How to Handle Tax Notifications Involving Cryptocurrency Income

Author: Attorney Yang Hong

Recently, individuals holding overseas accounts, using overseas platforms, or receiving cross-border income have received messages, phone calls, alerts from the Individual Income Tax app, and even formal Notices of Tax Matters regarding their overseas income.

If income involves cryptocurrency, verification and reporting become more complex: exchange records may be incomplete, there are numerous wallet addresses, crypto-to-crypto trades, stablecoin settlements, and OTC withdrawals are intertwined, while bank accounts often only show the final fiat deposit.

Some individuals want to promptly pay taxes based on their bank deposit amounts, while others, concerned that disclosing cryptocurrency transactions might expose additional risks, choose not to respond. Both approaches may lead to problems.

After receiving the reminder, the correct sequence is: respond promptly, then verify the nature of the income, the tax year, the original cost of the property, reasonable expenses, and taxes already paid overseas, and finally determine the filing and tax payment plan in accordance with the law.

The phrase "don't use bank statements to retroactively calculate taxes" does not mean delaying filing or refusing to pay taxes; rather, it means avoiding the direct assumption that bank statements equate to taxable income before the transaction facts have been fully verified.

Different forms of alerts may correspond to different processing stages. First, verify the source of the information, the specific matter, and the deadline for action—do not assume you have underpaid taxes based solely on a text message or phone call.

Individual Income Tax App or general notice

Upon receiving the notification, initiate the self-check for overseas income for the corresponding year, and verify the sources of income, filing records, and tax payment status.

At this stage, do not directly confirm "no foreign income" before the facts have been verified, nor should you assume you definitely need to pay additional taxes based solely on one reminder.

Tax officials request an explanation via phone or text message.

Verify the identity of staff members and the relevant tax authority through official channels, and confirm the tax year, inspection items, response deadline, and required documents.

During communication, please retain notifications, records of document submissions, and written responses to avoid issues in subsequent processing due to misunderstandings.

Official Tax Matters Notice

You should carefully review the matters stated in the document, the legal basis, the list of required materials, and the submission deadline, and proceed accordingly.

If additional transaction records, domestic and foreign income and expense details, foreign tax payment certificates, or other tax-related documents are required, prepare them as soon as possible. For any disputed income classifications or tax calculation methods, provide supporting explanations and documentation within the deadline rather than ignoring them.

Please note that a tax reminder does not mean the tax amount has been finalized, but once you receive official documentation, you should not treat it as a general information alert.

Statutory filing deadline and foreign tax credit

According to the Announcement by the Ministry of Finance and the State Administration of Taxation on Individual Income Tax Policies Regarding Income Derived from Outside China (Announcement No. 3 of 2020), resident individuals who obtain income from outside China shall generally file and pay taxes between March 1 and June 30 of the year following the receipt of such income.

Residents who have actually paid income tax abroad may offset their corresponding tax liability in China within the prescribed credit limit. To process the credit, you typically need to provide proof of foreign tax payment, tax payment receipts, or tax records. If such documents cannot be obtained, you may submit the foreign income tax return or tax payment notice along with the corresponding bank payment receipt in accordance with regulations.

Therefore, when handling tax reminders, it is essential to pay attention to three key deadlines simultaneously: the deadline set by the tax authority for response or document submission, the statutory filing deadline, and the date of obtaining overseas tax payment certification. These three deadlines must not be confused with one another.

In cryptocurrency trading, on-chain records reflect asset transfers, while bank statements reflect fiat currency settlements. There may be multiple transactions, different parties, and distinct legal relationships between the two.

For example, an overseas remittance could represent income earned from providing services, proceeds from the sale of digital assets including the original cost of acquiring those assets, or the subsequent conversion of digital assets whose income has already been recognized in a prior stage—requiring further analysis to determine whether new taxable income has been generated.

If the entire amount received is directly classified as labor remuneration or income from property transfer, it may lead to misclassification of income type, failure to account for the original cost of the property, or double-counting of the same economic benefit.

Also note that overseas platforms, overseas payment accounts, or overseas servers do not automatically determine that income is sourced outside of China.

According to relevant regulations on foreign-sourced income, the source of income must be determined based on the specific type of income. For example, income from services requires attention to the actual location where the services are performed; income from property transfers requires analysis of the nature, location, and specific transaction arrangements of the transferred property. Income cannot be automatically classified as foreign-sourced solely because the payment account is located overseas.

For virtual currencies, on-chain transactions, matching on overseas platforms, and third-party settlement may occur simultaneously; the source of income, timing of acquisition, and tax basis still require analysis in accordance with existing tax laws and specific facts.

Therefore, the focus of tax accounting is not simply summing up bank statements, but answering three key questions:

• What type of income does this economic benefit represent?

• Which tax year should it be attributed to, and what tax calculation rules apply?

• Which costs, fees, and taxes paid overseas are eligible for legal deduction or credit?

1. How are assets acquired?

Settlement in cryptocurrency does not inherently change the nature of the underlying income.

For example, when obtaining digital assets by providing services such as development, consulting, design, creation, or promotion to overseas enterprises or platforms, determine whether these may involve different categories such as salaries and wages, labor remuneration, royalty income, or business income, based on the contractual relationship, performance obligations, and the nature of the business.

If a profit is obtained by buying and then selling, further analysis is required to determine whether it constitutes capital gains.

The State Administration of Taxation's "Approval on the Issue of Levying Individual Income Tax on Income Derived from Individuals Trading Virtual Currency Online" (Guoshuihan [2008] No. 818) stipulates that income earned by individuals who purchase virtual currency from players online and resell it at a higher price shall be subject to individual income tax as income from property transfer, and provides guidelines for determining the original cost of the property and supporting documentation when such information is insufficient.

However, this document pertains specifically to scenarios involving transactions of virtual currencies on particular networks and cannot be directly used to conclude that all modern cryptocurrency transactions are subject to the same tax category or uniform tax rate. The specific application must still be determined in light of general provisions of current tax law and the facts of each individual case.

For situations such as airdrops, staking rewards, and DeFi income, the conditions for acquiring the assets, whether consideration is involved, the economic benefits at the time of acquisition, and subsequent disposal should also be analyzed. Currently, there is still a lack of comprehensive, specialized rules governing individual income tax treatment for various types of cryptocurrency protocol income across all scenarios.

The absence of clear rules does not automatically imply tax exemption; similarly, without proper basis, all gains cannot be uniformly classified under a single tax category.

2. Which wallets and transactions truly belong to me?

A blockchain explorer can display addresses and transaction histories, but it cannot prove the legal ownership of assets based on an address alone.

The wallet may belong to an individual, company, project team, exchange, multisignature entity, or smart contract, and may also serve as a collection, custody, or intermediary wallet.

Therefore, a wallet ownership list should be established, at minimum specifying:

• Who controls the address and has signing authority;

• Who ultimately owns the wallet assets;

• Are there any nominee holdings, company assets, or joint control arrangements;

• Whether a transfer between different addresses constitutes an internal asset transfer, an external payment, or an asset disposal.

Transferring funds from your exchange account to a self-custody wallet, or between wallets under your control, generally cannot be deemed to generate new taxable income based solely on the transfer record. However, the determination should consider the preceding and subsequent transactions, asset ownership, and specific legal relationships.

3. Can the original value and expenses of the asset be verified?

Cost reconstruction is often one of the most complex aspects of tax verification for virtual currencies.

Please organize the following information as thoroughly as possible:

• Exchange orders, trade history, and account statements;

• Fiat deposit records and cryptocurrency purchase receipts;

• On-chain transaction hash (TxID) and wallet transfer history;

• Coin-to-coin exchange and cross-platform transfer records;

• OTC trade contract, trade confirmation, and payment receipt;

• Receipts for transaction fees, gas fees, and other related charges.

For multiple purchases, cross-platform transfers, and crypto-to-crypto exchanges, a reconcilable cost allocation statement should be prepared, documenting the calculation methods used, the supporting rationale, and any unverifiable portions. It is not advisable to assume that any single cost calculation method will automatically be accepted by tax authorities.

If complete and accurate documentation of the original cost of assets cannot be provided, there is a risk that the competent tax authority will determine the original cost of the assets.

4. Can the contract flow, asset flow, and fund flow be aligned?

Common issues include: discrepancies between the contract counterparty and the bank payer; combining multiple on-chain transactions into a single fiat transfer; differences between the digital asset disposal amount and the final credited amount due to fees, exchange rates, or OTC discounts; and inconsistencies between the bank memo and the nature of the underlying transaction.

It is recommended to establish four lines of evidence:

• Contract flow: Specifies the parties involved in the transaction, the reason for the transaction, and their respective rights and obligations;

• Asset Flow: Describes how digital assets are acquired, transferred, and disposed of;

• Cash Flow: Specify who pays the fiat currency, where it is directed, and how the settlement amount is determined;

• Tax Flow: Clarifies which tax year the economic benefit belongs to, what type of income may apply, and how to calculate the reporting amount.

The four lines of evidence do not need to be completely consistent at every stage, but any discrepancies in the principal amount, amount, or timing should be reasonably explained through contracts, transaction confirmations, third-party payment arrangements, settlement statements, or payment instructions.

Special Notice: Holding digital assets through offshore trusts or foreign entities

Announcement No. 21 of 2026 by the Ministry of Finance and the State Administration of Taxation, issued in July 2026, provides specific regulations regarding individuals contributing assets to offshore trusts, income generated during the trust’s existence, and related asset transfers.

This announcement categorizes the relevant assets as movable property, immovable property, and other types of property, and sets forth provisions regarding individuals transferring assets to offshore trusts or to overseas entities they hold, control, or manage. Related administrative and enforcement matters are detailed in State Administration of Taxation Announcement No. 15 of 2026.

If virtual currency is held through an offshore trust or its controlled or managed offshore entities, the analysis cannot simply follow the approach used for ordinary personal wallet transactions; instead, further verification is required for aspects such as asset contribution, income generated during the trust period, asset transfers, and trust termination.

Whether a tax obligation arises, and how to determine the original cost and market value of assets, must be assessed based on the specific structure, control relationships, and applicable rules. Individuals involved in such structures are advised to conduct a separate tax assessment.

Step 1: Verify the authenticity of the alert and the program stage

Verify through the Individual Income Tax App, the Natural Person Electronic Tax Bureau, 12366, or the official contact information of the competent tax authority.

Confirm the verification year, relevant matters, submission deadline, contact person, and documentation requirements, and retain related records.

Step 2: First respond and cooperate with verification; do not hastily confirm the tax category or amount.

We are currently organizing platform records, wallet statements, and cost documentation, and confirming the required materials, submission methods, and deadlines with the tax authorities.

Until the facts are fully established, it is inappropriate to directly claim that all income constitutes "investment gains" or "labor income," nor should overseas income be denied without sufficient basis.

Step 3: Create an annual transaction facts worksheet

It is recommended to at least specify the date, asset type, transaction quantity, transaction type, platform or wallet, counterparty, RMB valuation, original cost of the asset, related fees, and corresponding documentation.

Clearly distinguish between earning income in digital assets, purchasing crypto with fiat currency, crypto-to-crypto trading, transfers between your own wallets, selling crypto for fiat, and other protocol rewards such as staking and airdrops.

For transactions that cannot be confirmed temporarily, mark them separately rather than making assumptions solely to complete the form.

Step 4: For disputed issues, prepare calculations using different methodologies.

If there are disputes regarding the nature of the income, source location, tax year, or cost recognition, they should be listed separately:

• Transaction facts that have been confirmed;

• Legal basis for different recognition methods;

• Differences in taxable income and tax amounts under different calculation methods;

• Evidence still missing and issues requiring further verification.

The focus of communication should be on facts, evidence, and calculation discrepancies, rather than broadly asserting that "no taxes are due."

Step 5: Timely file declarations, corrections, or additional documents.

Once the facts and applicable criteria are clearly established, you should promptly file supplementary or amended declarations, pay any outstanding taxes, or submit required explanatory documents, in accordance with the deadlines set by the tax authority.

If it is truly impossible to complete the document preparation within the deadline, communicate as early as possible and provide an explanation. If necessary, request a reasonable extension or other procedural accommodations, and retain relevant records.

Whether further investigation, penalties, or other actions are warranted, and how they should be handled, must be determined based on specific facts, legal grounds, and procedures, and cannot be generalized.

Step 6: Synchronize the assessment of non-tax risks

Paying taxes legally does not mean that related cryptocurrency transactions or fund pathways have been approved by regulators.

Notice No. 42 [2026] issued by the People's Bank of China and seven other departments explicitly states that activities such as exchanging fiat currency for virtual currencies, exchanging one virtual currency for another, acting as a central counterparty in buying or selling virtual currencies, and providing information intermediation and pricing services for virtual currency transactions are classified as strictly prohibited illegal financial activities; overseas entities and individuals are prohibited from providing any form of virtual currency-related services to domestic entities or individuals.

Therefore, when situations involving large OTC transactions, frequent third-party collections and payments, use of others' accounts, high-risk addresses, or frozen bank cards arise, in addition to tax concerns, it is essential to assess foreign exchange, anti-money laundering, civil, and criminal risks based on the transaction role, source of funds, and specific pathways.

Error 1: Directly multiplying the bank deposit amount by 20%

Bank statements reflect the results of fund settlements, not taxable income. Gains from property transfers require verification of the original cost of the property and related expenses, while service income may be subject to different tax calculation rules.

Error 2: Classifying all on-chain inflows as investment returns

On-chain inflows may correspond to service income, project rewards, loans, funds held in trust, or transfers from self-owned wallets. Misclassification may affect the categorization of income, tax year, cost basis, and tax treatment of subsequent transactions.

Mistake three: Believing that paying taxes makes a transaction legal

Tax obligations and financial regulation belong to different assessment dimensions. Filing a tax return does not prove that operations on an overseas platform, OTC exchanges, or cross-border fund pathways are necessarily compliant.

Error 4: Failing to respond, or casually claiming "no foreign income"

Ignoring official tax documents or providing statements that clearly contradict objective records may increase subsequent compliance risks. For facts that cannot be confirmed, it is essential to provide accurate disclosures and conduct further verification rather than reaching hasty conclusions.

If any of the following situations apply, it is recommended to seek professional legal or tax assistance as soon as possible:

• Long historical period with missing platform records;

• Involves multiple exchanges, wallets, and cross-chain records;

• Service income mixed with investment transactions;

• Frequent crypto-to-crypto trading, staking, or DeFi yield activities are present;

• Holding digital assets through an overseas company, partnership, or trust;

• Involves OTC and third-party settlement withdrawals;

• The official tax documentation has been received;

• Or it may simultaneously involve foreign exchange, anti-money laundering, bank card freezing, and criminal risks.

Upon receiving a tax notification regarding foreign income, the two things you should absolutely avoid are ignoring it and hastily paying taxes based on transaction records before verifying the facts.

The correct sequence of steps can be summarized as:

Respond first, then categorize; reconstruct the transaction facts first, then calculate the gains; verify the costs and fund pathways first, then file or amend in accordance with the law.

Tax reminders are not messages to be ignored, but they do not mean that the tax amount has been finalized. For Web3 professionals and investors, what truly needs to be addressed is not just whether to pay back taxes, but what taxes to pay, for which year, how they should be calculated, and whether this calculation can be supported by complete, verifiable evidence.