China's four regions synchronize verification of overseas income. How should Web3 practitioners respond?

Author: FinTax

News Overview

From March 25 to 26, 2025, the tax authorities of Hubei, Shandong, Shanghai and Zhejiang in China issued simultaneous announcements within 48 hours to carry out centralized verification on the overseas income declaration of residents in China. In September 2014, China formally committed to the implementation of the Automatic Exchange of Financial Account Information (AEOI) standard under the CRS framework, and completed the first exchange of information with other CRS participating countries (regions) in September 2018, covering core data such as account balances and investment income of major countries such as the United Kingdom, France, Germany, Switzerland, and Singapore, as well as traditional tax havens such as the Cayman Islands, the British Virgin Islands (BVI), and Bermuda. This time, the tax authorities of the four places in China identified a number of typical cases, with the recovery amount ranging from 127,200 yuan to 1,263,800 yuan, and adopted the five-step working method of "prompting and reminding, urging rectification, interviewing and warning, filing and inspection, and public exposure" to promote rectification.

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1. Interpretation of Announcement Features

The recent tax inspection presents two distinct characteristics. The first characteristic is the expansion of the inspection targets for overseas income, aimed at the middle-class group. Unlike previous regulations focusing on high-net-worth individuals' overseas income, the taxpayers in this inspection have asset scales and income levels that fall within the upper-middle income range. For example, in a typical case published by the Zhejiang tax department, the amount of back taxes due was 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 scope of verification by tax authorities in four regions. 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 joint issuance of verification announcements by multiple regions may indicate a higher level of unified directive, which also means that the previous practice of individuals voluntarily declaring overseas income will gradually shift to strict substantive inspections of overseas income by tax authorities.

2. How does mainland China tax residents' overseas income?

China implements a global taxation principle for individual tax residents, 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 has been in use ever since. In early 2020, the Ministry of Finance and the State Administration of Taxation 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 Administration of Taxation, hereinafter referred to as "Announcement No. 3"), which further clarified the tax treatment and collection management of Chinese residents' overseas income. 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:

In terms of taxpayers, according to the Individual Income Tax Law of the People's Republic of China, individuals who meet any of the following conditions are recognized as "Chinese tax residents": 1. Having a domicile in China: This refers to individuals who have habitual residence 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 abandoned their household registration or family ties, they may still be recognized as residents. 2. Residing in China for 183 days or more: Individuals who reside in China for a total of 183 days within a tax year (January 1 - December 31), even if they do not have a domicile, are also considered residents.

In terms of the scope of taxable income, residents who obtain all income from within and outside of China should declare and pay individual income tax according to China's Individual Income Tax Law. However, if a non-resident individual has resided in China for a cumulative total of 183 days within a tax year, but has not resided in China for a cumulative total of 183 days in any one of the previous six years or has left China for more than 30 days at a time, the income sourced from outside China and paid by foreign entities or individuals during that tax year is exempt from individual income tax.

3. The tax implications for Web3 practitioners

Announcement No. 3 clarifies the types of taxable foreign income, which can be divided into comprehensive income (income from wages and salaries, remuneration for labor services, author's remuneration, royalties), business income and other income (income from interest, dividends, dividends, property transfer, property lease and incidental income) derived from sources outside China. However, other classified income of resident individuals derived from sources outside China shall not be combined with domestic income, and the tax payable shall be calculated separately.

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

For commercial mining activities that continue to operate overseas, the tax authorities may treat them as operating income and allow deductions for necessary costs such as equipment and electricity, which is commensurate with their capital-intensive and continuous investment characteristics. However, if the miner mines as an individual, the tax characterization is in a dilemma: if it is treated as accidental income, although it fits the random characteristics of the income, the tax burden is abnormally high due to the inability to deduct the cost; If we refer to the income from property transfer, and due to the lack of a stable valuation benchmark for crypto assets, it is difficult to reasonably verify the value-added part, which is likely to lead to tax calculation disputes.

Another common scenario is when residents of mainland China obtain profits through cryptocurrency asset trading, where the determination of commercial substance becomes key. If there is a fixed location, a hired team, 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 taxes on the appreciation portion, but they need to provide complete cost documentation to prove the original value of the assets, thereby avoiding double taxation and excessively high deemed profit rates.

4. What can Web3 practitioners in mainland China pay attention to?

In response to late declarations or deliberate concealment of foreign income, the Chinese mainland tax authorities have established a layered legal liability system. According to Articles 32 and 63 of the Law on the Administration of Tax Collection, taxpayers who fail to file on time or make false declarations will result in progressive punishment of tax collection, accumulation of late fees, administrative penalties and even criminal penalties: from the day after the expiration of the statutory declaration period, a late payment penalty of 5/10,000 of the overdue tax will be charged on a daily basis, resulting in huge financial pressure; For verified tax evasion, in addition to recovering the full amount of tax, a tiered fine of 50% to 5 times of the tax payable will be imposed according to factors such as the degree of subjective malice and the complexity of the concealment means; If the amount involved reaches the standard for filing a criminal case, it will be transferred to the judicial authorities for criminal responsibility.

In the context of global tax transparency and regulatory technology upgrades, the tax issues of cross-border income from crypto assets deserve more attention. At present, the Chinese tax authorities have achieved in-depth supervision of core data such as overseas account balances and investment income through CRS information exchange and other means. Web3 practitioners can consider making reasonable tax arrangements and truthfully file tax returns. In particular, judging from the several cases disclosed this time, the cost of late fees and fines paid after the fact far exceeds the taxes and fees that should have been paid. Specifically, Web3 practitioners in Chinese mainland can start to prevent risks from two aspects: first, they can sort out their past overseas income by themselves or with the help of professionals, determine whether they have generated taxable income, and take remedial measures; Second, they can constantly adjust and update their own tax arrangements, and reduce their own tax burden as much as possible while complying with relevant laws and regulations.