According to a report Tokyo’s Asahi Shimbun tax authorities recently filed a tax evasion incident in which a photo studio in the city, over the course of three years, helped three Chinese people transfer 27 billion yen (about $237 million) in cryptocurrencies to property investments in Japan.
Because of China’s exchange controls, there is an annual limit of $50,000 on people converting foreign currencies, so investors interested in investing in foreign real estate often use other methods of converting foreign currencies.
For Tokyo tax authorities, the foreign exchange method used by Chinese investors is not within the scope of their management, but presents a problem in terms of taxation.
The photo studio mentioned above helped clients convert cryptocurrencies into Japanese yen and received a commission.
However, the photo studio declared an annual income of just 10 million yen (approximately more than $80,000) and, in the verification process, tax authorities discovered that there was a huge flow of funds into the company’s account.
Thus, from the perspective of the tax authorities, it was evident that the company had avoided a significant amount of taxes.
Company income could not be properly registered to tax authorities as it clearly violated China’s regulations on exchange control. On this issue, Shenhong Kakuta, a retired tax official and now chairman of Ernst & Young Japan, explained:
This case shows that the tax authorities of China and Japan need to cooperate to carefully unravel the flow of funds, clarify the problems involved in such transactions and implement measures to deal with the problems.
However, since the two countries have very different attitudes towards cryptocurrencies, cooperation can be quite tricky.
The natural “tax avoidance” properties of cryptocurrencies
Benjamin Franklin, one of the founding fathers of the United States, once said that, in this world, only death and taxes are inevitable.
For a long time, taxation has been ingrained in the American psyche. As a result, the subject of “tax evasion” is considered taboo in the Western context and is rarely discussed in public.
However, things got worse when cryptocurrencies came along, and while the subject of tax evasion remains taboo, many cryptocurrency users don’t know about how the “tax evasion” of this new thing works.
During this time, there were some extremist libertarians who openly asserted that current tax policy was irrational, mainly arguing that a portion of US tax revenue was used in war, even though “peace and love” people did not want to spend money to support wars. , people could refuse to pay taxes unless the government could distinguish which taxes were used in wars.
Roger See, the representative who holds this opinion, known as the “Jesus of Bitcoin”, is an American citizen who voluntarily renounced his nationality because of his extreme libertarian attitude.
But, of course, “in this world, where only death and taxes are unavoidable”, being an American citizen, one of the prerequisites for giving up citizenship is paying all taxes.
Significant differences in US and Chinese tax structures
There is no way of knowing how much Roger Ver has paid in taxes, as he has a huge amount of bitcoin and faces a huge “capital gains tax” because the cryptocurrency has risen so much since he bought it.
In that sense, early relinquishing his US citizenship freed him from some of the fees as the price of bitcoin continues to rise.
Of course, whether or not he has properly declared his possessions in cryptocurrencies to the US tax authorities or whether they have the ability to find out how many cryptocurrencies he actually owns is another matter.
The “capital gain tax”, which is a common tax in the US, is little known in China.
If a person buys an asset and sells it, as long as the sale price is greater than the purchase price, the corresponding portion of the profits will be subject to capital gain tax, regardless of the condition of the asset, whether it is a share, title, ownership, or something new such as cryptocurrencies.
Other countries are doing something similar, like Austria, which plans to impose a 27.5% capital gain tax on cryptoactives like bitcoin and ether in March 2022.
South Korea has said it will impose a 20% capital gain tax on cryptocurrencies in January 2022.
In some countries, there is no capital gain tax, as in Singapore, which has somehow become a tax haven, and in China, there is no such tax either.
For example, if you buy Montai stock for 100 Yuan and sell it for 2,000 Yuan, you don’t have to pay 1,900 Yuan appreciation tax.
It is clear that China is not a “tax haven” and its rates are mainly reflected in value added tax (or VAT).
For individual Chinese investors, although there is no capital gain tax, as most Chinese properties are in real estate, there is a real estate VAT for real estate transactions, for example.
If you buy a house for $1 million and sell it for $5 million, you will have to pay about 5.3% VAT on the $4 million appreciation.
For tax authorities, taxation also needs to be taken into account in the ratio of entry and exit.
For example, Americans’ wealth is mainly in the stock market so a capital gain tax on equity investments is important while Chinese wealth is allocated to real estate, so a real estate tax source is important.
For a country, expenditure on public defense and social services comes from taxes, but as a taxpayer, there is a natural incentive to pay less or no fees, and it is a test of the tax authorities’ ability to collect taxes. each country.
The tax collection capacity of the US Internal Revenue Service (or IRS) is by far the strongest among global governments, but people can still find many ways to avoid paying taxes.
Donald Trump, the former US president, being a rich man, only paid 750 in taxes, which created an uproar.
For ordinary people with far fewer assets than rich, it’s perfectly understandable that they can “avoid taxes” through cryptocurrencies, after all, one of the main functions of taxes is to reduce the gap between rich and poor rather than widening it.
In the case of China, with just 40 years of reform and opening up, the capacity to collect taxes is still under construction.
Previous incidents of tax evasion by celebrities such as Liu Xiaoqing or Zheng Shuang were visible to the press, but ordinary people always felt that such incidents were far removed from them, far from the need to hire professional accountants to help them file their taxes as well. Americans do.
However, things are slowly changing. In 2003, the “Golden Tax II Project” was completed, eliminating false VAT invoices.
The “Golden Tax Phase III” has recently been completed, and readers who have used a personal tax income app will appreciate the accuracy of the information.
Since there is no capital gain tax in China yet, investors in cryptocurrencies need not consider the consequences of selling cryptocurrencies for profit for now, but rather when the event of “sell cryptocurrencies” violates regulations.
On October 19, the China Tax News Agency, a subsidiary of the State Tax Administration (or SAT), published an article entitled “Avoiding fiscal risks associated with virtual currencies”, which generated turmoil.
However, the country’s central bank, the People’s Bank of China (or PBoC), has decided that “commercial activities related to virtual currencies are illegal financial activities” and has tried to clean up the industry, so it is possible collect taxes by these assets currently.
About the author
Colin Wu is a Chinese journalist known as Wu Blockchain. It is a reference when it comes to coverage of the Chinese cryptocurrency market. Through a blog and a non-Twitter profile, he daily covers behind the scenes of the contentious relationship between China and bitcoin.
*Translated and edited by Daniela Pereira do Nascimento with permission from WuBlockchain.