China Taxes Crypto Gains Up To 45% Despite Trading Ban

China’s stance on cryptocurrency is complex, with stringent regulations that prohibit trading and mining activities within the country. However, many individuals and businesses continue to engage in crypto transactions through foreign platforms. Understanding the tax implications of these activities is crucial for staying compliant with China’s financial regulations. The State Taxation Administration (STA) is the primary authority overseeing these tax rules, ensuring they align with the country’s strict financial controls.

The STA, in collaboration with the People’s Bank of China (PBOC), enforces a ban on Initial Coin Offerings (ICOs) and crypto exchanges, which has been in place since 2017. Additionally, mining and trading activities were further restricted in 2021. Despite these bans, individuals and businesses that engage in crypto transactions via foreign platforms are still required to pay taxes on their crypto-related income and gains. Crypto is not recognized as legal tender in China but is treated as a virtual commodity for tax purposes.

In China, there are several types of taxes that apply to cryptocurrency activities. Capital Gains Tax (CGT) is levied on profits from selling or trading crypto, treated as gains from virtual commodities. Income tax applies to crypto earned from mining, staking, airdrops, or payments for services. Value-Added Tax (VAT) is not typically applied to individual crypto trades, but businesses dealing in crypto-related services may face VAT. Wealth tax does not apply to crypto, but inheritance tax may affect crypto passed to heirs, treated as property.

Individuals in China pay a flat 20% capital gains tax on crypto profits, regardless of the holding period. Businesses face a 25% corporate income tax on crypto-related gains. Income tax for individuals ranges from 3% to 45% based on annual earnings, applied to crypto income like staking or payments. Companies pay a 25% income tax on crypto earnings. There are no specific tax exemptions for crypto, though general income thresholds may reduce tax liability.

Buying and selling crypto is subject to specific tax treatments. Buying crypto with fiat is not taxed, but selling for profit triggers a 20% CGT. Crypto mining and staking rewards are taxed as income at rates ranging from 3% to 45% based on total earnings. Crypto received as salary or payment is treated as income and taxed at individual rates up to 3% to 45%. Crypto-to-crypto trades are considered taxable, with gains taxed at 20% based on market value at the time of the trade. DeFi activities, lending, and yield farming earnings are taxed as income at 3% to 45%. NFT transactions face a 20% CGT on sales profits, and creation or royalties may incur income tax.

Individuals and businesses must report their crypto earnings to the STA annually. Individuals file the Individual Income Tax Return, and businesses use the Corporate Income Tax Return, detailing crypto gains or income. They must record trades, dates, amounts, and values, often from foreign wallets due to local bans. Deadlines are March 31 for individuals and May 31 for companies, covering the previous year. Failing to file risks fines, audits, or asset seizure, especially as STA scrutiny grows.

China does not offer special tax breaks for crypto losses or costs. You cannot use crypto losses to lower taxes on other income, and businesses might cut taxes with mining expenses like equipment, but the mining ban makes this uncommon. The STA keeps rules tight, offering no breaks for small crypto users. Regular income tax limits give slight help, but nothing extra exists for crypto now.

The STA uses blockchain tools, foreign exchange data, and KYC rules to monitor crypto activities, even with bans in place. China’s Great Firewall and PBOC help catch illegal moves. Tax evasion brings tough penalties, with fines beginning at 50% of unpaid tax and can hit 500% for deliberate dodging, under the Tax Administration Law. Serious cases risk asset freezes or prison. Enforcement is tighter now, focusing on offshore crypto, with STA working with global tax groups to plug gaps, so sticking to the rules is a must.

China might toughen crypto tax rules soon, pushing more reporting on offshore assets. The government stands against crypto but tests a digital yuan (e-CNY), showing some blockchain interest. No tax relief is coming for investors, though state-backed blockchain firms could get perks. Global rules, like the OECD’s, may force clearer laws, mixing control with new ideas.

In conclusion, China taxes crypto as a virtual commodity, with a 20% CGT on profits and income tax up to 45% on earnings. The STA enforces strict compliance amid bans, leaving no room for lax reporting. Investors and businesses must track transactions carefully to avoid hefty fines or legal trouble. As rules evolve, consulting a tax expert familiar with China’s policies is wise to ensure adherence and manage risks effectively.