Tax authorities in various regions of China are inspecting individuals' overseas income. Should cryptocurrency and US/ Hong Kong stock investors be worried?

Author: FinTax

News Overview

From March 25 to 26, 2025, tax authorities in Hubei, Shandong, Shanghai, and Zhejiang provinces in China simultaneously issued announcements within 48 hours, launching a concentrated review of the declaration of overseas income for residents in China. China officially committed to implementing the Automatic Exchange of Financial Account Information (AEOI) under the CRS framework in September 2014, and completed its first information exchange with other CRS participating countries (regions) in September 2018, covering major countries such as the UK, France, Germany, Switzerland, Singapore, as well as traditional tax havens like the Cayman Islands, British Virgin Islands (BVI), and Bermuda, including core data such as account balances and investment income. The tax departments in these four regions of China identified multiple typical cases, with recovery amounts ranging from 127,200 yuan to 1,263,800 yuan, and adopted a five-step work method of "reminders, urging corrections, interviews and warnings, case investigations, and public exposure" to promote rectification.

FinTax Brief Comment

1. Interpretation of Announcement Features

This tax review presents two distinct characteristics. The first characteristic is the expansion of the review targets for overseas income, now focusing on the middle-class group. Unlike previous efforts that primarily monitored high-net-worth individuals' overseas income, the taxpayers in this review fall into the upper-middle income category, as exemplified by a typical case published by the Zhejiang tax department with a tax payment amount of 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 review scope among the four regional tax departments. On one hand, the cross-border flow of private capital in Zhejiang, offshore financial transactions in Shanghai, traditional manufacturing going abroad in Shandong, and new manufacturing in Hubei essentially cover the mainstream scenarios of overseas income for the middle class. On the other hand, the simultaneous issuance of review announcements by multiple regions may imply a higher-level unified directive, indicating that the previous practice of individuals "voluntarily declaring" overseas income will gradually transition to strict substantive inspections by tax authorities.

2. How Does Mainland China Tax Residents' Overseas Income?

China implements a global taxation principle for tax resident individuals, which has been established since the introduction of the "Interim Measures for the Collection and Management of Individual Income Tax on Overseas Income" in 1998 and continues to this day. In early 2020, the Ministry of Finance and the State Taxation Administration issued the "Announcement on Individual Income Tax Policies Related to Overseas Income" (Announcement No. 3 of 2020 by the Ministry of Finance and the State Taxation Administration), further clarifying the tax treatment and collection management of overseas income for Chinese residents. The foundation of the global taxation principle lies in maintaining national tax sovereignty and achieving social equity. Based on this principle, the requirements for taxing residents' overseas income in mainland China are roughly as follows:

Regarding taxpayers, according to the "Individual Income Tax Law of the People's Republic of China," individuals meeting any of the following conditions are recognized as "Chinese tax residents": 1. Having a domicile in China: Refers to individuals who habitually reside in China due to household registration, family, or economic interests, and even if they work or live abroad for a long time, as long as they have not given up their household registration or family ties, they may still be recognized as residents. 2. Residing in China for 183 days or more: Individuals who accumulate a residence of 183 days within a tax year (January 1 - December 31) are considered residents, even if they have no domicile.

Regarding the scope of taxable income, residents must declare and pay individual income tax on all income obtained from both within and outside China according to the Chinese Individual Income Tax Law. However, if an individual without a domicile resides in China for 183 days or more in a tax year, but has not accumulated 183 days of residence in any of the previous six years or has a single departure exceeding 30 days, the income sourced from abroad and paid by foreign entities or individuals for that tax year is exempt from individual income tax.

According to Chinese tax law, Chinese tax residents are required to pay taxes on global income, which includes income from U.S. and Hong Kong stocks. The income obtained by investors from the stock market mainly consists of two types: dividends and distributions from stocks (dividend income) and profits from buying and selling stocks (considered capital gains; however, China does not separately impose a capital gains tax, and it falls under the category of "income from property transfer").

For U.S. stock dividend income, Chinese investors must include U.S. stock dividends in their comprehensive income and pay individual income tax at a rate of 20%. According to Announcement No. 3 of 2020 by the State Taxation Administration, taxpayers can enjoy a credit based on the taxes paid in the U.S. (mainly the withholding tax imposed by the U.S.). Therefore, Chinese tax residents must include the full amount of U.S. stock dividends in their income and calculate the taxable amount based on Chinese tax rates after deducting the taxes already paid abroad, with the specific calculation formula being: Chinese taxable amount = dividend income × Chinese tax rate − taxes paid abroad (within the credit limit). For capital gains from U.S. stocks, Chinese investors pay individual income tax at a rate of 20% on income from property transfer, where eligible foreign investment losses can be deducted before tax, and taxes already paid abroad can also be applied for tax credits.

For Hong Kong stock dividend income, Chinese residents can invest in Hong Kong stocks through either the Hong Kong Stock Connect account or a Hong Kong account. According to the "Notice on Tax Policies Related to the Pilot Program of the Shanghai-Hong Kong Stock Market Trading Interconnection Mechanism," H shares dividends received by mainland individual investors are subject to a 20% withholding tax by H share companies, while non-H share dividends are withheld at a 20% rate by China Securities Depository and Clearing Corporation Limited. For red-chip stocks of companies that are Chinese-controlled or primarily operate in mainland China but are listed in Hong Kong, according to the "Corporate Income Tax Law" and its implementation regulations, red-chip companies withhold 10% corporate income tax before distributing dividends, but not all of the after-tax profits of red-chip companies are subject to the 10% corporate income tax, resulting in individual income tax rates for Hong Kong stock investors ranging from 20% to 28%. Additionally, if investors open a securities account in Hong Kong for Hong Kong stock investments, they do not need to withhold individual income tax for most cases, except for H shares and certain red-chip stocks, which require a 10% dividend tax.

For capital gains from Hong Kong stocks, the tax treatment in mainland China also distinguishes between two situations: first, profits from stock trading through the Hong Kong Stock Connect account are exempt from individual income tax in mainland China; second, transferring shares of Hong Kong-listed companies directly through a Hong Kong securities account requires reporting overseas income to the tax authorities in mainland China. Furthermore, the Hong Kong region exempts capital gains tax on the price differences obtained by overseas investors in Hong Kong stocks, thus not generating tax credits in mainland China, and investors must pay individual income tax at a rate of 20% on income from property transfer.

In recent years, the State Taxation Administration of China has placed great emphasis on the issue of tax evasion by high-net-worth individuals, with dedicated personnel responsible for monitoring significant fund movements and identifying individual tax risk points, and income from overseas investments such as U.S. stocks is also within the monitoring scope. However, income from overseas stock trading is primarily calculated through self-declaration, making it difficult for Chinese tax authorities to implement direct supervision through withholding mechanisms.

The CRS (Common Reporting Standard) mechanism is one of the methods for tax authorities in mainland China to obtain tax-related information for tax audits. CRS is an automatic exchange standard for financial account tax information led by the Organization for Economic Cooperation and Development (OECD), which establishes a system for exchanging account information of taxpayers among member countries to combat tax evasion. China has implemented this mechanism since 2017, allowing tax authorities to automatically obtain account information of Chinese tax residents in foreign financial institutions, including data on deposits, investments, insurance, and other financial assets. As of 2025, 106 countries and regions have joined CRS (including mainland China and Hong Kong), and information exchanges cover account balances, interest, dividends, and other aspects. CRS itself does not set a global minimum for "individual account balances" or "reportable amounts"; all accounts identified as "reportable accounts" must be reported to the competent tax authorities. However, some jurisdictions have set non-mandatory reporting thresholds in their legislation. For example, Hong Kong's "Regulations on Automatic Exchange of Financial Account Information" explicitly allows financial institutions to exempt "pre-existing entity accounts" from immediate due diligence and reporting if the account balance does not exceed $250,000, but financial institutions can also conduct investigations on accounts below this threshold in full compliance. Therefore, accounts with larger amounts are more likely to attract attention, but the possibility of small accounts being reported and exchanged cannot be ruled out.

Currently, the U.S. has not joined CRS and applies its own information exchange framework—the Foreign Account Tax Compliance Act (FATCA), which has been applicable to all countries since January 1, 2014. It requires foreign financial institutions to disclose information about U.S. accounts to the U.S. tax authorities, or else face taxation. There are two disclosure models: Model 1 involves foreign governments reporting U.S. account information maintained by all financial institutions in their jurisdictions to the U.S. tax authorities, while Model 2 involves financial institutions directly reporting U.S. account information to the U.S. tax authorities. Since June 30, 2014, China has reached a substantive agreement with the U.S. on Model 1 of FATCA, treating it as a jurisdiction with an effective intergovernmental agreement, but as of now, the two countries have not signed a formal intergovernmental agreement regarding this cooperation. Therefore, Chinese tax authorities are currently unable to obtain information about tax residents' accounts in the U.S. through information exchange mechanisms such as CRS or FATCA. In contrast, information exchange between mainland China and Hong Kong through CRS is very convenient.

However, the CRS/FATCA mechanism is not the only way to obtain information. First, at the market level, brokers in mainstream securities markets such as Hong Kong and U.S. stocks regularly report relevant trading information to the tax authorities in mainland China, which then analyzes potential overseas income based on these reports. Second, through close cooperation among government departments such as the State Taxation Administration, financial regulatory authorities, human resources and social security departments, customs, and foreign exchange management authorities, tax authorities can integrate relevant payment data, labor dispatch data, entry and exit data, and foreign payment data of Chinese residents, and comprehensively assess tax risks through individual income tax risk management systems. In practice, these methods play a more critical role in the tax authorities' acquisition of overseas tax-related information, tax risk assessment, and audits.

3. Tax Obligations for Web3 Practitioners

Announcement No. 3 clarifies the types of taxable overseas income, which can be divided into comprehensive income sourced from outside China (salary income, labor remuneration income, manuscript income, royalty income), business income, and other income (interest, dividends, property transfer income, property leasing income, incidental income). The classification criteria are basically consistent with domestic income, but there are differences in taxation methods: for example, overseas comprehensive income and overseas business income should be combined with domestic comprehensive income and domestic business income to calculate the taxable amount, while other classified income sourced from abroad should be calculated separately without merging with domestic income.

The tax treatment of crypto assets in mainland China currently still has many controversial points. The following examples illustrate a few common scenarios:

For commercial mining activities that continue to operate overseas, tax authorities may classify them as business income, allowing for the deduction of necessary costs such as equipment and electricity, which aligns with their capital-intensive and ongoing investment characteristics. However, if miners engage in mining as individuals, the tax classification becomes problematic: treating it as incidental income aligns with the randomness of the income but results in a disproportionately high tax burden due to the inability to deduct costs; if classified as property transfer income, the lack of a stable valuation benchmark for crypto assets makes it difficult to reasonably determine the appreciation portion, leading to potential tax disputes.

Another common scenario is when residents of mainland China obtain income through crypto asset trading, where the determination of commercial substance becomes crucial. If there is a fixed location, a hired team, and ongoing transactions, it may be recognized as business income, with high-frequency traders facing 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 property, thereby avoiding double taxation and excessively high deemed profit rates.

Since tax authorities have begun to focus on the tax regulation of overseas investment income from U.S. and Hong Kong stocks for Chinese tax residents, whether Web3 overseas income will become the next key audit target is a matter of urgent attention. According to Chinese tax law, Web3 income falls within the scope of taxable income as long as it can be categorized under relevant tax categories in the law, which is primarily a technical issue of legal application. In practice, an important prerequisite for tax authorities in mainland China to successfully implement tax collection is their ability to obtain information about Chinese tax residents' Web3 income.

Under the current framework for processing tax-related information, CRS also applies to the flow of funds related to cryptocurrencies. However, if investors do not interact on centralized platforms (especially not trading on CEX), it is difficult for CRS to track, and mainland tax authorities may find it challenging to directly obtain relevant transaction information (though there remains a risk of being reported for tax evasion by others). Nevertheless, this does not mean that tax authorities are completely unaware of tax violations by tax residents in the Web3 space. Just as tax authorities can assess residents' overseas securities investment situations through multiple data sources, they may also have a corresponding risk indicator system for practitioners or investors in the Web3 field, such as examining individuals' travel patterns abroad, whether their industry is closely related to blockchain technology, and whether they hold high-value assets without dynamic activity in their fiat accounts. Additionally, with the development of the Web3 industry, it is not ruled out that Chinese tax authorities may establish closer relationships with more cryptocurrency exchanges in the future to obtain information about users' trading records and profit and loss situations. The recent repeal of the IRS's "Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital Asset Sales" indicates that, in the short term, while tax authorities in various countries may find it difficult to exert sufficient pressure on decentralized platforms, centralized platforms represented by centralized exchanges may not be so.

4. What Should Web3 Practitioners in Mainland China Pay Attention To?

In response to overdue declarations or intentional concealment of overseas income, tax authorities in mainland China have established a clear legal responsibility system. According to Articles 32 and 63 of the "Tax Collection and Administration Law," failure to declare on time or false declarations will result in a progressive penalty system involving tax recovery, accumulation of late fees, administrative penalties, and even criminal penalties: starting from the day after the statutory declaration deadline, a late fee of 0.05% of the overdue tax will be added daily, creating significant financial pressure; for verified tax evasion, in addition to full recovery of taxes owed, a tiered fine of 50% to five times the amount of tax owed will be imposed based on factors such as the degree of subjective malice and complexity of concealment methods; if the amount involved reaches the standard for criminal prosecution, the case will be referred to judicial authorities for criminal liability.

In the context of global tax transparency and regulatory technology upgrades, the tax issues related to cross-border income from crypto assets deserve more attention. Currently, Chinese tax authorities have achieved in-depth regulation of core data such as overseas account balances and investment income through methods such as CRS information exchange. Web3 practitioners may consider making reasonable tax arrangements and truthfully declaring taxes. Particularly, from the disclosed cases, the costs of late fees and penalties for subsequent payments far exceed the original taxes owed. Specifically, Web3 practitioners in mainland China can take two approaches to mitigate risks: first, they can independently or with the help of professionals review their past overseas income situations, determine whether taxable income has been generated, and take remedial measures; second, they can continuously adjust and update their tax arrangements to minimize their tax burden while complying with relevant laws and regulations.

As global tax transparency increases and regulatory technology upgrades, Chinese tax authorities are also strengthening their efforts in tax audits of overseas income. In the long run, compliance may be the more beneficial choice for long-term interests. For investors in U.S. stocks, Hong Kong stocks, and Web3, it is necessary to reassess the compliance logic of cross-border assets and enhance attention to the issue of declaring cross-border income.