Author | FinTax
The author's views do not represent the views of Wushuo.
News Overview
From March 25 to 26, 2025, tax authorities in Hubei, Shandong, Shanghai, and Zhejiang simultaneously issued announcements within 48 hours, conducting a concentrated review of the offshore income declaration issues for residents in mainland China. China officially committed to implementing the automatic exchange standard for financial account tax information under the CRS framework in September 2014, and completed the first information exchange with other CRS participating countries (regions) in September 2018, covering core data such as account balances and investment income from major countries, including the UK, France, Germany, Switzerland, Singapore, as well as traditional tax havens like the Cayman Islands, British Virgin Islands (BVI), and Bermuda. This time, tax authorities in the 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 'prompt reminders, supervision and rectification, warnings through discussions, case investigations, and public exposure' to promote rectification.
FinTax Brief Comment
1. Interpretation of Announcement Features
This tax audit presents two distinct characteristics. The first characteristic is the expansion of the audit targets for offshore income to the middle-class group. Unlike previous focuses on the offshore income of high-net-worth individuals, the taxpayers under this audit belong to the upper middle-income category, as indicated by the typical case published by the Zhejiang tax authorities, with tax recovery amounts reaching 127,200 yuan. This shift indicates that the tax authorities in mainland China have begun to pay attention to the offshore income of the middle-income group.
The second characteristic is the collaborative and complementary scope of the audits conducted by the tax authorities in the four regions. On one hand, the cross-border flow of private capital in Zhejiang, offshore financial transactions in Shanghai, traditional manufacturing overseas in Shandong, and new manufacturing industries in Hubei essentially cover the mainstream scenarios of offshore income for the middle class. On the other hand, the coordinated issuance of audit announcements by multiple regions may imply higher-level unified directives, signaling a shift from individuals' 'voluntary declarations' of offshore income to strict substantive audits of offshore income by tax authorities.
2. How does mainland China tax residents' offshore income?
China implements a global taxation principle for tax resident individuals, a principle established since the issuance of the Provisional Measures for the Collection and Administration of Individual Income Tax on Offshore Income in 1998 and still in use today. In early 2020, the Ministry of Finance and the State Taxation Administration issued an announcement on the individual income tax policies related to offshore income (Announcement No. 3 of the Ministry of Finance and the State Taxation Administration, hereinafter referred to as 'Announcement No. 3'), further clarifying the tax treatment and collection management of offshore income for Chinese resident individuals. The foundation of the global taxation principle lies in maintaining national tax sovereignty and achieving social fairness. Based on this principle, the requirements for taxing residents' offshore 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 residence in China: refers to individuals who habitually reside in China due to household registration, family, or economic interest relations, 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: individuals who accumulate 183 days of residence in one tax year (January 1 - December 31) are considered residents, even if they do not have a residence.
Regarding the scope of taxable income, all income obtained by resident individuals from both inside and outside China should be reported and taxed according to China's Individual Income Tax Law. However, if an individual without a residence accumulates 183 days of residence in China in one tax year (January 1 - December 31), but has not accumulated 183 days of residence in any one of the previous six years or has a single departure of more than 30 days, income from outside China paid by foreign entities or individuals in 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, including income from US stocks and Hong Kong stocks. The income obtained by investors from the stock market mainly consists of two types: first, dividends and distributions from stocks (dividend and bonus income); second, profits from buying and selling stocks (which belong to capital gains, although China has not established a separate capital gains tax, and it should fall under the category of 'property transfer income').
For dividend income from US stocks, Chinese investors need to include US stock dividends in their comprehensive income and pay individual income tax at a rate of 20%. According to Announcement No. 3 of the State Taxation Administration in 2020, taxpayers can enjoy a credit based on the tax paid in the US (mainly the withholding tax imposed by the US). Therefore, Chinese tax residents need to fully account for US stock dividends as income, deduct the taxes already paid abroad, and calculate the taxable amount according to Chinese tax rates. The specific calculation formula is: Chinese taxable amount = dividend income × Chinese tax rate − taxes paid abroad (within the credit limit). Regarding capital gains from US stocks, Chinese investors pay individual income tax at a rate of 20% categorized as property transfer income, where eligible foreign investment losses can be deducted before tax, and taxes paid abroad can also be applied for tax credits.
For dividend income from Hong Kong stocks, Chinese resident individuals 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 Trading Connectivity Mechanism of the Shanghai and Hong Kong Stock Markets, individual investors in mainland China receiving H-share dividend income will have individual income tax withheld at a rate of 20% by H-share companies, while non-H-share dividend income will have individual income tax withheld at a rate of 20% by China Securities Depository and Clearing Corporation Limited. For red-chip stocks of companies that are mainly controlled or have substantial business in mainland China but are listed in Hong Kong, according to the Corporate Income Tax Law and its implementation regulations, red-chip enterprises will first withhold 10% corporate income tax before distributing dividends. However, not all after-tax profits of red-chip enterprises are subject to the 10% corporate income tax, so the individual income tax rate for Hong Kong stock investors varies between 20% and 28%. Additionally, if investors open a securities account directly in Hong Kong for investment in Hong Kong stocks, dividends received, except for H shares and red-chip stocks that require a 10% withholding tax, do not need to pay individual income tax.
Regarding capital gains from Hong Kong stocks, the tax treatment in mainland China distinguishes between two scenarios: first, income from stock trading through a Hong Kong Stock Connect account, which is exempt from individual income tax in China; second, direct transfers of stocks listed on Hong Kong stock companies through a Hong Kong securities account, which require reporting offshore income to Chinese tax authorities. Additionally, the Hong Kong region exempts capital gains tax on the trading price differences obtained by offshore investors in Hong Kong stocks, thus not generating tax credits for mainland China, requiring investors to pay individual income tax at a rate of 20% on property transfer income.
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 personal tax risk points, including offshore income from investments in US stocks. However, income from foreign stock trading is primarily assessed through self-declaration, and Chinese tax authorities cannot directly implement supervision through withholding at the source.
CRS (Common Reporting Standard) mechanism is one of the methods for Chinese tax authorities to obtain tax-related information for conducting tax audits. CRS is the automatic exchange standard for financial account tax information led by the Organization for Economic Cooperation and Development (OECD), a system established by major countries worldwide to combat tax evasion through the exchange of information about taxable individuals' accounts among member countries. China has implemented this mechanism since 2017; thus, Chinese tax authorities can automatically obtain information on accounts held by Chinese tax residents in foreign financial institutions, including deposits, investments, insurance, and other financial asset data. By 2025, a total of 106 countries and regions have joined CRS (including mainland China and Hong Kong), with information exchange covering 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 and exchanged with the competent tax authorities. However, some jurisdictions have set non-mandatory reporting thresholds in their legislation. For example, Hong Kong clearly allows financial institutions to exempt 'pre-existing entity accounts' from immediate due diligence and reporting if the account balance does not exceed $250,000, although financial institutions conducting investigations on accounts below this threshold is also fully compliant. 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 United States has not joined the CRS, but applies its own information exchange framework — the Foreign Account Tax Compliance Act (FATCA), which has been effective globally since January 1, 2014. This act requires foreign financial institutions to disclose information about US accounts to the US tax authorities, or else face taxation. There are two disclosure models: Model One is where foreign governments report information about US accounts maintained by all financial institutions within their jurisdiction to the US tax authority; Model Two is where financial institutions report information about US accounts they maintain directly to the US tax authority. Since June 30, 2014, China has reached agreement with the US on substantial content for Model One of FATCA and is treated as a jurisdiction with an effective intergovernmental agreement. However, as of now, the two countries have not signed a formal intergovernmental agreement regarding this cooperation. Therefore, Chinese tax authorities are temporarily unable to obtain tax residents' account information in the United States through information exchange mechanisms such as CRS and FATCA. In contrast, the 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, on the market level, brokers in mainstream securities markets such as Hong Kong and the US regularly report relevant trading information to mainland tax authorities, which then analyze potential offshore income through these reports. Second, close cooperation among various government departments, including the State Taxation Administration, financial regulatory agencies, human resources departments, customs, and foreign exchange management departments, allows tax authorities to consolidate relevant payment data, labor dispatch data, entry and exit data, and foreign payment data of Chinese residents, and to comprehensively assess tax risks through individual income tax risk management systems. In practice, these methods play a more crucial role in the acquisition of offshore tax-related information, tax risk assessment, and audits by tax authorities.
3. Tax liability of Web3 practitioners
Announcement No. 3 clarifies the types of taxable offshore income, which can be divided into comprehensive income sourced from outside China (wage income, labor remuneration income, manuscript remuneration income, and royalty income), business income, and other income (interest, dividends, property transfer income, property leasing income, and occasional income). The classification standards are basically consistent with domestic income, but there are differences in the taxation methods: for example, offshore comprehensive income and offshore business income should be combined with domestic comprehensive income and domestic business income to calculate the taxable amount, but residents' other classified income sourced from outside China should not be combined with domestic income and should be calculated separately.
The tax treatment of crypto assets in mainland China still has many contentious points, and the following examples illustrate a few common scenarios:
For ongoing commercial mining activities abroad, tax authorities may consider it as business income, allowing the deduction of necessary costs such as equipment and electricity, which aligns with its capital-intensive and continuous investment characteristics. However, if miners engage in mining as individuals, the tax classification may become problematic: if treated as occasional income, while it fits the randomness of returns, the inability to deduct costs leads to an excessively high tax burden; 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, which may lead to tax disputes.
Another common scenario is when residents of mainland China obtain income through crypto asset trading, where the determination of commercial substance becomes critical. If there are fixed locations, hired teams, and continuous trading, it may be classified as business income. High-frequency traders face the risk of being upgraded to business income, while ordinary investors typically only pay tax on the appreciation portion but need to provide complete cost evidence to prove the original value of the assets, thereby avoiding double taxation and excessive deemed profit margins.
Since tax authorities have begun to focus on the tax regulation of offshore investment income from US stocks, Hong Kong stocks, etc., it is worth noting whether Web3 offshore income will become the next key audit target. According to Chinese tax law, as long as Web3 income can be classified under relevant tax categories in the tax law, it should fall within the scope of taxable income, which is primarily a technical issue of legal applicability. In practice, an important prerequisite for tax authorities in mainland China to successfully implement tax collection is their ability to obtain information on Web3 income from Chinese tax residents.
Under the current framework for handling 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 challenging for CRS to track, and mainland tax authorities find it difficult to directly obtain relevant trading information (but there still exists the risk of being reported for tax evasion by others). However, this does not mean that tax authorities cannot detect tax violations by tax residents in the Web3 field. Just as tax authorities can assess residents' offshore securities investment situations through various data, they may also have a set of corresponding risk metric systems for Web3 practitioners or investors, such as examining individuals' travel patterns abroad, the extent of their engagement in industries closely related to blockchain technology, and whether they hold high-value assets without any dynamics in their fiat accounts. Furthermore, with the development of the Web3 industry, it is not ruled out that Chinese tax authorities will establish closer relationships with more cryptocurrency exchanges in the future to obtain transaction records and gain/loss information from exchange users. From the previously announced Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital Asset Sales that was ultimately abolished by the US IRS, it can be seen that in the short term, although it is difficult for tax authorities in various countries to exert sufficient pressure on decentralized platforms, this may not be the case for centralized platforms represented by centralized exchanges.
4. What should Web3 practitioners in mainland China pay attention to?
In response to the behavior of late declarations or intentional concealment of offshore income, the tax authorities in mainland China have established a well-defined legal responsibility system. According to Article 32 and Article 63 of the Tax Collection and Administration Law, taxpayers who fail to declare on time or make false declarations will face progressive penalties, including tax recovery, accumulation of late fees, administrative penalties, and even criminal punishment: starting from the day after the statutory declaration deadline, a late fee of 0.05% per day will be charged on the late tax payment, creating significant financial pressure; for verified tax evasion behaviors, in addition to full tax recovery, a graduated 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 the complexity of concealment methods; if the amount involved reaches the standard for criminal cases, it will be referred to judicial authorities for criminal liability.
In the context of global tax transparency and regulatory technology upgrades, the tax issues of cross-border income from crypto assets deserve more attention. Currently, Chinese tax authorities have achieved in-depth supervision of core data such as offshore account balances and investment income through means such as CRS information exchange. Web3 practitioners may consider accurately declaring taxes while making reasonable tax arrangements. Especially from the disclosed cases, the late fees and penalties for subsequent payments far exceed the originally due taxes. Specifically, Web3 practitioners in mainland China can take two approaches to mitigate risks: first, they can organize past offshore income situations, determine whether taxable income has been generated, and take remedial measures either independently or with the help of professionals; second, they can continuously adjust and update their tax arrangements to minimize their tax burden while complying with relevant laws and regulations.
With the increasing transparency of global taxation and the upgrading of regulatory technologies, the Chinese tax authorities have also strengthened their efforts in auditing offshore income taxation. In the long run, compliance may be the more favorable choice for long-term interests. For investors in US stocks, Hong Kong stocks, and Web3, it is necessary to reconsider the compliance logic of cross-border assets and enhance attention to issues related to cross-border income declarations.
