This AMA session was jointly hosted by FinTax and Wu Blockchain, moderated by Maodi from Wu Blockchain. Calix, the founder of FinTax, and Simon, the senior tax manager, shared their insights. Calix analyzed China’s recent campaign to collect back taxes on overseas income, focusing on its impact on Web3 participants and investors. He pointed out that mainland tax authorities can cross-verify residents’ overseas income through various channels such as CRS data, foreign exchange records, and payment platforms. The tax collection efforts have become more evident and systematic. Regarding crypto income, although not explicitly defined by law, there are catch-all tax provisions such as “income from property transfer.” There have already been cases of high-profit crypto traders being pursued for tax payments. The future tax risks associated with crypto assets cannot be overlooked. Simon explained the criteria for determining “tax residents” and relevant tax exemptions, offering some advice for individual investors. Both also addressed practical questions such as how to compliantly declare on-chain labor income, tax verification periods, and the burden of proof.

Q1: Is this tax inspection campaign launched unexpectedly?

Maodi: Calix, since the beginning of this year, tax authorities in various provinces across China have launched a series of tax inspection campaigns targeting individuals. Could you please introduce the relevant situation?Calix: Specifically, since March and April of this year, tax bureaus in regions such as Shanghai, Zhejiang, Shandong, and Hubei have successively issued announcements requiring Chinese tax residents to pay back taxes on their overseas income, accompanied by penalty decisions. This is neither a new policy nor a sudden development. From past experience, there have always been cases each year where high-net-worth and high-income individuals are required to supplement taxes on unreported overseas income. Previously, these cases were rarely disclosed or reported. This year’s uniqueness lies in the information being made public and attracting media attention, suggesting that this round of enforcement is more transparent and systematic. For example, tax authorities have published specific cases this year. Although the amounts involved are not particularly large, they apparently send a signal, reflecting an upgrade in the tax collection mechanism—based on specific risk indicators and internal “five-step work methods,” tax authorities are systematically evaluating overseas income for individuals.From a deeper background perspective, two key factors have driven this campaign:First, the tax authorities’ tax collection technology and tax data analysis capabilities have significantly improved. In the past, tax collection primarily relied on taxpayers’ voluntary declarations. Now, through information integration and technological means, data previously isolated in “information silos,” such as bank and foreign exchange records, are being connected.Second, fiscal pressures are a real driving force, although this aspect is not convenient to elaborate on.Currently, common targets for verification include individuals investing in Hong Kong and U.S. stocks and those realizing overseas equity in internet companies. However, we believe that income related to the Web3 crypto circle is equally noteworthy and may become a future focus.

Q2: Do Investors in Hong Kong and U.S. Stocks Need to Pay Taxes?

Maodi: In response to the recent tax inspections, I have noticed that some KOLs have posted that many of their friends have received calls from their local tax authorities, requiring them to self-inspect and supplement taxes on overseas income from 2021 to 2023. These incomes, though not necessarily related to the crypto circle, are certainly connected to Hong Kong and U.S. stocks. Some even explicitly state that using brokers like Tiger Securities, FUTU Securities, Interactive Brokers Hong Kong, etc., will result in tax inspections by the Chinese tax authorities, with a 20% income tax levied on profitable transactions, calculated cumulatively. Is this true?Calix: Indeed, many KOLs have recently discussed these situations. From the actual cases we have encountered, some of our clients have indeed been targeted in such scenarios, including inquiries through brokers and crypto-related clients. We currently see three main types of accounts: overseas stock accounts, overseas bank accounts, and family trusts.Based on publicly available information, it cannot be confirmed whether the tax authorities obtain data through brokers. However, regardless of the information source, the fundamental reason lies in the fact that information from these overseas financial accounts is transmitted back to the Chinese tax authorities via the Common Reporting Standard (CRS). Many individuals may not realize that under CRS, as long as you hold Chinese nationality, your overseas financial accounts, including balances and key information, will be regularly aggregated and returned to the Chinese tax bureau.In the past, tax inspection cases were rarely heard of because early tax authorities may not have had sufficient means or resources to utilize this data. However, in recent years, data analysis capabilities have significantly strengthened, and tax authorities have begun actively analyzing CRS data.Therefore, whether the information is obtained through brokers is not critical. The key point is that as a Chinese tax resident, if your overseas assets and income are sufficiently “conspicuous,” it is highly likely that you will enter the tax authorities’ radar. In the long term, such overseas assets will inevitably face the attention and tax collection efforts of the Chinese tax authorities.

Q3: Will the Middle Class Also Be Audited?

Maodi: If high-net-worth individuals are currently the primary focus of tax authorities, will the overseas income of the middle class also be subject to tax authority attention?Calix: From several tax supplement cases in our previous article with nearly 100,000 views, the amounts involved are not particularly large and can essentially be categorized within the “middle class” range. To put it bluntly, high-net-worth individuals have stronger tax planning capabilities and higher tax amounts, whereas the middle class is more likely to be “exposed” to the tax authorities’ scrutiny. The reason is that the middle class generally does not engage professional tax attorneys or accountants for planning. Their overseas income is often in the form of salaries or labor compensation, which typically needs to be remitted to China through foreign exchange. Bank transaction records and foreign exchange quotas leave a clear audit trail. Currently, one of the tax authorities’ key observation indicators is the foreign exchange movement in individual accounts. For example: Have you exhausted your annual foreign exchange quota? Are there multiple cross-border remittances? Is there frequent foreign exchange movement among family members? If these data points show anomalies, tax authorities can essentially infer that you may have overseas income sources. Therefore, regardless of whether the middle class becomes a focus, from the perspective of data availability, the overseas income behavior of the middle class is more easily trackable in data terms, thereby facing a higher risk of identification.

Q4: Is the Crypto Circle Already Subject to Taxation?

Maodi: What is the Chinese tax authority’s stance on income from the crypto circle? Will they specifically focus on tax collection in this area?Calix: This is an interesting question. In fact, our company initially chose to provide tax and financial services in the crypto circle due to related real-life cases. When I first started my entrepreneurial journey, tax and financial compliance in the crypto industry was not widely accepted within the community. Many people believed that “the crypto circle should not be compliant,” and even found this direction strange and challenging. However, I persisted because, during my time as a financial director at a U.S.-listed company, a friend made over 100 million RMB from crypto trading on an exchange and was subsequently targeted by the tax authorities. He was not only required to supplement taxes but also faced substantial fines and late payment surcharges, making the entire process extremely painful. I can clearly state that taxing crypto trading income is not baseless; there are indeed many large-scale tax inspection cases in reality. However, due to the relatively closed nature of this community and limited information dissemination, the outside world may not be aware of such cases. The core reason why we rarely see large-scale tax collection actions in the crypto space is that the law has not yet explicitly defined the nature of crypto income. Without a clear legal framework, comprehensive tax collection is challenging for tax authorities. Nevertheless, we must note that the Individual Income Tax Law includes catch-all provisions, such as “income from property transfer” and “other income,” which can serve as a basis for taxation. The phase where Bitcoin surpassed $100,000 has already generated significant wealth effects, and this industry has become a major hub for high-net-worth individuals. Tax authorities will definitely not ignore it. In Europe and the United States, crypto tax rules are relatively clear, with specific regulations on tax obligations in various scenarios. However, whether they can be tracked or whether individuals voluntarily declare is another matter. In contrast, China currently lacks a systemic tax framework. I believe tax authorities are maintaining very close technical monitoring, and some tax officials have a professional understanding of cryptocurrencies.

Q5: How Do Tax Authorities Identify Overseas Income?

Maodi: How do mainland Chinese tax authorities determine the overseas income of mainland residents? If I do not repatriate my overseas income to China or hold it in financial institutions with non-state-owned backgrounds, will I still be subject to taxation?Calix: This question is not complex. The core lies in the Common Reporting Standard (CRS) framework. The OECD’s CRS has been adopted by numerous countries, aiming to master the asset status of residents’ overseas financial accounts and identify potential tax avoidance behaviors. The information exchanged under CRS primarily consists of basic financial data of accounts, such as account balances and account holder identities. In theory, account information of Chinese citizens and Chinese tax residents held in overseas financial institutions will be regularly transmitted back to the Chinese tax authorities. However, it should be noted that account balance data alone cannot directly be used for taxation. Tax authorities still need to combine specific fund sources and uses to reconstruct the situation and determine appropriate tax categories in consultation with taxpayers before completing tax collection. This means the process is not automated; after data collection, manual operations and evidence collection are still required. The United States is an exception, as it has not joined the CRS system but has its own independent information exchange framework (FATCA). Although there is no CRS data exchange mechanism between China and the United States, I understand that there may be other channels to obtain partial information, though specific methods are not publicly disclosed, and I will not speculate here. In addition to CRS, tax authorities now also rely on cross-border payment data, payment platform information, and fund flow records for indirect identification. For instance, if you frequently receive funds from overseas or have fund transactions highly correlated with overseas businesses, these can serve as auxiliary evidence to identify whether you have overseas income.Finally, in the context of enterprises “going global” becoming the norm, many sizable domestic companies typically establish branches, accounts, or generate revenue in Hong Kong or other overseas markets. Once there are significant fund flows within the country, tax authorities can easily trace whether these enterprises have overseas business income.

Q6: What to Do After Being Notified of a Tax Inspection?

Maodi: Suppose someone is notified of a tax inspection. How long does the entire process generally take? Is there significant flexibility for negotiation and compromise between the two parties? Could you share one or two relevant cases?Calix: Generally, from receiving the notification to completing the preliminary audit, the process takes about two months. If the case enters the audit stage, the timeline may extend to six months. The specific duration depends on several factors: the level of cooperation between the tax authorities and the taxpayer, the complexity of the case itself, and the outcome of the communication and negotiation. These variables can lead to significant individual differences in each case. Regarding the scope of negotiation, we have indeed seen considerable flexibility in many cases. For example, tax authorities may initially propose a high tax amount, but during subsequent processes, through data review, it may be discovered that part of the amount is for living expenses, debt repayment, or there are unaccounted losses that can offset taxable income. These factors can significantly impact the final tax payable. The difference between the actual tax amount and the initial assessment can sometimes exceed 90%, depending on the completeness of information and the adequacy of evidence. If the tax authorities have already obtained your financial account data, such as the amount deposited into a trading platform, withdrawal records, and account balances, they may directly calculate your actual profit situation, including principal invested and cumulative losses. However, if your fund movements are complex, involving multiple accounts or frequent transactions with corporate accounts and diverse fund sources, tax authorities may not be able to fully reconstruct the true situation. In such cases, tax authorities will require you to provide an explanation of the fund sources and uses. For instance: Is this money your income? Is it a transfer between your own accounts? Is it an investment or a living expense? You will need to substantiate your claims with contracts, invoices, fund details, transfer records, and other materials. Only when these data are recognized by the tax authorities can they serve as the basis for adjusting the tax base. Otherwise, if you cannot provide a clear explanation, there is a risk of being taxed based on the “maximum profit” assumption.

Q7: How to Determine Tax Residency Status?

Maodi: Does holding Chinese nationality equate to being a Chinese tax resident?Calix: The determination of tax residency status is a technical issue that many clients inquire about during consultations. Next, I will invite Simon, our senior tax manager at FinTax, to provide a detailed explanation.Simon: Hello everyone, I’m Simon. The concept of “tax residency” is crucial in China’s individual income tax collection. Many clients often ask: Does Chinese nationality automatically make me a Chinese tax resident? The answer is no. Nationality and tax residency status are not entirely equivalent. China’s tax law primarily uses two standards to determine whether an individual is a Chinese tax resident: the “domicile standard” and the “number of days of residence standard.”First, the domicile standard: Even if you work or live abroad long-term, if you have not formally renounced Chinese nationality and your family members or principal economic interests remain in China, tax authorities may consider you to have a “domicile” in China, thereby deeming you a Chinese tax resident.Second, the number of days of residence standard: If you reside in China for 183 days or more within a tax year (i.e., from January 1 to December 31 of the Gregorian calendar), you may be considered a Chinese tax resident even without a domicile. In our practice, we have encountered many cases where clients, after studying, working, visiting family, or traveling abroad, return to live in China. Tax authorities often determine that China remains their “habitual place of abode” based on their regular life in the country post-return, thus classifying them as Chinese tax residents.

Q8: How to Declare On-Chain Labor Income?

Wayne: Hello everyone, I’m Wayne. I’d like to ask a question on behalf of a friend. He recently entered this industry and is engaged in on-chain-related work, not crypto trading. He receives his salary in USDT and wishes to convert it back to China via a Hong Kong account for future use in education or visa applications. He also wants to compliantly declare individual income tax as income proof.However, he is concerned because his income is disbursed through corporate accounts like Backpack and BR, and then transferred back to the mainland via a Hong Kong account. He has read some materials, including on GPT, which suggest that this type of income is considered compensation from an exchange and does not qualify as labor income, so he hesitates to withdraw the funds. How should he handle this situation?Calix: This is not complicated. If the USDT he receives is indeed for labor provision or fulfilling work responsibilities, it qualifies as typical “labor income.” The key points are: (1) retaining a complete labor contract or service agreement; (2) keeping records of monthly USDT disbursements; (3) preserving all on-chain transfer records, Hong Kong account receipt records, and fund movement paths to ensure end-to-end traceability of the funds. As long as these documents can corroborate the source and use of income, it can be declared as salary income in China for tax purposes.Wayne: If he previously paid taxes in Hong Kong for this salary, can he claim a tax credit in China?Calix: Yes. If he has legally paid individual income tax in Hong Kong, the income will be aggregated into China’s taxable salary income, and the tax payable will be calculated according to Chinese tax law. If the calculation shows a tax liability of 20 RMB, and he has already paid 10 RMB in Hong Kong, he will only need to pay an additional 10 RMB in China. This is part of the “foreign tax credit” mechanism under the Individual Income Tax Law, designed to avoid double taxation.Wayne: That means he should ideally have a formal labor contract as supporting documentation?Calix: Exactly. A formal labor contract is ideal. If not available, other forms of contracts, work descriptions, or service agreements can supplement to demonstrate that it is “labor-derived income.” If the company is willing to provide a statement, it will be more helpful for tax authorities to recognize it.

Q9: Can Tax Residency Be Planned?

Maodi: This leads to another question—can one plan their tax residency status through certain means?Calix: There are various strategies for this, depending on your objectives and specific circumstances. Some methods are more complex, such as setting up a family trust, while others are more straightforward, such as adjusting the number of days spent in a country.Taking family trusts as an example, although their tax treatment in China remains somewhat contentious, they have indeed played an effective role in tax planning under specific structures in the past. However, future policy developments are uncertain, so this method should be assessed based on specific circumstances. A simpler approach is to operate based on the criteria for determining “tax residents” under Chinese tax law. As Simon mentioned earlier, the “183-day” rule and domicile standard are key. If an individual has been living abroad long-term and has no actual economic ties or residential arrangements in China, theoretically, they can plan their daily activities and declaration pathways to avoid being classified as a Chinese tax resident. Personally, I believe that China’s tax law still lacks clear operational guidance on the “deregistration of tax residency.” If an individual holds Chinese nationality or household registration but has been living abroad for years without any actual economic activities or income sources in China, they may no longer be considered a Chinese tax resident. For instance, if you have been living in Singapore or Hong Kong for an extended period, you should theoretically be subject to local tax laws and unrelated to mainland China. However, practical implementation varies significantly, involving factors such as place of residence, income pathways, and fund allocation. It is advisable to plan based on individual circumstances. Legally, there is room for maneuver, provided there is a clear strategy and compliant execution.