Crypto Taxation CRS is Coming: Three Practical Tips for Crypto Enthusiasts

Article by: Lawyer Liu Honglin

Recently, many friends in the crypto circle have been asking me the same question: “I heard that Hong Kong is starting to report crypto asset information. Are my crypto assets on overseas exchanges still safe? Will the mainland tax authorities find out? Do I need to pay additional taxes?”

This kind of anxiety is not unfounded.

By 2025, global tax transparency is ushering in a targeted “precision strike” against cryptocurrencies. As a legal practitioner deeply involved in Web3, today Lawyer Honglin will discuss the so-called “Crypto Asset CRS” in the crypto world, the CARF (Crypto-Asset Reporting Framework), and what it really means for each of our wallets.

What is CARF?

Over the past decade, the traditional financial world has a powerful tool called CRS (Common Reporting Standard). Simply put, if you are a Chinese citizen with deposits in overseas banks, foreign banks will exchange your account information with the Chinese tax authorities.

However, CRS has a major loophole: it cannot regulate cryptocurrencies. Previously, if you exchanged money for USDT and stored it in a wallet, or traded on Binance, OKX, the tax authorities could not see it.

Now, a patch has arrived. CARF (Crypto-Asset Reporting Framework) is specifically designed to plug this loophole.

Its core logic is: since they cannot find the decentralized you, they will instead target the “middlemen” who serve you.

Who needs to report? Exchanges (CEX), OTC traders, and even some project teams issuing tokens.

What to report? Your identity information (name, tax ID), how many coins you bought, how many you sold, and which wallet address you transferred coins to.

This means: from now on, every transaction you make on compliant exchanges and service providers will be “naked” in the eyes of tax authorities.

In the CARF era, the following behaviors will face extremely high risks of tax exposure:

Crypto inflows and outflows (USDT/USDC): Don’t think that converting to stablecoins means you’re safe. CARF explicitly states that converting cryptocurrencies to fiat, or exchanging one crypto for another (e.g., BTC for USDT), must be reported. Each swap could be considered a “sale” under tax law, requiring profit/loss calculation and taxation.

Large OTC transactions: In the past, people used to find offline OTC for exchanges. In the future, Hong Kong will regulate OTC traders, who will also be obliged to report large transactions.

DeFi and airdrops: Although DeFi is harder to regulate, if the protocol has an obvious “controller” (e.g., the project team retains management rights), or if you participate in DeFi mining through centralized exchanges, your earnings will also be recorded.

Withdrawal to cold wallets: You might say, “Can I just transfer coins to a cold wallet and be done?” Yes, but no. Because exchanges must record your “withdrawal” action and the recipient wallet address. Once this cold wallet address interacts with fiat in the future (e.g., buying a house, a car, or cashing out through an exchange), the tax authorities can use on-chain analysis tools to trace this address back to you, thereby calculating your entire history.

A misconception: “Trading cryptocurrencies in mainland China is illegal, so I don’t need to pay taxes?”

For mainland players, the reason they are paying attention to CARF is because of Hong Kong’s recent actions. Although Hong Kong is “one country, two systems,” it has long shared tax intelligence exchanges with mainland China.

According to consultation documents released by the Hong Kong government from late 2024 to early 2025, the timetable is very clear:

2025-2026: Hong Kong will enact local legislation to establish tax rules.

January 1, 2027: Official record-keeping begins. From this day, all transaction data from licensed exchanges and OTCs in Hong Kong will be recorded in the backend system.

2028: The Hong Kong tax authorities will start sending this data to other countries’ tax agencies (including mainland China). In the future, Hong Kong will no longer be a tax haven but a “transit station” for tax information.

Many friends think: “The state says Bitcoin trading is an illegal financial activity. Since they don’t protect me, why should I pay taxes?”

From a lawyer’s perspective: this may not necessarily be the case.

The core reason is that tax law looks at the “substance”: in the eyes of tax law, regardless of whether your income source is legal (like wages) or gray (like trading coins), as long as you earn money (“income”), you have a tax obligation.

In recent years, mainland China has been promoting “digital tax governance.” Previously, the tax authorities did not know about your overseas assets and couldn’t regulate them. Once CARF is implemented, and Hong Kong directly sends your transaction data (e.g., Zhang San, mainland ID number xxx, earning 1 million USDT in a certain exchange in 2027) to mainland tax authorities, system comparison will trigger alerts if you fail to declare.

Three Practical Compliance Tips

In the face of the increasing transparency of crypto taxation, panic is useless. Compliance is an inevitable path for the Web3 industry, and taxation is an unavoidable part of compliance. From this perspective, many have been looking forward to this day.

To better and more safely迎接 the crypto taxation wave, here are three rational compliance strategies.

Suggestion 1: Reassess your “Tax Residency Status”

CARF information exchange depends on your “tax residency.” If you hold a passport from a small country (e.g., St. Kitts, Vanuatu) but live long-term in Shanghai/Beijing, with your center of life in mainland China, you are still a Chinese tax resident. If you want to truly isolate risks, what you need to do is substantive residency planning—not just obtaining an identity, but actually relocating to crypto-friendly regions (such as Dubai, Singapore), severing tax ties with your original residence.

Suggestion 2: Asset Inventory and Historical Segmentation

2027 is the year of data collection. Before that, it’s advisable to do a comprehensive asset review. For example, distinguish between “stock assets” and “incremental assets.” For legacy issues involving large amounts, consult a professional tax advisor to see if you need to use the window period for compliant declaration or restructuring. Don’t wait until 2028 when data exchange occurs and respond passively.

Suggestion 3: Say goodbye to “underground methods” and embrace compliant structures

For Web3 entrepreneurs and high-net-worth individuals: avoid large personal account inflows and outflows. Consider holding assets through legal structures like family trusts or offshore companies. Although CARF will penetrate to identify “ultimate controllers,” legitimate structures can help you isolate some legal risks and provide room for tax planning. Also, stay far away from underground banks. CARF’s linkage with AML (Anti-Money Laundering) mechanisms means that once underground money channels are traced, it’s not just a matter of paying taxes but also involves criminal offenses.

The “Wild West” era of Web3 is coming to an end. The arrival of CARF marks the official entry of crypto assets into the global regulatory spotlight.

For us mainland players, “invisibility” is no longer possible. The future competition will be about “compliance.” Since avoidance is impossible, it’s better to equip yourself with a “bulletproof vest” and protect your wealth within the rules.