Crypto Taxation and CRS Are Coming: Three Practical Tips for Crypto Investors

Author: Liu Honglin

Recently, many friends in the crypto community have been asking me the same question: "I heard Hong Kong is about to start reporting cryptocurrency asset information—will my crypto assets on offshore exchanges still be safe? Will the mainland tax authorities find out? Do I need to pay back taxes?"

This anxiety isn't baseless.

In 2025, global tax transparency is entering a new phase of "precision targeting" for cryptocurrencies. As a legal professional deeply involved in Web3, today Lawyer Honglin will walk you through CARF—the so-called "crypto CRS"—and what it truly means for each of our wallets.

What is CARF?

Over the past decade, traditional finance has had a powerful tool called CRS (Common Reporting Standard). Simply put, if you're a Chinese resident with deposits in overseas banks, foreign banks will report your account information directly to China’s tax authorities.

But CRS had one major loophole: it didn’t cover cryptocurrencies. In the past, converting money into USDT and holding it in a wallet—or trading on Binance or OKX—was invisible to tax bureaus.

Now, the patch has arrived. CARF (Crypto-Asset Reporting Framework) was specifically designed to close this gap.

Its core logic is simple: since decentralized individuals are hard to track, regulators will instead target the "intermediaries" who serve them.

Who must report? Exchanges (CEXs), OTC dealers, and even certain token-issuing projects.

What gets reported? Your identity (name, tax ID), how much crypto you bought or sold, and where you withdrew funds—to which wallet address.

This means that under CARF, every transaction you make on compliant exchanges and service providers will be fully visible to tax authorities.

In the CARF era, the following activities face significantly increased tax exposure:

Stablecoin Deposits and Withdrawals (USDT/USDC): Don't assume converting to stablecoins keeps you safe. CARF explicitly requires reporting of all conversions between fiat and crypto, as well as between different cryptos (e.g., BTC to USDT). Each swap may be treated legally as a "sale," triggering capital gains tax obligations.

Large OTC Transactions: Many people used to rely on offline OTC trades. Going forward, Hong Kong will bring OTC dealers under regulation, obligating them to report high-value traders.

DeFi and Airdrops: While DeFi remains harder to regulate, if a protocol has a clear "controller" (e.g., project teams retaining admin rights), or if you access DeFi yield farming via centralized exchanges, those earnings can also be captured.

Withdrawing to Cold Wallets: You might ask, “Can I just withdraw to a cold wallet and disappear?” Partially—but not completely. Exchanges are required to log every withdrawal action and the recipient wallet address. If that cold wallet ever interacts with fiat later—say, buying property, a car, or cashing out through an exchange—tax authorities can use blockchain analysis tools to trace the link back to you and reconstruct your entire transaction history.

A Common Misconception: “Cryptocurrency trading is illegal in mainland China, so why should I pay taxes?”

Mainland users care about CARF because of Hong Kong’s imminent actions. Although Hong Kong operates under “One Country, Two Systems,” its tax information-sharing mechanisms with the mainland are already connected.

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

2025–2026: Local legislation in Hong Kong begins, establishing taxation rules.

January 1, 2027: Official data recording starts. From this day onward, all transaction data generated on licensed Hong Kong exchanges and OTC platforms will be systematically logged.

2028: The Hong Kong Inland Revenue Department begins sharing this data with tax authorities worldwide—including mainland China. Hong Kong will no longer be a tax haven but rather a hub for tax information exchange.

Many believe: “The state says Bitcoin trading is an illegal financial activity—if it doesn’t protect me, why should I pay taxes?”

From a legal perspective, here's the reality: it doesn't quite work that way.

The key reason lies in tax law principles: tax obligations depend on economic substance. Under tax law, whether income comes from legal sources (like salary) or gray-area activities (like crypto trading), once there is gain ("income"), a tax liability arises.

Moreover, in recent years, mainland China has been advancing "data-driven taxation." Previously, tax authorities lacked visibility into overseas assets. But once CARF takes effect, when Hong Kong sends data such as: “Zhang San, Mainland ID xxx, earned 1 million USDT profit on an exchange in 2027” directly to mainland tax authorities, automated systems will flag discrepancies immediately if unreported.

Three Practical Compliance Tips

Facing the wave of crypto tax transparency, panic won’t help—because compliance is an inevitable stage in Web3’s evolution, and taxation is part of that journey. In fact, this could even be seen as a long-awaited milestone.

To safely and proactively prepare for crypto taxation, here are three rational compliance strategies:

Tip One: Reassess Your Tax Residency Status

CARF determines reporting based on your tax residency. Holding a passport from a small country (e.g., St. Kitts or Vanuatu) won’t shield you if you live permanently in Shanghai or Beijing with strong economic ties to the mainland—you remain a PRC tax resident. To truly mitigate risk, real relocation—not just obtaining a second passport—is needed. Move to jurisdictions with crypto-friendly tax policies (such as Dubai or Singapore) and sever substantial connections to your previous tax domicile.

Tip Two: Conduct Asset Inventory and Historical Separation

2027 marks the first year of data collection. Before then, conduct a full audit of your holdings. Distinguish between "legacy assets" and "new investments." For significant historical positions, especially involving large sums, consult qualified tax professionals to explore voluntary disclosure or structural adjustments during current grace periods. Don’t wait until 2028 data exchanges trigger enforcement actions.

Tip Three: Leave the Wild West Behind—Embrace Compliant Structures

For Web3 entrepreneurs and high-net-worth individuals: stop using personal accounts for large inflows and outflows. Consider holding assets through legal vehicles like family trusts or offshore companies. While CARF includes provisions to identify "beneficial owners," legitimate structures can still help isolate legal risks and create room for tax planning. Above all, avoid underground banks entirely. CARF integrates with anti-money laundering (AML) frameworks—once illicit fund flows are detected, consequences go beyond back taxes and may lead to criminal charges.

The "wild west" era of Web3 is ending. CARF’s arrival marks the formal inclusion of crypto assets into the global regulatory landscape.

For us mainland users, remaining "invisible" is no longer possible. The future belongs to those who master compliance. Since evasion is off the table, better to suit up early—with proper "bulletproof vests"—and safeguard your wealth within the rules.