Tax Resident Must-Read: Do You Have to Pay Taxes on Profits from Crypto Assets?

Original Authors: Xu Qian, Jin Weilin

Introduction

In recent years, more and more people have gained substantial profits through cryptocurrency trading, but many still wonder: do I need to pay taxes on earnings made in anonymous wallets or decentralized exchanges?

To be direct: if you are a Chinese tax resident, regardless of how you obtained your cryptocurrency income, in principle, you should report and pay taxes to Chinese tax authorities according to the law.

How to define “Chinese Tax Resident”?

According to the “Individual Income Tax Law of the People’s Republic of China,” an individual who meets any of the following conditions is considered a Chinese tax resident:

1. Having a residence in China

Having a residence: refers to individuals who habitually reside in China due to household registration, family, or primary economic interests.

If your hukou (household registration) and family focus are in China, or your main living, working, and economic ties are domestic, even if you are often overseas, you may still be recognized as a tax resident.

2. Residing in China for a total of 183 days or more within a tax year

This is a clear time standard. Even if you are a foreign national, as long as you reside in China for a total of 183 days within a year, you are considered a Chinese tax resident.

Mankiw’s Tip:

Whether you are recognized as a tax resident because of “residence” or “residency duration,” once the criteria are met, you are required to report and pay taxes on your worldwide income (including domestic and overseas income).

Why should cryptocurrency earnings also be taxed?

Many believe that cryptocurrency is restricted domestically, so related earnings are “not taxable,” which is a common misconception. Tax authorities focus on whether you have income, not whether the income comes from a encouraged industry.

1. What is the nature of cryptocurrencies?

According to the “Notice on Preventing Bitcoin Risks” (Yinfa[2013]289) issued by the People’s Bank of China and five other ministries, the “Notice on Preventing Risks of Token Issuance Financing” (September 4, 2017), and the “Notice on Further Preventing and Disposing of Virtual Currency Trading Risks” (September 24, 2021), virtual currencies cannot circulate as currency, but their property attribute as “virtual commodities” is not denied. In other words, the law recognizes them as tradable property.

2. What are the relevant tax regulations?

The “Reply from the State Taxation Administration on Personal Income Tax on Income from Online Virtual Currency Transactions” (Guo Shui Han [2008] No. 818) clearly states: income from online buying and selling virtual currencies by individuals is classified as “property transfer income” and should be taxed accordingly.

3. Conclusion and tax rate

Therefore, regardless of which type of cryptocurrency you buy or sell, as long as the transaction yields profit, this income is considered “property transfer income” and should be taxed at a rate of 20%.

In short: Taxation does not depend on industry, only on income. Profits from cryptocurrency trading are property transfer income and must be reported and taxed at 20%.

Do I need to report if I use anonymous wallets or DEX trading?

Some investors believe that trading via decentralized wallets (like MetaMask) or on decentralized exchanges (like Uniswap), due to their anonymity, make it impossible for tax authorities to track. However, in the current regulatory and technological environment, this idea carries significant risks.

1. Fund flow can still be traced

Most investors will eventually convert their crypto assets into fiat currency through OTC or compliant platforms and transfer to domestic bank accounts.

Once funds enter the banking system, they fall under the supervision of tax authorities. Especially large or frequent transactions are likely to trigger bank risk control systems and attract tax department attention.

2. International tax information exchange mechanisms are now routine

China has joined CRS (Common Reporting Standard), enabling automatic exchange of tax information with over a hundred countries worldwide. If you hold accounts on overseas exchanges or banks, relevant account information may have been exchanged back to Chinese tax authorities.

3. The “Golden Tax Phase IV” enhances data monitoring capabilities

The “Golden Tax Phase IV” system uses big data, AI, and other technologies to connect data across tax, banking, customs, and industry and commerce departments. The system can automatically compare personal declared income with actual consumption and assets. If discrepancies are found, a tax warning will be triggered.

Therefore, even if your transactions occur on-chain or overseas, as long as your profits are ultimately reflected in your name or lifestyle expenses, there is a risk of being detected and asked to pay back taxes by the tax authorities.

What are the consequences of not reporting cryptocurrency income?

If tax authorities discover that you have not reported overseas cryptocurrency income, you may face the following legal consequences:

1. Back taxes and late fees

Tax authorities will order you to pay the owed taxes, plus a late fee of 0.05% per day (about 18.25% annually) according to Article 32 of the “Tax Collection and Administration Law of the People’s Republic of China.” The longer the delay, the greater the amount owed.

2. Tax penalties

If deemed as “failure to report,” penalties can be up to 2,000 RMB; more serious cases may incur fines between 2,000 and 10,000 RMB.

If classified as “tax evasion” (refusing to report or submitting false reports after notification), penalties can be 50% to 5 times the unpaid or underpaid tax amount.

3. Possible criminal liability

If the amount of tax evasion is large and exceeds 10% of the payable tax, and after the tax authority issues a recovery notice you still do not pay, it may constitute tax evasion, leading to criminal charges.

Mankiw’s Tip:

Failing to report cryptocurrency income may seem “hidden,” but it involves multiple risks—from hefty late fees and large fines to potential criminal responsibility. It is advisable to proactively comply and declare to avoid future legal and financial risks.

Mankiw’s Advice

If you have earned income from trading cryptocurrencies, especially if funds have flowed back into domestic accounts, Mankiw recommends:

1. Proactively organize your trading records

Try to compile a clear trading history, including dates, amounts, prices of buy and sell transactions, and keep evidence that can prove your asset cost basis, such as bank transfer records, exchange transaction details, blockchain transaction hashes, etc.

Complete documentation of costs makes the calculation of taxable income more accurate and the tax burden more reasonable.

2. Consider voluntary declaration or self-audit

• If you have not yet received a notice from tax authorities, you can declare via the “Individual Income Tax” app or the Electronic Tax Bureau for Individuals.
• When declaring, submit to the tax authority where your employer is registered; if you are unemployed, you can declare to the local tax bureau at your hukou (household registration), usual residence, or main source of income.
• If you have received reminders via SMS, phone calls, etc., cooperate actively, honestly explain your fund sources, and prepare relevant proof materials such as transaction records.

3. Keep all transaction evidence

Develop the habit of saving screenshots of transactions, wallet addresses, transfer records, exchange bills, etc., over the long term. These are not only the basis for calculating taxes but also key evidence for explaining and verifying transaction authenticity during tax inspections.

4. Plan reasonably within legal boundaries

If you trade frequently or with large amounts, consider tax planning within legal limits, such as managing assets through compliant structures or utilizing tax treaties legally. It is recommended to consult professional tax lawyers or accountants during this process to ensure the plan is sound and feasible.

Conclusion

In today’s digital economy and globalization, tax compliance has become an essential lesson for every investor. Although the world of cryptocurrencies has a “decentralized” aura, the obligation to pay taxes does not disappear.

Proactively understanding regulations, honestly reporting income, and properly keeping records are not only respectful of the law but also long-term protections for your assets and credit.

If you have questions or need assistance regarding cryptocurrency taxation, seek professional support early to ensure steady progress on the compliant track.