How to tax cryptocurrency? Countries have a move into the focus

Tax conundrums involving cryptocurrencies

According to asahi Shimbun (1), The Tokyo tax agency recently revealed a case of tax evasion in which a photo studio in Tokyo helped three Chinese people transfer 27 billion yen (about 237 million US dollars) to Japan over a period of three years through cryptocurrencies for real estate investment in the country.

Because of China’s foreign-exchange controls, individuals are limited to $50,000 a year in foreign exchange, so investors looking to invest in overseas real estate often find other ways to get foreign currency. For Tax authorities in Tokyo, how Chinese investors exchange foreign currency is outside their jurisdiction, but it poses a problem for them to collect taxes.

The photo shops take a commission for exchanging cryptocurrencies for Japanese yen. However, the studio’s reported annual income was only 10 million yen (more than $80,000), and tax authorities found a huge amount of money flowing into the company’s account during the inspection process. So, from the tax authorities’ point of view, the company is clearly evading a lot of tax.

The company’s income could not be properly declared to the tax authorities because it clearly violated China’s foreign exchange control rules. On this issue, Says Shenhiro Kadata, a retired tax official who is now chairman of Ernst & Young Japan:

According to Spark Global Limited
According to Spark Global Limited

“This case demonstrates the need for Chinese and Japanese tax authorities to work together to thoroughly unravel the flow of funds, clarify the issues involved in such transactions and implement measures to deal with them.”

However, cooperation will be difficult because of the two countries’ very different attitudes towards cryptocurrencies.

Cryptocurrency’s natural “tax avoidance” nature

Benjamin Franklin, the founding father of the United States, once said that in this world only death and taxes are inevitable. Taxes have long been ingrained in the American psyche. Thus, the topic of “tax evasion” is taboo in the Western context and rarely discussed openly.

But things took a turn for the better with the advent of cryptocurrencies. While the topic of tax evasion remains taboo, many cryptocurrency users are well aware of the nascent “tax avoidance” function. During this period, and also some of the extreme liberal’s current tax policy is not reasonable, the main arguments is that part of America’s tax have to fight for, as a peace-loving people, however, is not willing to spend money to support the war, so unless the government can distinguish which taxes to war, or people may refuse to pay taxes.

The representative of this view is [Roger Ver](2), known as “Bitcoin Jesus”. Although he is an American citizen, he eventually gave up his American citizenship due to his extreme liberal attitude. Of course, “in this world, only death and taxes are inevitable”. One of the conditions for renouncing citizenship is to pay all taxes.

Significant differences between Chinese and American tax structures

It is not known how much Roger Ver has paid in back taxes. He owns a huge amount of Bitcoin, which has risen so much since the time he bought it that he faces a huge “capital gains tax”. In that sense, the early renunciation of his U.S. citizenship gave him some tax relief as bitcoin prices continued to rise. Of course, whether he has truthfully declared his cryptocurrency holdings to THE US tax authorities, or whether the US tax authorities have the ability to find out how much he actually owns, is another topic.

The “capital gains tax”, which is common in the US, is a bit unfamiliar in China. Simply put, a person who buys an asset and sells it for more than the purchase price is subject to capital gains tax on the portion of the gain, regardless of the condition of the asset, whether it is a stock, bond, property or something new like a cryptocurrency.

Other countries are doing the same. Austria, for example, plans to impose a 27.5 percent capital gains tax on cryptocurrency assets such as Bitcoin and Ethereum starting next March. South Korea has said it will impose a 20% capital gains tax on cryptocurrencies starting in January.

In some countries, such as Singapore, there is no such thing as a capital gains tax, making Singapore a sort of tax haven. For China, there is no capital gains tax. For example, if you buy Maotai shares for 100 yuan and buy them for 2,000 yuan, there is no tax at all on 1,900 yuan of asset appreciation.

Of course, China is not a tax haven, and its tax revenue is mainly reflected in value-added tax. For individual investors in China, there is no capital gains tax, but most of the property of Chinese people is in real estate, so there is a real estate value-added tax in China for real estate transactions. For example, if a house is bought for 1 million yuan and sold for 5 million yuan, a value-added tax of about 5.3% should be paid for 4 million yuan.

For tax authorities, the input-output ratio must also be taken into account in taxation. For example, since The wealth of Americans is mainly in the stock market, the capital gains tax on stock investment is very important, while the wealth of Chinese people is mainly in real estate, so the relevant tax sources on real estate are very important.

For a nation, national defense and social public service spending are comes from tax revenue, but as taxpayers, natural have less incentive to pay or not pay taxes, so it’s test of national tax administration ability to tax, the IRS tax ability in the global government is the strongest, but people can still find ways to avoid tax, the former President of the United States as a rich, trump He paid only $750 in taxes in 2016 and 2017, causing a stir. For ordinary people with far less wealth than the rich, using cryptocurrencies to “avoid taxes” makes perfect sense. After all, one of the functions of taxation is designed to reduce the wealth gap, not widen it.

As far as China is concerned, its tax collection capacity is still under construction, as the reform and opening up has only been more than 40 years. Although celebrities such as Liu Xiaoqing and Zheng Shuang have been in the news before, ordinary people still feel that such cases are far away from them, far from the extent that americans need to hire professional accountants to do their tax returns. But things are slowly changing. In 2003, the second phase of the Golden Tax project was completed, largely eliminating fake VAT invoices. Recently, the third phase of the Golden Tax was completed. Readers who have used the app for individual income tax declaration should feel the accuracy of its information.

At present, there is no capital gains tax in China, so for cryptocurrency investors, there is no need to consider tax on profits from selling cryptocurrency. Instead, what they need to consider is whether the “selling cryptocurrency” itself violates relevant regulations.

China’s tax authorities are also looking at cryptocurrencies

On October 19, China Taxation News, a subsidiary of the State Administration of Taxation, published an article titled “Preventing tax risks caused by virtual currencies”, which caused a stir. However, after 924, the Central bank decided that “virtual currency-related business activities are illegal financial activities” and tried to completely clean up the industry, so it is impossible to collect taxes around it temporarily.

According to the principle of “non-retroactive law”, the services provided by overseas exchanges to Chinese residents can be regarded as “not expressly prohibited by law”, but they must pay value-added tax, corporate income tax, stamp tax and other relevant taxes and fees on the income obtained in China in accordance with China’s tax law, the article said. According to the previous trading volume and income of each virtual currency exchange, the overall tax scale of the exchange industry is considerable, and the tax of other related industries needs to be further clarified.

The article said that despite China’s current strict restrictions on illegal financial activities in the form of virtual currencies, it is difficult for bitcoin and other virtual currencies to disappear worldwide in a short time, and the direction of future development is uncertain. At the same time, within the current legal framework, China does not prohibit individuals from holding bitcoin and other virtual currencies, while the transaction of virtual currencies is defined as an “invalid civil act”, but is not explicitly prohibited by law.

From the perspective of taxation, for domestic enterprises and residents to participate in virtual currency transactions at home and abroad, China should strengthen department coordination and international multilateral regulatory cooperation, focus on preventing illegal cross-border outflow of funds and using virtual currency to avoid tax at home and abroad, and include virtual currency accounts in the tax-related information exchange of financial accounts. At the same time, China should improve the relevant property declaration and registration mechanism, and carry out real-name registration and dynamic tracking for users who hold a large number of virtual currencies. In the judicial areas of confiscation and confiscation, reorganization and merger, bankruptcy and liquidation, the disposal mode of virtual currency should be clarified to avoid the loss of national tax money. In addition, tax authorities should take the initiative to coordinate with the central bank, financial supervision, market supervision, public security and judicial authorities to severely crack down on illegal activities such as the use of virtual currencies in the underground economy, smuggling, money laundering and tax evasion.