Do cryptocurrencies, as legal property, need to be taxed in mainland China？

On September 1st, the Chinese People's Court Daily published an article titled "Recognition of the Property Attributes of Virtual Currency and Issues concerning the Disposal of Involved Properties." By analyzing the criminal law attributes of virtual currencies such as Bitcoin, the article believes that virtual currencies like Bitcoin have economic attributes and can be classified as property. Current relevant regulations explicitly define Bitcoin and other virtual currencies as virtual commodities, and administrative and legal policies do not completely prohibit virtual currency transactions. Under the current legal and policy framework, virtual currencies held by relevant entities in China still constitute legal property and are protected by law.

1. Do individuals need to pay taxes on the transfer income from privately held cryptocurrencies?

Regarding the tax issues concerning virtual currencies like Bitcoin, most major countries or regions worldwide have issued relevant tax regulations that stipulate taxation matters related to holding and transferring virtual currencies. For example, according to US tax law, individual capital gains from the transfer of Bitcoin are subject to income tax, and the tax rate varies based on the holding period. In Japan, individual income from the transfer of Bitcoin and other virtual currencies is subject to miscellaneous income tax, among others.

In China, on one hand, due to the current policy that classifies virtual currency-related activities as illegal financial activities, there are legal risks for any legal entities, non-legal entities, or individuals involved in virtual currency investment and trading activities. On the other hand, specific regulations regarding the tax issues of gains from the transfer of Bitcoin and other virtual currencies have not been introduced in tax supervision. As a result, many practitioners have misconceptions and believe that gains from the transfer of Bitcoin and other virtual currencies are not subject to taxation and do not need to be declared.

However, firstly, current Chinese regulations do not prohibit individuals from holding cryptocurrencies such as Bitcoin. As mentioned at the beginning of the article from the Chinese People's Court Daily, according to existing legal framework, privately held virtual currencies are considered legal property and are protected by law. Secondly, the current tax laws in China have not issued specific regulations concerning Bitcoin and other virtual currencies, which does not mean that gains from the transfer of Bitcoin are exempt from tax. On the contrary, China's existing tax laws already encompass issues related to gains from the transfer of cryptocurrencies like Bitcoin.

Currently, the tax bureau in mainland China may obtain information about the transfer of personal cryptocurrency assets through various channels, including centralized cryptocurrency exchanges and service providers, information provided through CRS (Common Reporting Standard) exchanges, information provided by blockchain transaction tracking technology teams, and information provided by public security departments.

2. What tax obligations may be involved in the transfer of personal cryptocurrencies?

According to the current tax laws in China, the transfer of virtual currencies such as Bitcoin by individuals may be subject to individual income tax and other relevant taxes.

Currently, existing regulations in China classify Bitcoin and other virtual currencies as specific virtual commodities, and personally owned virtual currencies are considered personal property. When a transfer is made and income is generated, it falls under the category of taxable personal income, and individual income tax should be calculated and paid based on the category of property transfer income.

According to the "Individual Income Tax Law of the People's Republic of China," Article 1 states, "... residents shall pay individual income tax on income obtained within and outside the territory of the People's Republic of China in accordance with the provisions of this Law." Article 2 states, "... the following items of personal income shall be subject to individual income tax: ... (8) Income from property transfers," and the "Implementation Regulations of the Individual Income Tax Law of the People's Republic of China," Article 6 states, "The scope of various personal income as stipulated by the Individual Income Tax Law includes: ... (8) Income from property transfers, referring to income obtained from the transfer of negotiable securities, equity interests, shares of partnership enterprises, real estate, machinery and equipment, vehicles and ships, and other properties."

Previously, the State Taxation Bureau had issued a specific reply regarding the collection of personal income tax on virtual currency transactions. According to the provisions of the State Taxation Letter [2008] No. 818, individuals who acquire virtual currency from players through the internet and earn income by selling it to others at a higher price are considered taxable income for personal income tax. They should be subject to personal income tax calculation and payment according to the "income from transfer of property" category.

Although this regulation mainly targets virtual currencies such as game coins and Q coins, which are different from blockchain-based virtual currencies like Bitcoin, according to existing laws in our country, both types of virtual currencies are considered virtual commodities. Therefore, this regulation has certain reference value for the personal income tax of Bitcoin and other virtual currency transfer transactions.

3. What happens if taxes are not paid on income from cryptocurrency transfers?

Taxes should be paid on the income at the time it is obtained. Failure to declare and pay taxes on time may result in not only the payment of the owed taxes, but also the payment of late fees and penalties at a daily interest rate of 0.05% when verified by the tax authorities. In cases of tax evasion, there may be corresponding criminal liabilities, resulting in significantly high post-event costs.

4. How should individuals consider tax matters when it comes to income from cryptocurrency transfers?

If individuals have income from cryptocurrency transfers, they should consider tax matters from the perspective of their status as individual tax residents, including the types of taxes involved, the amount of taxes to be paid, and potential tax benefits that can be applied for.

However, tax regulations are complex, and tax matters themselves are quite specialized. In addition, the calculation of income from cryptocurrency transfers, such as Bitcoin, is intricate, making tax matters related to cryptocurrency transfers more complicated and uncertain. Therefore, it is advisable for individuals who are involved in income from cryptocurrency transfers, such as Bitcoin, to communicate in advance with tax professionals or institutions to understand whether they are subject to related tax issues and to plan ahead for how to declare and pay taxes in practice. This will help avoid unnecessary tax risks or costs that may arise from failure to timely declare taxes, imposition of tax obligations in multiple jurisdictions, or the need for repeat tax payments.