China's four regions simultaneously verify overseas income. How should Web3 practitioners respond?

Web3 practitioners should pay attention to the declaration of overseas encryption asset income and make reasonable tax arrangements.

Written by: FinTax

News Overview

From 25 to 26 March 2025, the tax authorities of Hubei, Shandong, Shanghai and Zhejiang in China will simultaneously issue announcements within 48 hours to carry out centralized verification of the overseas income declaration of residents in China. In September 2014, China formally committed to the implementation of the Automatic Exchange of Financial Account Information (AEOI) standard under the CRS framework, and completed the first exchange of information with other CRS participating countries (regions) in September 2018, covering core data such as account balances and investment income from major countries such as the United Kingdom, France, Germany, Switzerland, and Singapore, as well as traditional tax havens such as the Cayman Islands, the British Virgin Islands (BVI), and Bermuda. This time, the tax authorities in the four regions of China identified a number of typical cases, with recoveries ranging from 127,200 yuan to 1,263,800 yuan, and adopted a five-step working method of "prompting and reminding, urging rectification, interviewing and warning, filing and auditing, and public exposure" to promote rectification.

FinTax Brief Review

1. Interpretation of Announcement Features

This tax audit presents two distinct characteristics. The first characteristic is the expansion of the audit subjects for overseas income, targeting the middle-class group. Unlike previous focuses on the overseas income of high-net-worth individuals, the taxpayers in this audit have asset sizes and income levels that fall into the upper-middle-income category. For example, in a typical case published by the Zhejiang tax department, the amount of tax owed was 127,200 yuan. This shift indicates that tax authorities in mainland China have begun to pay attention to the overseas income of the middle-income group.

The second characteristic is the coordinated and complementary verification scope of tax authorities in four regions. On one hand, the cross-border flow of private capital in Zhejiang, offshore financial transactions in Shanghai, traditional manufacturing going global in Shandong, and new manufacturing in Hubei essentially cover the mainstream scenarios of overseas income for the middle class. On the other hand, the coordinated release of verification announcements by multiple regions may imply a higher-level unified directive, and it also means that the previous practice of individuals "voluntarily declaring" their overseas income will gradually shift to strict substantive audits by tax authorities regarding overseas income.

2. How does Mainland China tax residents' overseas income?

At the beginning of 2020, the Ministry of Finance and the State Administration of Taxation (MOF, SAT Announcement [2020] No. 3, hereinafter referred to as "Announcement No. 3") issued the Announcement on Individual Income Tax Policies on Overseas Income (Announcement No. 3 [2020] of the Ministry of Finance and the State Administration of Taxation) to further clarify the tax treatment and collection administration of overseas income of Chinese resident individuals. Based on the principle of global taxation, which is based on safeguarding national tax sovereignty and achieving social fairness, the requirements for taxation of residents' overseas income in Chinese mainland are roughly as follows:

In terms of taxpayers, according to the Individual Income Tax Law of the People's Republic of China, an individual who meets any of the following conditions is recognized as a "Chinese tax resident": 1. Domestic domicile: refers to an individual who has formed a habitual residence in China due to household registration, family and economic interests, even if he has been working or living abroad for a long time, as long as he has not abandoned his household registration or family ties, he may still be recognized as a resident. 2. Residence in China for 183 days: Individuals who have resided for a total of 183 days in a tax year (January 1 - December 31) are considered residents even if they do not have a domicile.

Regarding the scope of taxable income, resident individuals who obtain all income from both within and outside China shall declare and pay individual income tax according to China's Individual Income Tax Law. However, if an individual without a domicile resides in China for a cumulative period of more than 183 days in a tax year, but has not resided in China for more than 183 days in any one of the previous six years or has a single departure from China exceeding 30 days, the income derived from outside China and paid by foreign entities or individuals in that tax year is exempt from individual income tax.

3. Tax Obligations of Web3 Practitioners

Announcement No. 3 clarifies the types of taxable foreign income, which can be divided into comprehensive income (income from wages and salaries, remuneration for labor services, author's remuneration, royalties), business income and other income (income from interest, dividends, dividends, property transfer, property lease and incidental income) derived from sources outside China. However, other classified income of resident individuals derived from sources outside China shall not be combined with domestic income, and the tax payable shall be calculated separately.

The tax treatment of encryption assets in mainland China still has many points of controversy. The following will illustrate this with a few common scenarios:

For commercial mining activities that continue to operate overseas, tax authorities may classify them as business income, allowing the deduction of necessary costs such as equipment and electricity, which aligns with their capital intensity and continuous investment characteristics. However, if miners engage in mining as individuals, the tax classification becomes a dilemma: if treated as occasional income, it aligns with the randomness of earnings but results in an excessively high tax burden due to the inability to deduct costs; if referenced to capital gains, the lack of stable valuation benchmarks for encryption assets makes it difficult to reasonably ascertain the appreciation portion, leading to potential tax disputes.

Another common scenario is when residents of mainland China generate profits through encryption asset trading, where the determination of commercial substance becomes crucial. If there is a fixed location, a hired team, and continuous trading, it may be recognized as business income. High-frequency traders face the risk of being classified as business income, while ordinary investors typically only pay taxes on the appreciation portion, but need to provide complete cost documentation to prove the original value of the asset, thereby avoiding double taxation and excessively high assessed profit rates.

4. What can Web3 practitioners in mainland China pay attention to?

In response to late declarations or deliberate concealment of foreign income, the Chinese mainland tax authorities have established a layered legal liability system. According to Articles 32 and 63 of the Law on the Administration of Tax Collection, taxpayers' failure to file on time or false declaration will result in progressive punishment of tax collection, accumulation of late payment fines, administrative penalties and even criminal penalties: from the day after the expiration of the statutory declaration period, a late payment penalty of 5/10,000 of the overdue tax will be charged on a daily basis, resulting in huge financial pressure; For verified tax evasion, in addition to recovering the full amount of tax, a tiered fine of 50% to 5 times of the tax payable will be imposed according to factors such as the degree of subjective malice and the complexity of the concealment means; If the amount involved reaches the standard for filing a criminal case, it will be transferred to the judicial authorities for criminal responsibility.

In the context of global tax transparency and regulatory technology upgrades, the tax issues of cross-border income from crypto assets deserve more attention. At present, the Chinese tax authorities have achieved in-depth supervision of core data such as overseas account balances and investment income through means such as CRS information exchange. Web3 practitioners can consider making reasonable tax arrangements and filing tax returns truthfully. In particular, judging from the several cases disclosed this time, the cost of late fees and fines paid after the fact far exceeds the taxes and fees that should have been paid. Specifically, Web3 practitioners in Chinese mainland can start to prevent risks from two aspects: first, they can sort out their past overseas income by themselves or with the help of professionals, determine whether they have generated taxable income, and take remedial measures; Second, they can constantly adjust and update their own tax arrangements, and reduce their own tax burden as much as possible while complying with relevant laws and regulations.