Current Status and Trends of Cryptocurrency Taxation and Regulation in China series I

Taxation of cryptocurrencies has become a hot topic in both theoretical and practical fields. Many issues need to be addressed, including whether and how tax authorities can levy taxes; how industry entities deal with compliance and whether they can obtain regulatory certainty; and whether and how individuals can be taxed on gains from cryptocurrency activities. These are also hot issues for tax authorities, businesses and industry stakeholders in China.

Series I Status of taxation and administration

For some time now, tax authorities in some regions have conducted tax audits of businesses engaged in cryptocurrency production and individuals who have obtained large excess profits through cryptocurrency transactions, providing some insight into subsequent tax collection and management.

Taxability of cryptocurrencies

There is no clear basis for cryptocurrency taxation in China's tax law. According to the principle of statutory taxation, the actual taxation process will create a great deal of uncertainty for both the tax office and the company. The tax law does not clarify the tax obligations, taxation objects and taxation management methods in the acquisition, holding, transaction, payment and transfer of cryptocurrency. However, in the spirit of the Corporate Income Tax Act and the Individual Income Tax Act, it is taxable to some extent if an enterprise or individual obtains economic benefits in the above-mentioned cryptocurrency value creation process, or other forms of economic gains that can be exchanged for products and services in the market.

Currently, cryptocurrencies are not legal tender in China, and their conversion transactions with legal tender are not supported by policies and regulations, or even explicitly prohibited, but market transactions and payments can be carried out overseas. Although a Chinese resident taxpayer cannot directly engage in cryptocurrency transactions in China, he/she still has the obligation to carry out global taxation as a resident taxpayer and declare profits from cryptocurrency transactions abroad as foreign income for taxation. On the other hand, when cryptocurrency producers or related enterprises exchange goods or pay employees through cryptocurrency, the commodity properties of cryptocurrency are also reflected, and whether it can be managed in accordance with barter taxation is also controversial. However, in accordance with the spirit of the tax law, cryptocurrency holders formulate a financial attribute of the cryptocurrency held, and then buy the goods and services exchanged and the salaries of employees through the payment function of the financial attribute, which is essentially a merger of two links. Then, in the first link, the commodity attributes of cryptocurrency need to be supported by market value, and the exchange function is given to reinforce the commodity attributes. Therefore, the formulation and quantification of the value involved in this case is taxable in an economic sense, and can be measured in terms of specific market value.

In short, taxation is a complex field of economics and law, where tax authorities are legally empowered by legislation to levy taxes on the economic actions or economic income of taxpayers. Although cryptocurrencies are new and involve many links in their value chain, the act of taxation by tax authorities still has some economic support in the current situation where the legislative system of tax laws and regulations is still insufficient and unclear.

Uncertainty of cryptocurrency taxation

The uncertainty of cryptocurrency tax administration is mainly reflected in legislation and enforcement. The current tax legislation does not provide a specific tax law, provisional regulations or normative documents to clarify the specific objects of taxation and the determination of tax obligations, so as to realize that there are legal objects for taxation and a legal basis for tax payment. Accordingly, the problems faced by law enforcement are even greater. The lack of a legal basis at the bottom and the absence of a top-level tax collection and management system will make it a contradictory issue for tax authorities at all levels to manage taxes in accordance with the law as the main law enforcement agency. Due to the lack of legal basis and unclear regulations on tax collection and administration, tax authorities have different understanding of the determination of tax obligations and different caliber of enforcement, which will easily lead to large differences between tax authorities and legal entities, and eventually lead to tax litigation. On the judicial side, due to the lack of legislation and enforcement, it is also a great test to see how the judiciary can achieve a fair and impartial judgment, especially since the tax system itself is very complex and huge, and cryptocurrency is an emerging product, which also indirectly brings greater pressure on the judicial system.

Uncertainty also exists with regard to collection and administration procedures. It is also difficult for tax authorities at all levels to obtain specific transaction information of cryptocurrency practitioners and to have entry points or grips for tax collection. Even if there is a tax collection law in the future, it is still unclear how to effectively exercise tax collection power and scientifically govern taxation.

Inspiration from cryptocurrency cases

Some regional tax authorities have targeted cryptocurrency producers and individuals who have made high excess profits from cryptocurrency trading for tax purposes, in different ways and by different means. The author believes that this is not necessarily a signal for official taxation, but it is sufficient for practitioners, companies and individuals in the industry, as well as professional service providers, to prepare and plan in advance.

Although individual cases do not necessarily represent the official attitude, there are inevitably some factors behind the accident, and it cannot be ruled out that this is a pilot trial by some taxation authorities. In the current form, the legislation still needs to be strengthened and optimized, and it will take some time for it to reach the level of law enforcement by the tax authorities, and the occurrence of individual cases will not affect the whole legislative enforcement process. However, for industry practitioners, it is important not to overlook case handling. Although the final result may not be the best, it may be used by other tax authorities as a reference for comparison and may implicitly influence tax treatment.