The emergence of cryptocurrency has sparked global discussions around financial innovation, regulation, and taxation. As digital assets like Bitcoin gain traction worldwide, governments are grappling with how to integrate them into existing tax frameworks. In China, where cryptocurrency trading and fiat conversion are restricted, the debate over taxation remains both timely and complex. This article explores a comprehensive proposal from the Xiamen National Institute of Accounting on how China might approach cryptocurrency taxation, drawing insights from international practices and adapting them to domestic realities.
Global Approaches to Cryptocurrency Taxation
As nations experiment with regulatory models, their tax treatment of cryptocurrencies reflects broader policy goals—ranging from encouragement of innovation to prevention of financial instability.
United States: Capital Gains vs. Ordinary Income
The U.S. Internal Revenue Service (IRS) issued Notice 2014-21, establishing that cryptocurrencies are treated as property for federal tax purposes. This means every transaction involving crypto—whether it's buying goods, selling coins, or receiving payments—can trigger taxable events.
- Mining income is taxed at fair market value on the date received, treated as ordinary income.
- Holding period matters: If held over one year, gains are subject to capital gains tax (0%–20%). Short-term holdings are taxed as ordinary income, up to 39%.
- The IRS has since intensified enforcement, sending warning letters and requiring exchanges like Coinbase to disclose user data.
👉 Discover how global tax systems are adapting to digital assets
Despite clear rules, enforcement remains challenging due to anonymity and decentralized networks.
United Kingdom: Property-Based Taxation
Initially applying VAT to crypto transactions, the UK shifted course in 2014 by classifying Bitcoin as private property. The HM Revenue & Customs (HMRC) clarified:
- No VAT on crypto-to-fiat or crypto-to-crypto exchanges.
- Capital gains tax applies to individuals when disposing of crypto.
- Corporation tax applies to businesses.
- Mining was initially exempt but later deemed taxable if carried out regularly with profit intent.
In 2019, HMRC updated guidance listing specific activities that generate tax liability, including staking and hard forks.
Japan: Legal Tender Treatment with High Tax Rates
Japan recognizes cryptocurrency as legal payment method under the Payment Services Act. Key features include:
- Elimination of 8% consumption tax on crypto purchases in 2017.
- Gains from crypto trading are classified as “miscellaneous income,” taxed progressively between 5% and 45%, plus a 10% local inhabitant tax.
- Taxpayers must file annual returns if gains exceed ¥200,000.
- Cost basis can be calculated using moving average or total average methods.
Japan treats crypto similarly to stocks but imposes higher effective rates, reflecting caution toward speculative behavior.
Australia: Barter Transaction Framework
The Australian Taxation Office (ATO) views cryptocurrency transactions as barter arrangements. Key principles:
- Crypto is an asset subject to capital gains tax (CGT).
- Transactions for goods/services trigger CGT events unless the asset cost under AUD 10,000 and is for personal use.
- Mining income is taxable as ordinary income.
- Since 2018, foreign currency rules apply to cross-border crypto dealings.
Australia’s framework emphasizes purpose—investment vs. personal use—which determines tax exposure.
Toward a Chinese Cryptocurrency Tax Framework
While China prohibits cryptocurrency trading and banking services related to digital assets, blockchain technology is actively promoted. Given this nuanced stance, the Xiamen National Institute of Accounting proposes a cautious yet forward-looking approach: taxing cryptocurrency at key lifecycle stages without legitimizing unrestricted circulation.
Why Taxation Is Necessary Despite Restrictions
Even with domestic trading bans:
- Mining operations persist (though increasingly relocated).
- Cross-border transactions occur via offshore platforms.
- Anonymity enables unreported wealth accumulation.
Without a taxation mechanism, China risks significant tax base erosion and loss of fiscal control over digital economy activities.
Proposed Taxation Model: Three Key Stages
The model focuses on three taxable moments: mining, circulation, and disposal.
1. Mining Stage: Taxing Creation of Value
Mining generates new coins and verifies transactions—activities that create economic value. The report suggests treating mining income as service-based revenue.
Value-Added Tax (VAT)
- Input VAT: Eligible for deduction on hardware, electricity, and facility costs.
- If mining ceases, unused input VAT must be reversed.
- If continued, carryforward allowed within a defined period.
Output VAT:
- Block reward: Based on Bitcoin’s fair market value at receipt.
- Transaction fees: Full amount treated as taxable turnover.
Income Tax
- For individuals: Classify mining income under “windfall gains” per SAT Announcement [2019] No. 74, similar to guarantee fees.
- For enterprises: Recognize revenue at fair value upon receipt; deduct operational costs to determine taxable income.
👉 Learn how digital economies are reshaping tax systems globally
2. Circulation Stage: Transactions Using Crypto
When users pay with Bitcoin for goods or services, it constitutes a non-cash transaction akin to barter.
VAT Treatment
Treat as mutual sale-purchase:
- Seller records crypto received as revenue (fair value).
- Buyer records crypto spent as purchase cost.
Due to valuation challenges from volatility and anonymity, presumptive or核定 (nuclei) assessment could be used—setting default rates based on transaction volume or sector benchmarks.
Income Tax
- Enterprises: Non-monetary asset exchange treated as deemed sale under Corporate Income Tax Law.
- Individuals: Subject to personal income tax on capital gains from disposal.
3. Disposal Stage: Selling Cryptocurrencies
Selling mined or acquired Bitcoin triggers final realization of gain or loss.
VAT
- Output tax based on market value at sale date.
- Input tax credit only allowed if detailed records exist (e.g., acquisition date, source, cost).
- Use FIFO (First-In, First-Out) method for cost tracking to prevent manipulation.
Income Tax
- Recognize income on settlement date.
- Deduct acquisition cost and related expenses.
- Tax as property transfer income under both corporate and individual regimes.
- Allow loss carryforwards for enterprises to smooth out volatile returns.
Strengthening Tax Administration
Effective taxation requires robust enforcement mechanisms tailored to crypto’s unique attributes.
1. Establish Government-Sanctioned Trading Platforms
A regulated exchange would:
- End anonymity by mandating KYC/AML compliance.
- Enable real-time transaction monitoring.
- Facilitate automatic reporting to tax authorities.
However, this risks undermining decentralization ideals and raises privacy concerns—trade-offs requiring careful balancing.
2. Build Advanced Monitoring Systems
Tax authorities should develop blockchain analytics tools to:
- Track wallet addresses linked to known entities.
- Estimate holdings based on network activity.
- Require miners and institutional holders to file periodic disclosures.
Implement withholding at source where possible (e.g., from mining pools), followed by annual reconciliation.
3. Enhance International Cooperation
Cryptocurrencies transcend borders. China should:
- Join global initiatives like the OECD’s Crypto-Asset Reporting Framework (CARF).
- Share data with partner jurisdictions to prevent double non-taxation.
- Coordinate definitions and reporting standards to reduce compliance burdens.
Frequently Asked Questions
Q: Can China legally tax something it bans?
A: Yes. Taxation does not imply legalization. Governments often tax illicit or restricted goods (e.g., tobacco, gambling). What matters is economic value creation.
Q: How can taxes be enforced if transactions are anonymous?
A: Through regulated gateways—such as exchanges and mining pools—and advanced blockchain forensics tools that trace wallet activity even without full identity disclosure.
Q: Would taxing mining discourage technological development?
A: Not necessarily. Properly structured taxes can coexist with innovation incentives. Tax revenue could even fund R&D in blockchain infrastructure.
Q: Is there precedent for taxing unregulated assets?
A: Yes. Many countries tax offshore income or undeclared cash economies. The principle is universal: economic benefit triggers tax liability regardless of legality.
Q: What happens if someone uses a foreign exchange?
A: While harder to track, international cooperation and bank-level controls can flag suspicious inflows/outflows tied to crypto proceeds.
Conclusion
As digital finance evolves, so must taxation systems. While China maintains strict controls on cryptocurrency circulation, the Xiamen National Institute of Accounting’s proposal offers a pragmatic path forward: targeted taxation at value-creation points, supported by modern administration tools.
By learning from U.S., UK, Japanese, and Australian models—and adapting them to China’s regulatory environment—the country can protect its tax base, promote fairness, and prepare for a future where digital assets play a larger role in the economy.
👉 Explore how next-generation financial systems are being built today