Professional Discussion: Does crypto world income need to be taxed in the future? How to deal with it?

Author | FinTax

During this discussion, the global regulatory compliance heat for crypto assets continues to rise, as countries strengthen tax information exchange and tracking for on-chain assets, overseas accounts, and cross-border transactions. In this session, Calix and William shared their cross-border tax practical experience and on-chain business backgrounds, discussing hot topics such as global tax compliance for crypto assets, tax arrangements, and regulatory games. The two discussants also shared their visions for an ideal Web3 tax system and, using real cases, discussed the taxation logic in various scenarios including exchange compliance, DeFi, mining, and airdrops.

Who should cross-border income be taxed to?

Calix: I would like to first ask a "soul question". You usually engage in mining, and the company sometimes issues bonuses in the form of cryptocurrency. How do you typically fulfill your tax obligations for this kind of income?

William: This is a very practical question. I completely agree with a point you mentioned earlier: since we are enjoying the infrastructure and business environment provided by a certain country or region, fulfilling our tax obligations is reasonable in itself. However, the reality is not that simple. For example, our company's clients are distributed across multiple markets including North America, Europe, and the Middle East, and the revenue behind this relies on conditions provided by multiple locations, making it difficult to attribute it completely to one place.

Although I mainly deal with American clients and most of my income comes from the U.S. market, it is actually quite difficult to have a definitive answer on who this tax should be paid to.

Overall, I am willing to pay taxes, but it is indeed not easy to clarify who the money should be paid to for this type of income. After all, the formation of this income does not entirely depend on where I am.

Calix: I think your answer really hits the nail on the head. Web3 projects are inherently cross-national and cross-regional, making it difficult to accurately attribute income to a specific location. Economic activities are closely related to both the source of customers and the platforms, networks, and infrastructure used. Therefore, the question of who should ultimately pay this tax is indeed a matter worth exploring in depth.

To be honest, although I have been working in tax-related jobs for many years, I have also been confused about this issue myself. According to the current tax laws, I might be a tax resident of mainland China, and I might also have tax obligations in Singapore, but my business primarily targets North America, and sometimes there are salaries issued through a Hong Kong company. If I were to follow the tax laws completely, the answer might seem clear on the surface, but determining what approach is more reasonable is indeed worth pondering. For Web3 practitioners, these discussions often surpass the scope that traditional tax frameworks can fully cover.

William: That's right, I think the core issue is that the evolution of the global tax regulatory system really struggles to keep up with the pace of technology and industry development. Regulation has been trying to catch up, but industry changes and technological innovations are always ahead. This state of being "chased" may persist for a long time, and there will always be a dynamic balance between regulation and industry.

Case Discussion: Tax Supplement for Individual Cryptocurrency Trading in Mainland China

Calix: Recently, there have been two hot topics in the Chinese Twitter community, one of which is the announcement released by the Zhejiang Taxation Bureau, stating that an individual was asked to pay back taxes due to cryptocurrency trading. Later, we learned through some channels that, in fact, it was after the CRS information exchange that the tax bureau discovered an unusual balance in his overseas bank account and asked him to explain the source of the funds. He explained that this portion was income from investments, hence he needed to pay back taxes, and coincidentally, this investment involved cryptocurrency.

For me, this kind of case is not surprising, after all, this is my area of expertise, so I find it quite normal and representative. William, you have been working on on-chain projects like DeFi, mining, etc. What do you think about this case?

William: It is indeed very representative. We ourselves actually assessed early on that cryptocurrency trading would eventually be subject to taxation. However, when this situation truly occurs around us, especially for many Chinese, the impact is still quite significant. Traditional DeFi or some purely blockchain-based activities have always been difficult to regulate, often relying on users' self-discipline. In the past, there were indeed some regulatory barriers that led to the tax authorities not having particularly strong enforcement power over these relatively niche, decentralized, and hard-to-trace on-chain activities.

I think the reason why this is happening so "timely" now is also related to other trends in the industry. Recently, there have been many reports indicating that some U.S. stock investors have received text messages or phone calls requesting tax payments, which shows that regulators are starting to more closely track individuals' overseas income, with the first focus being on overseas securities investments.

The logic behind this is also very clear: the intersection between the US stock market and the cryptocurrency space is growing larger. From Robinhood to Asia’s Tiger Brokers and Futu, even Guotai Junan International, many brokerages are dealing with crypto assets, making it increasingly difficult to separate the links between the US stock market and crypto assets. Once you look at overseas income comprehensively, just by checking the US stock market, it is easy to include the cryptocurrency space in your view, especially considering that the size of crypto assets is already significant.

Moreover, this "stock-coin combination" is not a short-term phenomenon. For instance, in the United States, some companies are attempting to tokenize U.S. stocks; in Asia, conversely, they will package crypto assets into listed companies to drive stock prices, obtain premiums, and boost secondary market performance. There is an interest-driven motive behind this combination. Whether it's "stock becoming coin" or "coin being packaged as stock," both will further strengthen the connection between the two, which will naturally make the requirement to "pay taxes on trading coins" inevitable.

In general, cryptocurrencies and the stock market have become highly intertwined. As this trend continues to develop, the tax issues related to trading cryptocurrencies will become increasingly rigid, and the room for evasion will become smaller.

Calix: This perspective is indeed quite novel, and I haven't thought deeply from the angle of "stock-coin linkage" before. After all, when it comes to stock investment, people have already become accustomed to where they earn money in which market and where they pay taxes, whether it is capital gains tax or business income generated by quantitative investment; the framework is relatively clear.

However, when it comes to cryptocurrency, there are indeed gray areas in some regions, especially in the mainland, regarding "whether to pay taxes and what taxes to pay." However, looking at the evolution of stocks and tokens, this line of reasoning is actually quite enlightening and reminds everyone that this is a new issue that requires long-term attention.

The long-term game between regulation and tax avoidance

William: Based on your years of frontline tax practice experience, now that this has been initiated, do you think there will be people who, concerned about tax risks, start to avoid cryptocurrencies? Or will there still be people who are willing to take on risks to find ways to evade taxes, or even choose not to report taxes, continuing to operate heavily in the crypto space? What impact will this have on the overall direction of the industry?

Calix: This is a very typical real-world issue. I have always believed that regulation and "anti-regulation" have always existed, and this is not only a characteristic of the cryptocurrency space but also of traditional industries. For the tax authorities or any regulatory agency, they naturally hope to collect the taxes owed as completely as possible; while from the taxpayer's perspective, regardless of the region, everyone hopes to legally minimize taxes or reduce tax burdens as much as possible. These two demands are inherently contradictory.

In my experience, this dynamic is very much like the contradictions ingrained in human nature, always progressing through a cycle of conflict, balance, conflict, and balance again. Especially in recent years, regulatory measures have become increasingly diverse, and technological methods have become more digitalized. Take the mainland for example, the tax regulatory capabilities have indeed improved rapidly in recent years, and the level of informatization is also increasing. However, at the same time, tax avoidance methods are also evolving. In the early days, it might have only been traditional methods such as cash transactions, concealing income, and money laundering. The "tax avoidance" I am referring to here means non-compliant tax evasion behavior.

Later, with the advent of cryptocurrencies, some taxpayers found themselves with a new operational space. For quite a long time, cryptocurrencies were indeed difficult for tax authorities to track. Even though some regulatory agencies have on-chain tracking capabilities, when it comes to actual tax enforcement, the efforts are often insufficient, so some people did indeed enjoy the "sweetness" during this period.

But the core of the future still depends on the scale. For example, in the early days of the cryptocurrency world (from 2013 to 2017), many large mining farms and miners actually paid great attention to financial and tax compliance; compliance is the bottom line of operations. However, there were indeed players with very large scales who were still willing to take risks and evade taxes, and these two situations have always coexisted.

From a trend perspective, the early "grassroots" phase had low emphasis on compliance, but increasingly today, more large institutions are prioritizing compliance. After all, in mainstream markets like Hong Kong, Singapore, and Europe and the United States, regulatory bodies, especially tax authorities, have a deeper understanding of crypto assets, and this is an irreversible trend.

As for individual investors, such as retail investors or employees of Web3 projects, whether they can comply depends more on the actual amount involved. If the sum is too small, completing some necessary reporting actions is generally sufficient. Law enforcement also needs to consider the cost-benefit ratio; unless there are some typical cases with "demonstrative significance," like the recent event discussed on Twitter about "paying over a hundred thousand in taxes," which is not a large sum but has some warning effect.

Overall, large institutions will place increasing importance on compliance, as it is a prerequisite for sustainable operations; while on the C end, individuals are essentially still directly related to the amount of funds, just like in the real world.

The boundary between improper income and asset compliance

William: I think there is an interesting point here. Many people also feel that paying taxes to a certain extent is a way to prove the legitimacy of property or income. But in the cryptocurrency space, to put it bluntly, there are quite a few "cutting leeks" behaviors, which, in legal terms, are some improper financial operations. These behaviors can also bring high returns. So if these people pay taxes as required, does that mean they are, in a sense, "laundering" essentially improper money through taxation? This question might be a bit sensitive, what do you think?

Calix: This is a great question, and I often think about this boundary myself. I believe that whether taxes are paid or not can at most prove that the tax obligation has been fulfilled, but it cannot fundamentally prove that the funds are legal in a broader sense. If a sum of money simultaneously violates other financial regulatory laws, such as those related to the SEC, or involves fraudulent or other illegal financial activities, even if the taxes are paid, it does not affect other regulatory agencies' penalties and investigations into the source of those funds.

For example, if the funds are involved in money laundering, organized crime, or grey activities, and touch upon international anti-money laundering regulations, or if a person violates local customs, financial regulations, and other legal provisions in Hong Kong, then having paid taxes in Hong Kong does not simply mean that this money is not considered "black money". Tax compliance and the legality of funds are two separate legal aspects and cannot be simply equated.

William: I agree. I would like to add that I have always felt that the issue of "tax" should have been discussed earlier, because we must first acknowledge that an asset is legitimate before we can talk about taxation. If the property cannot even be effectively identified as an asset, it cannot be regarded as a taxable property, and naturally, there is nothing to report or pay tax on.

In the overall environment in China, this area has always been relatively vague, mainly because the legality of assets has often not been fully confirmed, making it difficult for people to establish tax habits, and regulation is also hard to truly advance. However, looking at a global scale, especially in most developed countries and regions, the legality of crypto assets has become relatively clear. As long as the legal status is determined, local tax authorities will require this portion of income to fulfill tax obligations.

For many Chinese people, if this money is confirmed overseas taxable income, it is theoretically very difficult to completely bypass it. The timing of this occurrence is also related to the gap in international systems. In the past, people believed that there were technical barriers and high levels of concealment on the blockchain, making it difficult for regulators to track, so there was a sense of "illusion". However, a very obvious trend now is the development of RegTech (regulatory technology). It is continuously enhancing the information mastery and data analysis capabilities of regulatory agencies, and many service-oriented companies are also providing support, which will gradually bridge the information gap between regulation and the industry to a large extent.

Tax planning space in the cryptocurrency sector for enterprises and individuals

William: I want to ask you a practical question. Since it's actually very difficult for ordinary users to completely "avoid" this tax, is there still a possibility to do some tax planning through compliant means? From your practical experience, is there much room for enterprises and individuals to do tax planning in the crypto space?

Calix: Let me start with a rather "heart-wrenching" conclusion on this topic: for most ordinary people, the space for tax planning is actually very limited. The main reason is that ordinary people's sources of income are relatively singular, primarily consisting of salaries, bonuses, or a small amount of subsidies, all of which are fully recorded by the company. Once the company reports truthfully, individuals find it very difficult to have any additional "optimization" opportunities.

Therefore, for ordinary individuals, the best they can do is to fully utilize the preferential policies already available in the local tax laws, such as exemptions, child support, elderly support, marriage deductions, etc. Effectively applying these basic deductions and thoroughly ensuring compliance in reporting can already be considered the "optimal solution."

William: Yes, it does sound like space is limited.

Calix: However, the situation is different for high-net-worth individuals or enterprises. Their income patterns and structures are usually more complex, with diverse sources, larger transaction scales, and more cross-border tax matters. This diversity and complexity naturally bring more operable space.

In simple terms, the tax rates and taxation methods applicable to different types of income vary. For example, wages are taxed at the full amount, while capital gains or dividend income often enjoy relatively favorable tax rates or exemptions. Additionally, there are differences in tax systems between different regions, such as Mainland China, Hong Kong, Singapore, the United States, or Canada, where the design of the system and tax burdens are quite distinct, potentially creating "arbitrage opportunities" in cross-border arrangements.

Moreover, don't forget that whether it is a civil law system or a common law system, the foundation of tax law is expressed through text, and legal provisions often leave some "gray areas." For high-net-worth individuals and large institutions, they have sufficient resources and professional advisory teams to study and utilize these spaces to maximize tax optimization within the legal boundaries.

This is also why I have always felt that the middle class is actually one of the hardest-hit groups: their income seems not low, working hard in companies or large enterprises, earning hundreds of thousands a year, often working overtime, but their income structure is singular, with limited maneuverability and very little room for tax savings; in contrast, high-net-worth individuals and large institutions earn more and have more tools at their disposal.

Therefore, regardless of the country, the middle class is usually a key focus of tax authorities - they have income that exceeds a sensitive threshold but do not have enough resources to legally hedge, making them the most easily "precisely targeted" in enforcement.

The potential tax obligations and optimization opportunities for income from mining, airdrops, DeFi, etc.

William: Calix, you just mentioned the issue of income structure, which I find very interesting. In the past, people's sources of income were indeed quite singular, just salaries and bonuses. However, the cryptocurrency space has provided many middle-class and ordinary people with a more diversified income stream, such as mining, airdrops, staking, and DeFi yields. For example, a mining machine might only cost $2000, and buying a few can be manageable for the middle class, making it a small-scale "business" operation. This kind of income brings new complexities; could you briefly introduce what different forms might involve in terms of tax obligations?

Calix: I think instead of directly talking to everyone about "how to pay taxes", it might be better to say a little more and see if there is some legal space within these actions. Although this topic is indeed quite sensitive, I still think it can be briefly discussed.

Many ordinary people seem to have more forms of income, but from a tax perspective, the core issue is: the income entity is generally still yourself, without the multi-layered structure of trusts, companies, or funds to disperse the tax burden. For example, mining is considered business income in most regions; airdrops, if only received but not disposed of, generally will not trigger tax obligations temporarily. Only after converting to fiat or exchanging for other currencies, resulting in actual gains, is it necessary to report. Staking or DeFi earnings can be considered capital gains in some jurisdictions, and capital gains tax rates are usually lower than business income, with some regions not even imposing them.

So there is indeed space for a "reasonable definition" in this regard, such as whether certain high-tax operating income can be reasonably interpreted under local tax laws as capital gains or other types of income with preferential tax rates. However, this premise relies on the fact that tax laws leave some gray areas, and that the supervision during execution cannot fully and accurately track on-chain activities. Otherwise, once the data becomes traceable, the space will be greatly reduced.

So essentially, it is not realistic for ordinary people to conduct large-scale tax planning, as all income is under their personal name and can easily be classified as business income or high tax burden categories. In contrast, things like airdrops and forks, if allowed by local policy, may be treated as low tax burden or deferred. Many people study how to reasonably convert high tax burden parts into categories with lower tax rates and better treatment, which depends on whether local laws leave enough room and whether the operations are compliant.

Practical considerations for digital nomad identity planning

William: I would like to ask one more question: there are quite a few people in the crypto space who call themselves "digital nomads." In the past, I might not have paid much attention to this, thinking that as long as I didn't engage in illegal activities, it would be fine to report taxes in my home country. But do you think more people will actively choose to become tax residents of certain overseas regions in the future? For example, they might want to use bilateral tax agreements to achieve "if I pay taxes in Singapore, I don’t have to pay them again in the mainland." Will this path become a legitimate planning direction chosen by more people?

Calix: This can actually be considered a relatively legitimate approach, making reasonable use of different tax jurisdictions to reduce the overall tax burden. However, I would like to remind you that no matter where you file your taxes, it is essential to keep good records of your deposits, withdrawals, and trading activities, as these can serve as key evidence during tax inquiries to avoid unnecessary trouble. Moreover, there is currently a CRS (Common Reporting Standard) mechanism globally, making it difficult to completely "hide" information for a long time. From a broader perspective, cross-border identity planning is worth considering, but in any case, all materials and records must be complete, and what needs to be reported must be reported truthfully.

Let me add one more point. Taking Singapore as an example, I recently had a friend who asked a similar question. He works in Singapore and earns income settled in USDT or fiat currency, and he pays taxes normally there. He asked: does he still need to report back to the mainland? His situation is that he spends less than 183 days in the mainland each year.

From the perspective of mainland tax law, whether an individual qualifies as a tax resident is primarily based on the core criterion of "183 days." However, in more detailed regulations and practical operations, factors such as nationality, household registration, and primary social relationships are also considered. If these connections are all within the country, even if the person is overseas, they may still be regarded as a Chinese tax resident and will need to conduct a complete tax settlement to deduct already paid taxes. Moreover, whether you hold a Singapore EP (Employment Pass), PR (Permanent Resident), or another type of status may also affect the outcome. There is no fixed template for this; it can only be analyzed on a case-by-case basis.

William: So even if you haven't lived in the mainland for a full 183 days in a year, you can't simply assume that it's completely "safe".

Calix: Yes, things are not that absolute. In international taxation, there is a "tie-breaker rule" that looks at factors such as your family ties, economic interests, daily life trajectory, etc., to determine the primary place of taxation.

William: Yes, many people tend to overlook this point. Even if a person is overseas, with their visa or identity abroad, if their main family and social connections are still in the country, according to the "Gabbi Rule", they are often ultimately recognized as a Chinese tax resident, so it is important to pay special attention to this part.

Vision for Future Cryptocurrency Taxation

Calix: Finally, I would like to ask a more open question, which can also serve as the conclusion of this discussion.

From your personal perspective, as a practitioner or user who has been deeply involved in the crypto space for many years, what kind of tax system do you think would be more user-friendly for Web3 users? In other words, what is your most ideal and anticipated tax model?

William: This question carries a bit of my personal viewpoint and does not represent the position of any company.

I have always quite agreed with the concept of "sovereign individual" in the context of crypto, which is rather idealistic. I also support the possibility of the "Network State" mentioned by Vitalik Buterin and others. I believe that at some point in the future, this form will slowly take root in some corner of the world, and it may even become an irreversible trend.

As time goes by, the infrastructure that humanity relies on may increasingly shift from the physical world to the digital world. For me, it might currently be 80% still at the physical level and 20% digitized, but in the future, the impact of digital infrastructure on everyone will certainly surpass that of traditional physical environments.

Just like what was often said in the internet circle before, "hardware is free, software is charged," some manufacturers used to give away phones for free, but the content and services were charged over the long term. I think the future may be similar: the "hardware" part of the physical world may bear a lighter burden, while what truly requires ongoing payment will be the "services" in the digital world.

From this perspective, I fully agree with a point you mentioned earlier: the blockchain infrastructure relies on physical resources such as electricity, network, and chips. Miners and nodes consume these resources to provide network services, and the money they earn should bear most of the tax responsibility to the physical world. For individual C-end users, they enjoy the digital services provided by these nodes and miners, so they primarily pay "service fees" to the network through Gas fees and other means, which are then used by miners and nodes to fulfill tax obligations to the real world.

So in my ideal model, it would probably be a two-layer structure:

On the first layer, infrastructure providers (miners, nodes) pay taxes to the physical world;

On the second layer, individual users indirectly pay fees to the network through forms such as Gas fees, which are then funneled back into the real-world tax system.

As the proportion of digital spending by humans continues to increase in the future, the direct tax burden in the physical world will gradually decrease, while the blockchain network will resemble a self-governing micro tax system, bearing corresponding real obligations through the Gas mechanism and distribution structure.

Calix: I think this is a very imaginative and forward-looking idea. I also believe that as the crypto industry develops, it will definitely accommodate an increasingly large volume of assets in the future, and the deep integration with traditional finance will accelerate. In the future, it may replace some parts of traditional finance that are inefficient and lack transparency, and at that time, it will inevitably require matching new legal systems and regulatory frameworks.

Many of the points you shared today are very insightful. When we conduct our current business, we also need to think more about what might happen in the future and even try to drive some changes if possible. I would like to add a point regarding RWA. Currently, many assets on the blockchain are essentially achieved through layers of packaging, nesting, and contract mapping. There is still a considerable separation between on-chain and off-chain. However, this may just be a transitional phase. In the future, if the legal system is more refined, asset information will be more directly and transparently brought on-chain, and those complex nests in between may gradually disappear.