Recently, many friends in the cryptocurrency community have been asking me the same question: "I heard that Hong Kong is going to start reporting crypto asset information. Are my crypto assets on overseas exchanges still safe? Will the mainland tax authorities know? Will I need to pay back taxes?" This anxiety is not unfounded. In 2025, global tax transparency is facing a "precise strike" against cryptocurrencies. As a legal practitioner deeply involved in Web3, today Attorney Honglin will discuss CARF (Crypto Asset Reporting Framework), known as the "crypto CRS," and what it really means for our wallets. What is CARF? Over the past decade, the traditional financial world has had a powerful tool called CRS (Common Reporting Standard). Simply put, if you are a Chinese citizen with deposits in overseas banks, the foreign banks will exchange your account information with the Chinese tax authorities. However, CRS has a major loophole: it doesn't cover cryptocurrencies. Previously, if you converted money into USDT and kept it in your wallet, or traded it on Binance or OKX, the tax authorities couldn't see it. Now, a patch has been found. CARF (Crypto-Asset Reporting Framework) was specifically designed to close this loophole. Its core logic is: since you can't find a decentralized version of yourself, then find a "middleman" to serve you. Who needs to report? Exchanges (CEXs), OTC merchants, and even some token-issuing projects. What to report? Your identity information (name, tax ID), how many coins you bought, how many you sold, and which wallet address you transferred the coins to. This means that every transaction you make with compliant exchanges and service providers will be completely transparent to the tax authorities. In the CARF era, the following behaviors will face extremely high tax exposure risks: Stablecoin deposits and withdrawals (USDT/USDC): Don't assume that exchanging for stablecoins is safe. CARF explicitly stipulates that cryptocurrency-to-fiat currency and cryptocurrency-to-cryptocurrency (e.g., BTC to USDT) transactions must be reported. Each exchange may be considered a "sale" under tax law, requiring the calculation of profit and loss and payment of taxes. Large OTC transactions: Previously, people were accustomed to exchanging OTC currency offline. In the future, Hong Kong will bring OTC merchants under its regulation, and they will also be obligated to report information on large-volume transactions. DeFi and Airdrops: While DeFi is more difficult to regulate, if the protocol has a clear "controlling party" (such as the project team retaining administrative authority), or if you participate in DeFi mining through a centralized exchange, your earnings will still be recorded. Withdrawing to a Cold Wallet: You might ask, "Can I withdraw my coins to a cold wallet and keep it locked up?" Yes and no. Because the exchange must record your "withdrawal" action and the recipient's wallet address. Once this cold wallet address interacts with fiat currency in the future (such as when you buy a house, a car, or cash out through an exchange), the tax authorities can use on-chain analysis tools to trace back to your address and thus calculate your total tax history. A common misconception: "Cryptocurrency trading is illegal in mainland China, so you don't have to pay taxes?" For mainland investors, the reason they pay attention to CARF is because of Hong Kong's recent efforts. Although Hong Kong operates under "one country, two systems," it has long had established connections with the mainland regarding the exchange of tax information. According to the consultation document released by the Hong Kong government at the end of 2024 and the beginning of 2025, the timeline is very clear: 2025-2026: Local legislation in Hong Kong to establish tax rules. January 1, 2027: Recording officially begins. From this day forward, all transaction data generated on licensed exchanges and OTC markets in Hong Kong will be recorded by the back-end system. 2028: The Hong Kong Inland Revenue Department begins sending this data to tax authorities in other countries (including mainland China). In the future, Hong Kong will no longer be a tax haven, but rather a "transfer station" for tax information. Many people think, "The government says Bitcoin trading is an illegal financial activity, so if they don't protect me, why should they tax me?" From a lawyer's perspective, that's not necessarily true. The core reason is that tax law focuses on "substance": in the eyes of tax law, regardless of whether your income source is legal (such as salary) or gray (such as cryptocurrency trading), as long as you make money (generate "income"), you have a tax obligation. Furthermore, in recent years, mainland China has been promoting "taxation based on data." Previously, the tax bureau didn't know you had overseas assets and couldn't manage it. Once CARF is implemented, Hong Kong will directly send your transaction data (e.g., Zhang San, mainland ID number xxx, earned 1 million USDT on a certain exchange in 2027) to the mainland tax authorities. The system will compare the data, and if you haven't declared it, a warning will immediately appear. Three Practical Compliance Tips Facing the wave of transparency in cryptocurrency taxation, panic is useless, because compliance is an inevitable path for the Web3 industry, and taxation is a necessary part of compliance. From this perspective, this is a day everyone has been eagerly anticipating. To more safely and joyfully welcome cryptocurrency taxation, here are three rational compliance strategies. Recommendation 1: Reassess Your "Tax Residency Status" CARF exchanges information based on your "tax residency" status. If you hold a passport from a small country (such as St. Kitts or Vanuatu) but reside in Shanghai/Beijing long-term, with your life centered in mainland China, you are still a mainland Chinese tax resident. If you want to truly isolate yourself from risks, you need substantial identity planning—not just obtaining residency, but actually relocating to a cryptocurrency-friendly tax region (such as Dubai or Singapore), severing your tax ties with your original place of residence. Recommendation 2: Asset Inventory and Historical Disconnection 2027 is the starting year for data collection. Before then, it is recommended to conduct a comprehensive inventory of your assets. For example, distinguish between "existing assets" and "new assets." For legacy issues, if the amounts involved are substantial, it is recommended to consult a professional tax advisor to see if a compliant filing or restructuring is necessary during the window period. Don't wait until the data exchange in 2028 to react passively. Recommendation 3: Say Goodbye to Unconventional Methods, Embrace a Compliant Structure. For Web3 entrepreneurs and high-net-worth individuals: Avoid using personal accounts for large transactions. Consider holding assets through legal structures such as family trusts or offshore companies. Although CARF can identify the "actual controller," a legitimate structure can help isolate some legal risks and provide room for tax planning. At the same time, stay away from underground banks. CARF is linked to Anti-Money Laundering (AML) mechanisms; once the funding channels of underground banks are investigated, it's not just a matter of paying back taxes, but also involves criminal offenses. The "wild west" era of Web3 is coming to an end. The arrival of CARF signifies that crypto assets have officially entered the global regulatory purview. For players in mainland China, "invisibility" is no longer possible; the future competition will be about compliance. Since we can't avoid it, we might as well prepare in advance and protect our wealth within the rules.
Catherine
Anais
Kikyo
Weatherly