In many places in China, tax authorities are inspecting individual overseas income. Should investors in the crypto world and US Hong Kong stocks be worried?

Author | FinTax

The author's views do not represent Wu's views.

News Overview

From March 25 to 26, 2025, tax authorities in Hubei, Shandong, Shanghai, and Zhejiang, China, simultaneously issued announcements within 48 hours to conduct concentrated inspections regarding the reporting of overseas income by residents within China. China officially committed to implementing the Automatic Exchange of Information (AEOI) standard for tax-related financial account information 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, and Singapore, as well as traditional tax havens like the Cayman Islands, British Virgin Islands (BVI), and Bermuda, with core data including account balances and investment income. This time, the tax departments in the four regions of China identified multiple typical cases, with amounts recovered ranging from 127,200 yuan to 1,263,800 yuan, and adopted a five-step working method to promote rectification, including "reminders,督促整改, warning interviews, case filing and investigation, public exposure."

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1. Interpretation of Announcement Features

This tax audit presents two distinct characteristics. The first characteristic is that the scope of verification for overseas income has expanded to target the middle class. Unlike previous focus on high-net-worth individuals' overseas income, the taxpayers in this audit belong to a medium-to-high income category in terms of asset scale and income level. For example, in a typical case published by the Zhejiang tax department, the additional tax amount was 127,200 yuan. This shift indicates that the tax authorities in mainland China have begun to pay attention to the overseas income of the middle-income group.

The second characteristic is the collaborative and complementary scope of verification among the tax authorities of the four regions. On one hand, the cross-border flow of private capital in Zhejiang, offshore financial transactions in Shanghai, traditional manufacturing going overseas in Shandong, and new manufacturing in Hubei essentially cover the mainstream scenarios of middle-class overseas income. On the other hand, the collaborative issuance of verification announcements by multiple regions may imply a higher level of unified directives, which also means that the previous practice of individuals "voluntarily declaring" overseas income will gradually transform into 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 Administration of Individual Income Tax on Overseas Income" in 1998 and has been in use ever since. At the beginning of 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 overseas income for Chinese resident individuals. 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:

For 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 habitually reside in China due to their household registration, family, or economic ties, and even if they work or live abroad for a long time, as long as they have not renounced their household registration or family connections, 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), even without a domicile, are also considered residents.

In terms of taxable income scope, resident individuals are required to declare and pay individual income tax in accordance with China’s Individual Income Tax Law for all income obtained from both domestic and foreign sources. However, if an individual without a residence has resided in China for a cumulative total of 183 days in 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 a single departure from China that exceeds 30 days, the income sourced from outside China and 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, which includes income from U.S. and Hong Kong stocks. The income obtained by investors from the stock market mainly falls into two categories: one is dividends and bonuses from stocks (dividend income), and the other is profits from buying and selling stocks (which falls under capital gains; however, China does not have a separate capital gains tax, and it should be classified under "property transfer income" tax category).

For the dividend income of U.S. stocks, Chinese investors are required to include the dividends of U.S. stocks in their comprehensive income and pay individual income tax at a rate of 20%. According to SAT Announcement 3 of 2020, taxpayers are eligible for a credit based on the amount of tax paid in the U.S., primarily U.S. withholding tax. Therefore, Chinese tax residents need to include the full amount of dividends from U.S. stocks in their income, and after deducting the tax paid abroad, calculate the tax payable according to the Chinese tax rate, which is calculated according to the specific formula: China tax payable = dividend income × Chinese tax rate - overseas tax paid (within the credit limit). For U.S. stock capital gains, Chinese investors are subject to individual income tax at a rate of 20% on the income from property transfers, of which qualified overseas investment losses can be deducted before tax, and tax already paid abroad can also apply for tax credits.

According to the Notice on the Relevant Tax Policies of the Pilot Program of the Shanghai-Hong Kong Stock Connect Mechanism, H-share companies will withhold individual income tax at a rate of 20% for H-share dividends obtained by mainland individual investors, and China Securities Depository and Clearing Corporation Limited will withhold individual income tax at a rate of 20% for non-H-share dividends and dividends obtained by China Securities Depository and Clearing Corporation Limited. For the red chips of companies with Chinese holdings or main business in Chinese mainland but listed in Hong Kong, according to the Enterprise Income Tax Law and its implementing regulations, red-chip enterprises withhold 10% of the corporate income tax in advance according to the standard of legal persons before paying dividends, and not all red-chip enterprises have 10% corporate income tax on after-tax profits, so the personal income tax rate of Hong Kong stock investors ranges from 20% to 28%. In addition, if you directly open a securities account in Hong Kong to invest in Hong Kong stocks, you will not need to withhold individual income tax on dividends and dividends obtained by investors, except for H shares and red chips, which are subject to 10% dividend and dividend tax.

For capital gains from Hong Kong stocks, the tax treatment in the mainland distinguishes between two scenarios: first, gains from trading through the Hong Kong Stock Connect account are exempt from individual income tax within China; second, directly transferring shares of Hong Kong-listed companies through a Hong Kong securities account requires reporting foreign income to the tax authorities in China. Moreover, the Hong Kong region exempts capital gains tax on the price differences obtained by foreign investors in Hong Kong stocks, hence no tax credits arise in the mainland. Investors are required to pay individual income tax at a rate of 20% on property transfer gains.

In recent years, the State Taxation Administration of China has placed great emphasis on the tax evasion issues of high-net-worth individuals, with specialized personnel responsible for monitoring significant capital movements of individuals and identifying personal tax risk points. Income from overseas investments, such as in U.S. stocks, is also within the scope of monitoring. However, the income derived from overseas stock trading is primarily calculated for tax liability through self-declaration, and Chinese tax authorities cannot directly implement supervision through mechanisms such as withholding at the source.

The Common Reporting Standard (CRS) mechanism is one of the methods for Chinese mainland tax authorities to obtain tax-related information for tax inspection. CRS is a standard for automatic exchange of tax-related information on financial accounts led by the Organization for Economic Co-operation and Development (OECD), that is, a system established by major countries around the world to combat tax evasion for the exchange of tax-related account information among member countries. China has implemented this mechanism since 2017, according to which Chinese tax authorities can automatically obtain the account information of Chinese tax residents with overseas financial institutions, including data on financial assets such as deposits, investments, and insurance. By 2025, 106 countries and territories have joined the CRS (including Chinese mainland and Hong Kong), and the exchange of information covers account balances, interest, dividends, etc. The CRS itself does not set a global floor for "individual account balances" or "reportable amounts", and all accounts identified as "reportable accounts" must be reported and exchanged with the competent tax authorities, although some jurisdictions have set non-mandatory reporting limits in their legislation. For example, in Hong Kong's Inland Revenue (Automatic Exchange of Financial Account Information) Regulations, financial institutions are expressly allowed to exempt from immediate due diligence and reporting on "pre-existing entity accounts" with a balance of less than US$250,000 (but not "shall"), but it is also fully compliant for financial institutions to actively investigate accounts below the limit. Therefore, accounts with larger amounts of funds are more likely to be noticed, but the possibility of information being reported and exchanged for small funds cannot be ruled out.

Currently, the U.S. is not a member of the CRS and is governed by its own information exchange framework, the Foreign Account Tax Compliance Act (FATCA), which has been applicable to all countries in the world since January 1, 2014, and requires foreign financial institutions to disclose information about U.S. accounts to U.S. tax authorities or face taxes. There are two modes of disclosure, one is for the other government to report to the IRS for information on U.S. accounts maintained by all financial institutions in its jurisdiction, and the other is for financial institutions to report directly to the IRS for information on U.S. accounts maintained by them. Since 30 June 2014, China and the United States have agreed on the substance of FATCA Model 1 to be treated as a jurisdiction with an active intergovernmental agreement, but to date the two countries have not entered into a formal intergovernmental agreement on this cooperation. As a result, the Chinese tax authorities are temporarily unable to obtain the account information of tax residents in the United States through information exchange mechanisms such as CRS and FATCA. In contrast, it is very convenient for Chinese mainland and Hong Kong to exchange information through CRS.

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 the United States also regularly report relevant trading information to the mainland tax authorities, who analyze potential foreign income based on these reports. Second, the close cooperation between the State Administration of Taxation, the Financial Regulatory Bureau, the Human Resources and Social Security Bureau, Customs, and the Foreign Exchange Administration allows the tax authorities to integrate relevant payment data, labor dispatch data, entry and exit data, and foreign exchange payment data of Chinese residents through inter-departmental collaboration. This integration enables a comprehensive assessment of tax risks through the personal income tax risk control management system. 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. Taxation possibilities for Web3 practitioners

Announcement No. 3 clarifies the types of taxable overseas income, which can be divided into comprehensive income (wages and salaries, labor remuneration, manuscript fees, royalties) from outside China, business income, and other income (interest, dividends, gains from property transfer, property leasing income, occasional income). The classification standards are basically consistent with domestic income, but there are differences in the method of taxation: for example, comprehensive income and business income from overseas should be combined with the calculation of taxable income for domestic comprehensive income and business income, while other classified income for individual residents from outside China should not be combined with domestic income and should be calculated separately for taxable income.

The tax treatment of crypto 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, tax authorities may regard 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 conduct mining as individuals, the tax classification becomes a dilemma: if treated as occasional income, it aligns with the randomness of earnings but leads to excessively high tax burdens due to the inability to deduct costs; if referenced as income from property transfer, it is difficult to reasonably assess the appreciated portion due to the lack of stable valuation benchmarks for crypto assets, which can easily lead to tax disputes.

Another common scenario is when residents of mainland China obtain profits through cryptocurrency transactions, 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. High-frequency traders face the risk of being classified as 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 property, thereby avoiding double taxation and excessively high assessed profit rates.

Since the tax authorities have begun to focus on the tax regulation of overseas investment income from US stocks, Hong Kong stocks, and other investments by Chinese tax residents, it is urgent to pay attention to whether Web3 overseas income will become the next key inspection target. According to Chinese tax law, Web3 income, as long as it can be classified under the relevant tax categories in the tax law, should fall within the scope of taxable income, which is primarily a technical issue of legal applicability. In practice, an important prerequisite for the successful tax administration by tax authorities in mainland China is their ability to obtain information on the Web3 income of Chinese tax residents.

Under the current tax-related information processing framework, the CRS is also applicable to cryptocurrency-related fund flows, but if investors do not interact with each other on a centralized platform (especially if they do not trade on CEXs), it is difficult for the CRS to be traced, and it is difficult for the mainland tax authorities to directly obtain relevant transaction information (but there is still a risk of being reported by others for tax evasion). However, this does not mean that tax authorities are completely unaware of tax irregularities by tax residents in the Web3 space. Just as the tax authorities can grasp the overseas securities investment of residents through multi-party data research and judgment, for practitioners or investors in the Web3 field, the tax authorities may also have a set of corresponding risk indicator systems, such as examining the individual's stay and return overseas, whether the industry is closely related to blockchain technology, and whether they hold some high-value assets in the absence of dynamic fiat currency accounts. In addition, with the development of the Web3 industry, it cannot be ruled out that the Chinese tax authorities will establish closer relationships with more cryptocurrency exchanges in the future, so as to obtain information such as transaction records, profits and losses of exchange users. Judging from the final repeal of the "Gross Proceeds Reporting by Brokers That Regularly Provide Services Effectuating Digital Asset Sales" previously announced by the U.S. Internal Revenue Service (IRS), in the short term, Although it is difficult for tax authorities in various countries to exert sufficient pressure on decentralized platforms, this is not necessarily the case for centralized platforms represented by centralized exchanges.

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

In response to overdue declarations or the intentional concealment of overseas income, tax authorities in mainland China have established a clear hierarchical legal responsibility system. According to Articles 32 and 63 of the Tax Collection and Administration Law, taxpayers who fail to declare on time or make false declarations will face a progressive penalty of tax recovery, accumulation of late fees, administrative penalties, and even criminal punishment: starting from the day after the statutory declaration period expires, a daily late fee of 0.05% on the overdue tax amount will be charged, leading to significant financial pressure; for confirmed tax evasion behaviors, in addition to full recovery of the tax amount, a tiered penalty ranging from 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 meets the standards for criminal prosecution, the case will be transferred 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. At present, the Chinese tax authorities have achieved in-depth supervision of core data such as overseas account balances and investment income through means such as CRS information exchange. Web3 practitioners can consider making reasonable tax arrangements and filing tax returns truthfully. 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.

With the increasing transparency of global tax systems and the upgrading of regulatory technologies, the Chinese tax authorities are also strengthening their scrutiny of overseas income tax. In the long run, compliance may be a more beneficial choice for long-term interests. For investors in US stocks, Hong Kong stocks, and Web3, it is quite necessary to reassess the compliance logic of cross-border assets and pay more attention to the issues of cross-border income declaration.