Web3 Compliance Discussion: How to Tax Earnings in the Crypto World

Written by: FinTax

During this discussion, the regulatory compliance heat for crypto assets continues to rise globally, with countries increasingly strengthening the exchange and tracking of tax information related to on-chain assets, overseas accounts, and cross-border transactions. In this session, Calix and William shared their experiences in cross-border tax practices and on-chain business, discussing hot topics such as global tax compliance for crypto assets, tax arrangements, and regulatory games. The two speakers also shared their visions for an ideal Web3 tax system in the future and discussed the tax logic in various scenarios, including compliance for exchanges, DeFi, mining, and airdrops, using real cases.

Who should cross-border income be taxed to?

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

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

Although I mainly deal with American clients and most of my income comes from the American market, it is actually quite difficult to have a definite 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 go to for this type of income. After all, the generation of this income does not completely depend on where I am.

Calix: Yes, I think your answer really hits the key point. 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 the source of customers as well as the platforms, networks, and infrastructure used. Therefore, the question of who should ultimately pay this tax is indeed worth exploring in depth.

To be honest, although I have been working in tax-related areas for many years, I have also been confused about this issue myself. According to the current tax law, I might be a tax resident in mainland China, and I might also have tax obligations in Singapore, but my business mainly targets North America, and sometimes I even receive compensation through a Hong Kong company. If I were to strictly follow the tax law, the answer might seem clear on the surface, but when it comes to what is more reasonable, it is indeed worth pondering. For Web3 practitioners, these discussions often exceed 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 pace with the speed of technological 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 the 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 an announcement from the Zhejiang Tax Bureau stating that an individual was required to pay back taxes due to cryptocurrency trading. Later, we learned through some channels that, in fact, after the CRS information exchange, the tax bureau discovered an unusual balance in his overseas bank account and requested him to explain the source of the funds. He explained that this portion was investment income, therefore he needed to pay back taxes, and this investment happened to involve cryptocurrency.

For me, this kind of case is not surprising, after all, this is my area of expertise, so I find it very 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 made this judgment quite early on that trading cryptocurrencies would eventually be subject to taxation. But when this matter actually happens around us, especially for many Chinese people, the impact is still quite significant. Traditional DeFi or some purely on-chain activities have always been difficult to regulate, often relying on the users' awareness. In the past, there have indeed been some regulatory obstacles, leading to the tax authorities not having particularly strong enforcement capabilities for 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 several reports indicating that some U.S. stock investors have received notifications via text messages or phone calls requesting tax supplements, 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 Asian brokers like Tiger Brokers and Futu, and even Guotai Junan International, many brokerages are dealing with crypto assets, making it increasingly difficult to separate the connections between the US stock market and crypto assets. Once one looks comprehensively at overseas income, it's easy to include the cryptocurrency space just by checking the US stock market, especially considering that the scale of crypto assets is already significant.

Moreover, this "combination of stocks and tokens" is not a short-term phenomenon. For example, in the United States, some companies are trying to tokenize US stock; in Asia, on the contrary, they will package crypto assets into listed companies to boost stock prices, gain premiums, and enhance secondary market performance. Behind this combination is a profit-driven motivation, whether it's "stocks becoming tokens" or "tokens becoming stocks," which will further strengthen the connection between the two, and naturally make "trading tokens subject to tax" unavoidable.

Overall, crypto assets and the stock market have become highly intertwined. As this trend continues to develop, the tax issues related to cryptocurrency trading will inevitably become more rigid, and the space for avoidance will become increasingly limited.

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

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

The long-term game of regulation and tax evasion

William: Calix, based on your years of practical experience in frontline tax operations, now that this has been initiated, do you think there will be people who, fearing tax risks, will start to avoid cryptocurrencies? Or will there still be those who, despite the risks, find ways to evade taxes or even simply not report their taxes and continue to operate heavily in the crypto space? What impact will this have on the overall direction of the industry?

Calix: This is a typical real-world issue. I have always believed that regulation and "anti-regulation" coexist, which is not only a characteristic of the cryptocurrency space but also applies to traditional industries. From the perspective of tax authorities or any regulatory body, they naturally want to collect as much of the taxes owed as possible; on the other hand, from the taxpayer's standpoint, regardless of the region, everyone hopes to legally minimize tax payments or reduce tax burdens. These two demands are inherently contradictory.

In my experience, this dynamic is very much like the contradictions etched into human nature, constantly moving forward in a cycle of conflict, balance, conflict, and then balance again. Especially in recent years, regulatory methods have become increasingly diverse, and technological means have become more digital. Take mainland China as an example; the tax regulatory capacity has indeed improved rapidly in recent years, and the level of information technology is also increasing. However, at the same time, tax evasion methods are also evolving. In the early days, it may have only been traditional methods such as cash transactions, hiding income, and money laundering. Here, when I refer to "tax evasion," I mean non-compliant tax evasion behavior.

Later, with the emergence of cryptocurrencies, some taxpayers found themselves with a new operational space. For quite a long time, cryptocurrencies were indeed difficult for tax authorities to trace. 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 experience the "sweetness" during this period.

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

From a trend perspective, the early "wild" stage had a low emphasis on compliance, but as we move into 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, are gaining 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 be compliant depends more on the actual amount. If the amount is too small, completing some necessary declaration actions is basically sufficient. Law enforcement also needs to consider the cost-benefit ratio, unless there are some typical cases with "demonstrative significance," such as the recent incident discussed on Twitter about "paying over a hundred thousand in taxes." The amount is not large, but it has a certain warning effect.

Overall, large institutions will place increasing importance on compliance, as it is a prerequisite for sustainable operations; while individual consumers, like in the real world, are essentially still directly related to the amount of money involved.

The boundary between improper income and asset compliance

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

Calix: This is a very good question that I often think about myself. I believe that whether one pays taxes can at most prove the fulfillment of tax obligations, 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 the relevant regulations of 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 regarding the source of those funds.

For example, if the funds involve money laundering, organized crime, or gray areas, and touch upon international anti-money laundering regulations, or if the person violates local customs and laws from the Monetary Authority in Hong Kong, then even if taxes are paid in Hong Kong, it cannot be simply understood that this money is not considered "dirty money." Tax compliance and the legality of funds are two different 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 brought to the table for discussion much earlier, because we need to first acknowledge that an asset is legitimate before we can talk about taxation. If this money cannot even be effectively recognized as having asset attributes, it cannot even be regarded as a valuable property, and naturally, there is nothing to declare or pay taxes on.

In the overall environment in China, this area has 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 also struggles to truly advance. However, on 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 circumvent it. The current situation is also related to the gap in international systems. In the past, everyone thought there were technical barriers and strong concealment on the blockchain, making it difficult for regulators to track, which led to a sense of "fantasy". 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 would like to ask you a practical question. Since it is actually quite difficult for ordinary users to completely "avoid" this tax, is there still a possibility of doing some tax planning through compliance means? From your practical experience, is there much room for businesses 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 income sources are relatively singular, mainly consisting of salaries, bonuses, or some small allowances, all of which are fully recorded by the company. Once the company reports truthfully, individuals find it hard to have any additional "optimization" opportunities.

Therefore, for ordinary individuals, what they can do more is to fully utilize the tax incentives that are already present in the local tax laws, such as exemptions, child support, elderly support, marriage deductions, etc. Effectively using these basic deductions and solidly carrying out the necessary compliance 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 and larger transaction volumes, along with more cross-border tax matters. This diversity and complexity naturally create more operational space.

In simple terms, different types of income are subject to different tax rates and methods of taxation. For example, wages are taxed in full, while capital gains or dividends often have relatively more favorable tax rates or exemption conditions. Additionally, there are differences in tax systems among different regions, such as mainland China, Hong Kong, Singapore, the United States, or Canada, where the design of the system and the tax burden vary significantly, potentially creating "arbitrage opportunities" in cross-border arrangements.

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

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 firms, earning hundreds of thousands a year, often working overtime, but their income structure is single, the room for maneuver is limited, and there is very little room for tax savings; in contrast, high-net-worth individuals and large institutions earn more and have more tools to operate with.

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

Potential tax obligations and optimization opportunities for earnings from mining, airdrops, DeFi, etc.

William: Calix, you just mentioned the issue of income structure, which I find very interesting. In the past, everyone’s sources of income were indeed relatively single, just salary and bonuses. But the crypto space has really provided a more diversified income channel for many middle-class and ordinary people, such as mining, airdrops, staking, DeFi returns, etc. For example, a mining machine might only cost $2000, and buying a few can be affordable for the middle class, making it a small "business" activity. This kind of income brings new complexity; could you briefly introduce what tax obligations might be involved in different forms?

Calix: I think it's better to talk a bit more about whether there are any legal spaces in these behaviors, rather than directly discussing "how to pay taxes". Although this topic is indeed quite sensitive, I still think it can be briefly talked about.

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 structures like trusts, companies, or funds to disperse the tax burden. For example, mining is usually recognized as business income in most regions; airdrops, if simply received but not disposed of, generally do not trigger tax obligations temporarily, only when converted to fiat currency or swapped for other coins, generating actual profits, must it be reported. Staking or DeFi income can be classified as capital gains in some jurisdictions, and capital gains tax rates are usually lower than business income rates, with some regions not even imposing them.

So there is indeed space for a "reasonable definition" in this area, such as whether certain high-tax operating income can be reasonably interpreted as capital gains or other income types with preferential tax rates according to local tax laws. However, this premise relies on the tax laws leaving some gray areas, and regulatory enforcement is still unable to fully and accurately track on-chain activities. Otherwise, once the data is traceable, the space will shrink significantly.

Therefore, essentially, it is unrealistic for ordinary people to engage in large-scale tax planning, as all income is tied to their personal names, making it easy to be classified as business income or high tax burden categories. In contrast, activities like airdrops and forks, if allowed by local policies, may be treated as low tax burden or deferred. Many people study how to reasonably convert the high tax burden portion into categories with lower tax rates and better benefits, which requires a specific look at whether local laws allow for sufficient leeway and whether the operations are compliant.

Practical considerations for digital nomad identity planning

William: Then I would like to ask another point: there are quite a few people in the cryptocurrency space who call themselves "digital nomads." In the past, I might not have paid much attention, thinking that as long as I didn't engage in illegal activities and reported taxes domestically, it would be fine. But do you think more people will actively choose to become tax residents of certain overseas regions in the future? For example, wanting to leverage bilateral tax agreements to say, "I paid taxes in Singapore, so I don't have to pay them again in mainland China." Will this path become a legal planning direction chosen by more people?

Calix: In fact, this can be considered a relatively legitimate approach to reasonably utilize different tax jurisdictions to reduce the overall tax burden. However, I would like to remind everyone that no matter where you file your taxes, you must keep good records of your inflows and outflows, as well as trading records. These materials can serve as key evidence during tax inquiries to avoid unnecessary troubles. Moreover, there is now a global CRS (Common Reporting Standard) mechanism for the automatic exchange of tax information on financial accounts, making it very difficult to completely "hide" information in the long term. From a broader perspective, cross-border identity planning is worth considering, but regardless, all documents and records must be complete, and any necessary declarations must be made truthfully.

I would like to add one more point. Taking Singapore as an example, a friend of mine recently asked a similar question. He works in Singapore and his income is settled in USDT or fiat currency, and he pays taxes normally there. He asked whether he still needs to declare when he returns to the mainland. His situation is that he spends less than 183 days in the mainland each year.

From the perspective of mainland tax laws, whether an individual constitutes a tax resident hinges on the core standard of "183 days". However, in more detailed regulations and practical applications, factors such as nationality, household registration, and primary social relationships will also be considered. If these connections are all within the domestic context, even if the person is overseas, they may still be regarded as a Chinese tax resident and will need to conduct a complete tax reconciliation to deduct already paid taxes. Furthermore, the type of status you hold—whether it's Singapore's EP (Employment Pass), PR (Permanent Resident), or another type—may also affect the outcome. There is no fixed template for this; each situation must be analyzed specifically.

William: So even if one does not reside in the mainland for a full 183 days in a year, it cannot be simply assumed that it is completely "safe."

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

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

Imaginings of the future cryptocurrency tax system

Calix: Alright, William, finally I would like to ask a more open question, which can also be considered a conclusion to this conversation.

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 friendly to Web3 users? Or, what does your ideal and most anticipated tax model look like?

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

I have actually always resonated with the concept of "sovereign individual" which is native to cryptocurrency, and I tend to be more idealistic. I also agree with the possibility of what Vitalik Buterin and others mentioned about the "Network State." 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% at the physical level and 20% digital, but in the future, the impact of digital infrastructure on everyone will definitely surpass that of the traditional physical environment.

Just like what was often said in the internet circle "hardware is free, software is charged," there were manufacturers who gave away phones for free, but the content and services were charged long-term. I think the future might be similar: the "hardware" part of the physical world may have a lighter burden, while what truly requires continuous payment will be the "services" in the digital world.

From this perspective, I strongly agree with a point you mentioned earlier: the infrastructure of blockchain relies on physical resources such as electricity, networks, 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 end-users, they enjoy the digital services provided by these nodes and miners, so they mainly pay "service fees" to the network through Gas fees, and then miners and nodes fulfill their tax obligations to the real world.

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

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

In the second layer, individual users indirectly pay fees to the network in the form of Gas fees and other means, which are then fed back into the real-world tax system by the network.

As the proportion of digital spending by humans continues to rise 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, assuming corresponding real obligations through the Gas mechanism and distribution structure.

Calix: I think this is a very imaginative and quite forward-looking concept. I also believe that with the development of the crypto industry, in the future it will certainly carry an increasingly large asset volume, and the deep integration with traditional finance will accelerate. In the future, it may replace some inefficient and opaque parts of traditional finance, 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 conducting our current business, we also need to think more about what might happen in the future and even push for some changes as much as possible. I would like to add a point regarding RWA. Currently, many assets being put on-chain are still essentially achieved through layers of packaging, nesting, and contractual mapping, with on-chain and off-chain remaining quite separate. However, this may only be a transitional phase. In the future, if legal systems become more完善, asset information will be more directly and transparently put on-chain, and the complex nesting in between may gradually disappear.