China has had a delicate relationship with the cryptocurrency industry for a long time, with its government hesitant on policies ranging from a total ban to researching the utility of blockchain. Several municipal governments have recently begun to levy a high-income tax on cryptocurrency.
Specifically, several crypto whales, miners, and other investors have stated that they are being audited by their local tax authorities for personal income tax beginning in early 2022 and are still waiting for the results, according to Colin Wu on January 25.
According to the report, this represents the implementation of a 20% personal income tax on investment profits for individual cryptocurrency investors and many Bitcoin (BTC) miners after several major domestic exchanges provided extensive information about some of the whales’ transactions to tax authorities.
Different perspectives on digital assets
Although this practice would imply that the Chinese government has finally accepted cryptocurrency’s legal status, the truth is more complicated, with tax officials and banking institutions holding opposing opinions on the legality of crypto.
China Tax News, a subsidiary of the State Administration of Taxation, published an article in October 2021 stating that the services previously provided by overseas exchanges to Chinese residents were “not expressly prohibited by law,” but imposing VAT, enterprise income tax, stamp duty, and other related taxes on the income they receive from China.
At the same time, while China has strict restrictions on illegal financial activities involving digital currencies, it does not prohibit individuals from holding digital currencies such as Bitcoin under its current legal framework, with the trading of virtual currencies defined as a “invalid civil act” but not explicitly prohibited by law.
In contrast, a November 2022 article in the China Public Prosecutor’s Journal stated that the government had intensified its monitoring of digital assets such as Bitcoin in recent years, highlighting significant financial risks associated with them.
According to a top tax professional, the taxation department has its own taxation foundation, as tax audits on whales have been tighter, and the tax authorities have lately initiated investigations of the international whale trade.
China’s intricate crypto connection
China began restricting the use of cryptocurrencies, especially Bitcoin, by the country’s banks more than nine years ago, but it has since unknowingly become a silent crypto whale, in part due to its restrictive tactics, and has listed as one of the top 10 countries in crypto adoption.
Interestingly, the FTX bankruptcy filing recently disclosed that mainland China accounted for the third greatest share of the crypto exchange’s users, trailing only island tax havens like the Caymans and the Virgin Islands.
In fact, China’s crypto holdings, which resulted from the confiscation of a substantial number of Bitcoin and Ethereum (ETH) from the Plus Token program in 2019, are so massive that the country could destroy the whole crypto market in seconds if it so desired.
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