The rapid evolution of blockchain technology has catalyzed a surge in decentralized digital economies, with cryptocurrencies like Bitcoin leading the charge. As these digital assets gain global traction, tax authorities worldwide are grappling with how to regulate them. Despite China’s cautious regulatory stance, the growing scale of the crypto market—surpassing $2 trillion—demands a reevaluation of its place within national tax frameworks. This article explores the taxability of crypto assets under existing tax laws, proposes a governance model based on legal functionality, and outlines a structured path for integrating crypto into China’s tax system.
Understanding Crypto Assets and Their Tax Challenges
Defining Crypto Assets and Their Legal Nature
Crypto assets are digital representations of value secured by cryptography and distributed ledger technologies such as blockchain. Unlike traditional currencies, they operate without central intermediaries, enabling peer-to-peer transactions. The Organisation for Economic Co-operation and Development (OECD) categorizes them into three types: payment tokens, utility tokens, and security tokens—each serving distinct economic functions.
From a legal perspective, the classification of crypto assets has evolved from early terms like "virtual currency" to the broader "digital asset," reflecting their multifaceted roles beyond mere exchange. Crucially, both civil and commercial law increasingly recognize crypto assets as property due to their scarcity, transferability, and market-driven value. This property status is foundational for establishing their taxability.
In tax law, an object must demonstrate economic benefit inflow and measurable value to qualify as a taxable asset. Crypto holdings meet this criterion: users gain economic benefits through ownership, and despite price volatility, active trading markets allow for reliable valuation. Thus, crypto assets satisfy core accounting and tax principles for asset recognition.
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Current Taxation Dilemmas in Practice
China’s financial regulators have consistently discouraged crypto trading. Key policies include:
- 2013 Notice: Prohibits financial institutions from handling Bitcoin transactions but does not outright ban individual ownership.
- 2017 Announcement: Bans Initial Coin Offerings (ICOs), citing risks of illegal fundraising.
- 2021 Notice: Declares all crypto-related financial activities illegal within China.
While these measures aim to protect financial stability and prevent illicit use, they create ambiguity in tax treatment. There is no explicit legislation confirming whether gains from crypto transactions are taxable. As a result, tax authorities remain hesitant, often deferring or declining to provide guidance.
A review of responses from regional tax bureaus reveals inconsistent interpretations. Some treat crypto as intangible property subject to income tax; others avoid comment entirely. This lack of uniformity undermines enforcement and leads to tax base erosion, where significant economic activity escapes taxation.
The root causes of this inertia include:
- Technical complexity: Many tax officials lack the expertise to assess blockchain-based transactions.
- Regulatory uncertainty: Negative policy signals discourage proactive tax administration.
Without clear rules, taxpayers face compliance risks, and the state loses potential revenue—a situation unsustainable in the long term.
Establishing the Taxability of Crypto Assets
To integrate crypto into the tax system, we must affirm its legitimacy, fairness, and practical feasibility under current law.
Legality: Fitting Within the Tax Legal Framework
Critics argue that taxing crypto contradicts China’s restrictive policies. However, legality should not be conflated with permissibility. The absence of explicit legalization does not equate to illegality.
Key points supporting legality:
- Regulatory notices target financial institutions, not individuals engaging in private transactions.
- Holding or transferring crypto for non-commercial purposes isn’t criminalized.
- The Supreme People’s Court’s 199th Guiding Case misinterpreted earlier regulations by invalidating Bitcoin-related arbitration awards—yet this reflects judicial caution rather than statutory prohibition.
Moreover, taxation does not imply endorsement. Governments tax tobacco and alcohol despite health concerns—likewise, taxing crypto can coexist with strict regulation.
Crucially, the principle of tax legality does not require every tax detail to be codified in law. It demands clarity and predictability, which can be achieved through administrative guidance or judicial interpretation. Given that crypto generates real economic gains, excluding it from taxation would violate the principle of equal treatment among taxpayers.
Reasonableness: Why Taxing Crypto Makes Economic Sense
Even if legal, is taxing crypto necessary? The answer lies in macroeconomic goals:
- Promoting Fairness: Allowing untaxed crypto profits creates inequality between digital and traditional investors.
- Curbing Illicit Flows: Transparent reporting requirements can help detect money laundering and capital flight.
- Supporting Fiscal Policy: With rising public spending needs, new revenue sources are essential.
- Global Alignment: Major economies—including the U.S., UK, Germany, and Japan—already tax crypto gains. Harmonization enhances cross-border cooperation.
For instance:
- The U.S. IRS treats crypto as property; gains trigger capital gains taxes.
- Germany taxes private sales only if held less than one year.
- Japan integrates crypto into its comprehensive income tax framework.
China risks falling behind if it fails to establish a coherent approach.
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Feasibility: Overcoming Measurement and Enforcement Barriers
A common objection is that crypto’s volatility and anonymity make taxation impractical. However, modern tools render these concerns manageable.
Tax Base Design
Three potential models exist:
- Quantity-based taxation (e.g., taxing data volume): Not viable—value depends on content, not size.
- Value-based taxation (e.g., wealth tax): Problematic due to price swings and unclear realization events.
- Gain-based taxation: Most suitable—taxes apply only upon disposal or exchange when profit is realized.
Adopting a gain-based model aligns with existing income tax logic: only actualized profits are taxed.
Enforcement Mechanisms
Blockchain’s transparency offers unique advantages:
- All transactions are recorded immutably.
- Wallet addresses can be traced (though pseudonymously).
- Chain analysis tools enable pattern detection.
Solutions include:
- Mandating exchanges to report user transaction data (similar to FATCA).
- Integrating blockchain analytics into tax audit systems.
- Developing digital declaration forms for self-reporting.
- Leveraging smart contracts for automatic withholding in DeFi scenarios.
These steps support a shift from “invoice-based” to “data-driven” tax governance—a key goal of China’s ongoing tax reform.
A Practical Tax Governance Framework
With taxability affirmed, the next step is designing implementation pathways across two stages: acquisition and circulation.
Taxation at the Acquisition Stage
How crypto is obtained determines its initial tax treatment.
Mining (Proof-of-Work)
"Miners" contribute computational power to validate transactions and receive new coins as rewards. This constitutes a service—securing the network—and should be treated accordingly.
- VAT: Applies at 6% under “information technology services.”
- Income Tax: Rewards count as labor income. Individuals report after deducting 20% expenses; enterprises deduct operational costs before corporate income tax.
Staking/Forging (Proof-of-Stake)
Users lock up coins to participate in consensus and earn rewards. This resembles interest or dividend income but remains probabilistic—thus better classified as windfall income.
- Taxed at a flat 20% rate upon receipt.
Airdrops
Free distribution of tokens for marketing purposes also constitutes unearned income.
- Treated similarly to staking rewards: 20% flat tax on received value.
Taxation at the Circulation Stage
Transactions involving transfer or exchange trigger capital gains taxation.
Homogeneous Tokens (Fungible)
These include cryptocurrencies and utility tokens.
Cryptocurrencies
- Stablecoins (e.g., USDT): Function like foreign exchange derivatives → taxed under “financial product transfers” at 6% VAT.
- General Cryptos (e.g., Bitcoin): Classified as “goods” → subject to 13% VAT on sale; capital gains taxed under property transfer rules.
Utility/Security Tokens
- If redeemable for future services → akin to prepaid cards → VAT applies at redemption.
- If representing governance or profit-sharing rights → treated as intangible assets → 6% VAT on transfer.
Non-Fungible Tokens (NFTs)
NFTs represent unique digital items (e.g., art, collectibles). Their dual-layer structure—on-chain token + off-chain content—requires bifurcated treatment:
- Token File: Digital certificate → taxed as “electronic publication” at 9% VAT.
- Underlying Content: Rights to artwork or media → treated as “intangible asset” → 6% VAT on transfer.
Frequently Asked Questions (FAQ)
Q1: Is owning cryptocurrency illegal in China?
A: No. While financial institutions are barred from handling crypto transactions, personal holding is not explicitly prohibited by law.
Q2: If I trade crypto privately, do I still owe taxes?
A: Yes. If you realize gains through exchange or sale, those profits may be subject to income tax under general principles of economic benefit realization.
Q3: How can tax authorities track anonymous wallet addresses?
A: While wallets are pseudonymous, exchanges typically require KYC verification. Authorities can subpoena exchange records to link identities to transactions.
Q4: Can losses from crypto investments be deducted?
A: In principle, yes—losses offset gains within the same category, though specific rules would need clarification in future guidance.
Q5: Will taxing crypto encourage speculative behavior?
A: Not necessarily. Clear rules reduce uncertainty and promote responsible investment, unlike unregulated environments that fuel speculation.
Q6: What prevents double taxation across jurisdictions?
A: Bilateral tax treaties and emerging global standards like the OECD’s Crypto-Asset Reporting Framework (CARF) aim to coordinate reporting and avoid overlap.
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Conclusion
Cryptocurrencies represent a transformative shift in digital finance—one that cannot be ignored by modern tax systems. While China maintains a cautious regulatory posture, the economic reality of widespread crypto usage necessitates a pragmatic response. By affirming the taxability of digital assets through legal functionality analysis, authorities can reconcile regulatory prudence with fiscal responsibility.
A phased governance model—differentiating acquisition methods and transaction types—offers a practical path forward within existing frameworks. This approach minimizes legislative burden while ensuring fairness, efficiency, and international alignment.
As the world moves toward decentralized economic models, proactive engagement—not avoidance—will define effective tax governance in the digital age.
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