The Impact of Tax Residency on Crypto Wealth Accumulation

On the evening of August 18, 2023, TaxDAO hosted its 3rd sharing meeting on crypto asset taxation. The theme was the influence of tax residency on the accumulation of cryptocurrency wealth. The main speaker, Jack, has many years of working experience in the field of tax management. He has worked in tax management in accounting firms, leading blockchain companies, and top internet enterprises, and possesses rich experience in both tax theory and practical applications. The conference was hosted by Calix, the founder of TaxDAO. Calix has a background in finance, blockchain, chip design, and other industries, and specializes in cutting-edge tax research and practice in the field of cryptocurrency.

Conference content

The meeting consists of three parts. The first part is the definition of tax residents, mainly introducing the definition of tax residents and the rules for determining tax residents. The second part mainly introduces the criteria for determining tax residency in several countries and regions. The third part is based on the first and second parts to talk about the impact of tax residency on crypto wealth.

Everyone is usually very familiar with the need to pay taxes to the tax bureau on their wages and business income. But everyone seems to have not thought about it: what standards does the tax bureau use to make us pay taxes? Let me give you the following examples:

First, do you need to pay taxes abroad for a period of time?

Second, if you work abroad for a period of time, do you need to pay tax overseas on your salary?

Third, if you buy a property in a foreign country and live with your family for a fixed period of time every year, does your income involve paying taxes overseas?

Fourth, can high-income people choose to pay taxes in countries with low tax rates?

What is a tax resident

These questions are all related to the tax residency we want to share today. What is a tax resident? Let's start with a case:

Case 1: American citizen A was dispatched by the company to work in Chinese Mainland from 2017 to 2022. A Except for staying in Chinese Mainland for 50 days in 2017, A has stayed in Chinese Mainland all year round and met his girlfriend in China from 2019 to 2020. Considering the reasons of work and family, A planned to permanently live in Chinese Mainland and purchased real estate in Chinese Mainland in 2022.

Q: As for the income from working in Chinese Mainland from 2017 to 2022, does A need to declare tax to the tax bureau in Chinese Mainland?

To answer the above question, we first need to understand the definition of a tax resident. Legally, a tax resident refers to a natural person who is recognized as a resident under the tax legal system of a country or region, and is therefore required to comply with the tax regulations of that country or region and pay the corresponding taxes. For example, the Chinese tax bureau first determines that you are a tax resident in Chinese Mainland, and then requires you to pay tax to the Chinese tax bureau on your income.

So, is the tax resident necessarily equivalent to nationality? What are the criteria for determining tax residents in different countries? Currently, there are two main principles for determining tax residents internationally: the first is the residence standard, and the second is the residence time standard. The determination rules of most countries involve two standards, and only a very small number of countries use only one of the two standards. For example, the domestic Individual Income Tax Law stipulates that individuals who have domicile in China or have no domicile but have resided in China for 183 days in a tax year are tax residents of Chinese Mainland. Obviously, through this definition, the tax resident standard in Chinese Mainland includes both residence standard and residence time standard. Next, we will explain the standards for residence and residence time in detail.

First, let us look at the criterion of domicile. At present, there is no uniform definition of domicile at the international level. Some countries define it according to permanent residence, others according to the place of the center of economic interests, still others according to customary residence, and some according to nationality directly. Permanent residence means the country in which you choose to live permanently. The center of economic interests is the country and territory where your main economic activity is located. Habitual residence is mainly for cases where you have different domiciles in multiple countries, meaning that your habitual residence is in whichever country you choose to habitually reside in. Compared to the first three criteria for determining domicile, nationality is more clearly defined. The criterion of domicile, as a qualitative criterion, is relatively vague and not easy to understand. Specific determinations need to be analyzed on the basis of actual cases.

Compared with the residence standard, the residence time standard is clearer. As the name suggests, the time of residence standard is the amount of time you spend in a certain country or region. At present, the international standard is that if a person stays in a country or region for 183 days in a tax year, it becomes a tax resident of that country. The standard length of stay in some countries or regions is 180 days. Some countries also adopt the standard of two years or cumulative multi-year stay for a certain number of days. From this point of view, the international definition of residence time standard is relatively uniform. The difference lies in the definition of days in each country or region, and some details of how days are counted.

In summary, tax residency defines which country you are a taxpayer in and to which country you should pay taxes. The definition of tax residence is generally broader than the definition of nationality. Just because you are a citizen of a country does not mean you are a tax resident of that country. Determining whether a person is a tax resident of a certain country either depends on whether you have a residence in that country or whether you have lived there for the required amount of time. As long as one of the two criteria is met, it is a tax resident of the country and needs to declare and pay taxes in the country.

Now, let's go back and revisit the issues involved in the case just mentioned. A, a U.S. citizen, did not have a habitual residence in mainland China in 2017. And he stayed in mainland China for only 50 days, which does not satisfy the 183-day standard. Therefore, A did not satisfy either the domicile standard or the length of stay standard in mainland China in 2017. Therefore, A is not a tax resident of mainland China in 2017.For 2018 through 2021, even though A does not have a habitual residence in mainland China and does not satisfy the domicile criterion, A stayed in mainland China throughout the year and satisfied the residence time criterion for mainland China. Therefore, for 2018 to 2021, A was a tax resident of mainland China.In 2022, A decided to reside permanently in mainland China and purchases property in mainland China, satisfying the domicile criterion for mainland China. Therefore, A was a tax resident of mainland China in 2022. Therefore, from 2018 to 2022, U.S. Citizen A needed to file a tax return with the mainland China tax bureau for the income in mainland China.

Tax residency criteria for major countries and regions

In the second part, we look at the principles of tax residency in major countries and regions. Because of time constraints, we will first share the judgment criteria of four countries and regions. If there are friends who are interested in other countries or regions, we can communicate later.

First, let's look at Hong Kong and Singapore. The tax residency criteria in Hong Kong and Singapore are basically the same, and the criteria for both places include the domicile standard and the length of residence standard. The difference lies in the standard of length of residence. There are two conditions for the length of residence criterion in Hong Kong, and one of them is to become a tax resident of Hong Kong. Singapore stipulates that those who reside in Singapore for more than 183 days become a tax resident of Singapore. For the standard of residence, both countries basically use permanent residence, or permanent "home".

Now let's look at the Japanese standard. In essence, the criterion of Japan is only the standard of residence, because the residence or residence in Japan is judged by the time of stay in Japan. Japan has a special criterion: If an individual is considered to have a residence in Japan and a relative living together in Japan, the relative living together is also considered to have a residence in Japan. For example, if you go to Japan to live with relatives for a while, even though you may not have lived in Japan for a full year. However, due to the fact of that your relatives already have a residence there, you are also determined to have a residence in Japan and are determined to be a tax resident in Japan.

Finally, let's look at the criteria in the United States, which is relatively broad. Domicile standards in the United States are determined according to the United States Internal Revenue Code. Citizens who hold U.S. citizenship, or a green card, become tax residents of the United States. If the above conditions are not met, the actual number of days of stay is determined according to the standard. The criteria for actual stay in the United States include two conditions, which are met to meet the U.S. residence standard. The first requirement is that you stay in the United States for at least 31 days during the year. On the basis of meeting the first condition, you will see if you have stayed in the United States for more than 183 days in a three-year period. The specific calculation rules for each year are determined by the corresponding formula.

Here is an example of how the actual length of stay in the United States is determined.

Case 2: B is a Chinese citizen who works for a U.S. company C located in China. From 2020 to 2022, due to work needs, B was dispatched by Company C to work in the United States for 12 days, 360 days and 40 days respectively. B returned to China at the end of 2022.

We judge one by one according to the US "actual stay days" rule:

1. Chinese Citizen B will only stay in the United States for 12 days in 2020 and does not meet Condition 1, "Stay in the United States for not less than 31 days in the current calendar year." Therefore, in 2020, Chinese citizen B is not a tax resident in the United States.

2. In 2021, both conditions 1 and 2 are met. Therefore, B is a US tax resident in 2021.

3. Meet Condition 1 in 2022. However, it does not meet condition 2. Therefore, B will not be a US tax resident in 2022.

Impact of tax residency on crypto wealth accumulation

Based on the introduction of the previous two parts, the third part we mainly talk about the impact of US tax residency on the accumulation of crypto wealth, mainly in two aspects.

3.1 Double taxation caused by multiple tax resident status

First of all, let's look at the first aspect, that is, the double taxation caused by multiple tax residency. Through the introduction of the first and second parts, a person can be defined as a tax resident in several countries and territories at the same time. There are two main ways to be identified as tax residents in more than one country in the same tax year:

The first meets the residence criteria of different countries at the same time. For example, A is a citizen of China and chooses to live permanently in Singapore. They are tax residents of the PRC according to the PRC tax law. They are tax residents of Singapore according to the Singapore domicile criteria. Therefore, A is both a tax resident of China and a tax resident of Singapore in the same year.

In the second case, the local residence criteria are met in one country and the local residence criteria are met in another country. As in the previous case, the Chinese citizen came to the United States to work for half a year. According to China's tax law, because he has a habitual residence in China, he meets China's residence standards and is a tax resident in China. According to the U.S. standard of stay, it meets the U.S. standard of 183 days, so it is a tax resident of the United States.

In both cases, the same income is taxed twice in multiple countries. There are two main international solutions to this situation.

The first is to determine the order of residence criteria by signing tax treaties between countries. For example, the tax treaty signed by China and the United States provides that: first, it depends on which country of the two countries a person has a permanent residence. If you have a permanent residence in China, you are a tax resident in China. If there is no permanent residence in either country, then look at which country the person's center of economic interests is in. For example, if the person's company manages business primarily in the United States, it is a primary tax resident of the United States. If the above two conditions are not met, then look at the habitual residence in which country, and finally the nationality of which country. If none of the above four conditions are met, the tax authorities of China and the United States will consult with each other to determine which country the person is the primary tax resident of. According to the tax treaty, only the main tax resident country has the right to tax. For example, if you are a primary tax resident in China and you may also have a residence in the United States, but you are not a primary tax resident in the United States, then only the Chinese Tax Bureau has the right to tax you.

The other is the tax credit, which avoids most double taxation. For example, if you travel to the United States for work as a Chinese resident every year, you have earned a certain amount of income in the United States. Depending on the length of stay standard in the US, you may be subject to tax in the US.

Both of the above methods can avoid double taxation, but there are certain limitations. First, not all countries have tax treaties with each other. For example, Chinese mainland has signed tax treaties with more than 100 countries and regions. But countries that do not have a tax treaty are at risk of double taxation. Second, taxes paid in one country may not be fully deductible in another. For example, according to the individual tax regulations of China and the United States, the individual tax rate in the United States is generally higher than that in China. When taxes paid in the United States are deducted in China, China will have a limit deduction. In addition, taxes paid in some countries are not deductible in China. As a result of these limitations, these programmes and measures do not completely avoid double taxation.

3.2 How to reasonably reduce the tax burden cost

As mentioned above, we may be tax residents of multiple countries, or we may only be tax residents of low tax countries. This requires understanding the relevant tax laws and regulations of each country and region, and determining which country to choose as a tax resident based on the tax resident rules of each country. To become a tax resident of a low-tax country, you only need to pay taxes at a low rate there.

When planning for tax status, we should not only consider tax reasons, but also the local politics, economy, and living environment. It is recommended to pay attention to two aspects:

First, when transnational income occurs, try to plan in advance and be familiar with local tax laws and regulations to avoid becoming tax residents of multiple countries. Otherwise, you may have to pay more taxes and not be able to make tax credits, resulting in an increased tax burden.

Second, for high-income groups, if conditions permit, reasonable tax status will be conducive to reducing tax costs.

The above content is my share today, thank you very much!