees to the network in forms such as Gas fees, which are then returned to the real-world tax system by the network.

As the proportion of digital spending by humans continues to increase in the future, the direct tax burden in the physical world will gradually decrease, while the blockchain network will resemble a self-governing micro tax system, undertaking corresponding real obligations through the Gas mechanism and distribution structure.

With the development of the encryption industry, it will undoubtedly carry an increasingly large asset volume in the future, and the deep integration with traditional finance will accelerate. In the future, it may replace some inefficient and opaque parts of traditional finance, and it will inevitably require matching new legal systems and regulatory frameworks.