PANews on Oct. 30 published an article by lawyer Yang Hong on how individuals should handle offshore income tax reminders when the income in question involves cryptocurrency. The article says some people with offshore accounts, overseas platform activity, or cross-border income have recently received text messages, phone calls, prompts in China’s individual income tax app, and even formal Notices on Tax Matters tied to offshore income.
According to the article, verification and filing become more complicated once virtual currency is involved. Exchange records may be incomplete. Wallet addresses may be numerous. Token-to-token swaps, stablecoin settlement, and OTC cash-outs may be intertwined, while bank accounts often show only the final fiat receipt. Some people want to make up taxes quickly based on the amount credited by the bank. Others avoid replying because they worry that disclosing virtual currency transactions could expose them to other risks. The article says both approaches can create problems.
Its recommended sequence is to respond first, then verify the nature of the income, the relevant tax year, original asset cost, reasonable expenses, and any tax already paid overseas, and only then determine a filing and tax payment plan under the law. The article adds that the warning not to "pay tax based on cash flow" does not mean delaying a filing or refusing to pay tax. It means avoiding a direct equation between bank statements and taxable income before the underlying transactions are clear.
First, identify what kind of tax reminder you received
The article says different forms of reminders may correspond to different stages of handling. The first step is to verify the source of the information, the specific issue involved, and the deadline for response rather than deciding from a text message or phone call alone that underpayment has already occurred.
If the reminder comes through the individual income tax app or as a general prompt, the article says the taxpayer should begin a self-review of offshore income for the relevant year and check income sources, filing records, and tax payments. At that stage, it is not advisable to state that there was "no offshore income" before the facts are checked, nor should a single reminder be treated as proof that additional tax is definitely due.
If tax staff ask for an explanation by phone or text, the article recommends verifying the staff member’s identity and the competent tax authority through official channels, and confirming the tax year involved, the scope of review, the reply deadline, and the required materials. It also recommends keeping records of notices, submitted materials, and written responses to avoid later problems caused by misunderstandings.
If a formal Notice on Tax Matters has been issued, the article says the taxpayer should focus on the matters listed in the document, its legal basis, the materials requested, and the submission deadline, then proceed accordingly. If transaction records, domestic and offshore income and cost details, proof of tax paid overseas, or other tax materials are needed, preparation should begin as early as possible. Where the nature of the income or the tax calculation method is disputed, the taxpayer should explain the reasons and provide support within the deadline instead of ignoring the notice.
The article stresses that a tax reminder does not mean the tax amount has already been fixed. A formal notice, though, should not be treated as an ordinary informational prompt.
Statutory filing deadlines and foreign tax credits are separate issues
Citing the Announcement on Individual Income Tax Policies Relating to Offshore Income issued by the Ministry of Finance and the State Taxation Administration, Announcement No. 3 of 2020, the article says resident individuals who earn offshore income generally need to file and pay tax from March 1 to June 30 of the year following the year in which the income was earned.
It also says income tax actually paid overseas may, if the conditions are met, be credited against the corresponding tax payable in China within the credit limit. To claim the credit, taxpayers usually need proof of tax paid overseas, tax payment certificates, or tax records. If those documents cannot be obtained, the article says the rules allow submission of an offshore income tax return or tax payment notice from overseas together with the corresponding bank payment voucher.
For that reason, the article says three time points must be tracked at the same time: the deadline set by the tax authority for a reply or document submission, the statutory filing deadline, and the time needed to obtain proof of tax paid overseas. They should not be mixed together.
Why bank credits should not be treated as taxable income by default
The article says on-chain records reflect asset transfers, while bank statements reflect fiat settlement. Between the two, there may be multiple transactions, different parties, and different legal relationships.
It gives several examples. An offshore remittance may be payment for services. It may also be proceeds from selling digital assets, which could include the cost of acquiring those assets earlier. It may also be the later liquidation of digital assets whose income had already been recognized at another stage, which would require a separate analysis of whether any new taxable income arose.
If the full amount credited is directly classified as labor remuneration or income from property transfer, the article says the result may be a wrong characterization of the income, a failure to account for original asset cost, or double counting of the same economic benefit.
The article also warns that an overseas platform, an offshore payment account, or an overseas server does not automatically mean the income is sourced outside China. Under the rules on offshore income, source must be determined according to the type of income involved. For labor income, the actual place where the labor was performed matters. For property transfer income, the analysis should consider the nature and location of the property transferred and the specific transaction arrangement. An offshore payment account alone is not enough to classify all income as offshore income.
For cryptocurrency, on-chain transfers, matching on overseas platforms, and third-party settlement may all exist at the same time. The source of income, the time of realization, and the tax basis still need to be analyzed under existing tax rules and the specific facts.
The article reduces the tax analysis to three questions:
- What is the legal nature of the economic benefit?
- Which tax year should it belong to, and what tax rules apply?
- Which costs, expenses, and overseas taxes paid can be deducted or credited under the law?
Four categories of facts need to be reconstructed in crypto cases
How the assets were obtained
The article says settlement in virtual currency does not automatically change the nature of the underlying income. For example, if digital assets were received for development, consulting, design, creative work, promotion, or other services provided to an overseas company or platform, the classification may involve wages and salaries, labor remuneration, royalties, or business income depending on the contract, performance, and business substance.
If the gain came from buying and later selling assets, the article says it is necessary to analyze whether income from property transfer is involved. It cites the State Taxation Administration’s Reply on the Levy of Individual Income Tax on Income Derived by Individuals from Buying and Selling Virtual Currency Online, Guo Shui Han [2008] No. 818, which says income earned by an individual who buys players’ virtual currency online and resells it at a markup is taxed as income from property transfer, and it also addresses original asset cost and deemed cost where documentation is insufficient.
At the same time, the article says that document addressed a specific online virtual currency trading scenario and cannot be used to conclude that all modern crypto asset transactions fall under the same tax item or a single tax rate. How the rules apply still depends on the general provisions of current tax law and the facts of each case.
For airdrops, staking rewards, and DeFi income, the article says the analysis should cover the conditions under which the assets were obtained, whether consideration existed, the economic benefit at the time of receipt, and what happened when the assets were later disposed of. It adds that there is still no unified, specialized set of individual income tax rules covering every type of crypto protocol income. Unclear rules do not mean automatic tax exemption. By the same token, all such income should not be forced into one tax category without a legal basis.
Which wallets and transactions actually belong to the individual
The article says blockchain explorers can display addresses and transaction records, but an address alone cannot prove legal ownership of assets. A wallet may belong to an individual, a company, a project team, an exchange, a multisig arrangement, or a smart contract. It may also serve as a collection, custody, or transit wallet.
It therefore recommends building a wallet ownership list that explains at least the following:
- Who controls the address and who has signing authority.
- Who ultimately enjoys the wallet assets.
- Whether nominee holding, company assets, or joint control is involved.
- Whether transfers between addresses are movements of one’s own assets or external payments or disposals.
The article says a withdrawal from one’s own exchange account to a self-custody wallet, or transfers between wallets controlled by the same person, usually should not be treated as new taxable income based on transfer records alone. Even so, the conclusion still depends on the surrounding transactions, asset ownership, and the specific legal relationship.
Whether original asset cost and expenses can be proven
Reconstructing cost is often one of the hardest parts of a crypto-related tax review, the article says. It recommends organizing as much of the following material as possible:
- Exchange orders, trade records, and account statements.
- Fiat deposit records and proof of coin purchases.
- On-chain transaction hashes, or TxIDs, and wallet transfer records.
- Token-to-token swap records and cross-platform transfer records.
- OTC contracts, trade confirmations, and payment vouchers.
- Proof of fees, gas costs, and other related expenses.
For repeated purchases, cross-platform transfers, and token-to-token swaps, the article says taxpayers should prepare a cost aggregation explanation that can be reviewed, recording the calculation method used, the basis for it, and any portions that cannot be confirmed. It says taxpayers should not assume that any one cost method will necessarily be accepted by the tax authority. If complete and accurate proof of original asset cost cannot be provided, the competent tax authority may determine the cost on its own.
Whether the contract flow, asset flow, and fund flow match
The article lists common issues such as a mismatch between the contractual counterparty and the bank remitter, multiple on-chain transactions being combined into one fiat remittance, differences between the amount realized from disposing of digital assets and the final bank credit because of fees, exchange rates, or OTC discounts, and bank memo descriptions that do not match the underlying transaction.
It recommends building four lines of evidence:
- Contract flow: who the parties are, why the transaction occurred, and what rights and obligations were created.
- Asset flow: how the digital assets were acquired, transferred, and disposed of.
- Fund flow: who paid the fiat funds, where they went, and how the settlement amount was formed.
- Tax flow: which tax year the economic benefit belongs to, which income category may apply, and how the reported amount was calculated.
These four lines do not have to match perfectly at every step, the article says. But if there are differences in parties, amounts, or timing, those differences should be reasonably explained through contracts, trade confirmations, payment-on-behalf arrangements, settlement sheets, or payment explanations.
Extra caution for offshore trusts and overseas entities
The article includes a separate warning for people who hold digital assets through offshore trusts or overseas entities controlled or managed by those trusts. In those cases, it says, the analysis used for ordinary personal wallet transactions cannot simply be copied over. The taxpayer should separately verify the transfer of assets into the structure, income during the life of the trust, transfers of property, and the termination of the trust.
It cites the Announcement on Matters Concerning Individual Income Tax for Offshore Trusts, issued in July 2026 by the Ministry of Finance and the State Taxation Administration as Announcement No. 21 of 2026. According to the article, that announcement sets out specific rules for individuals transferring property into offshore trusts, income generated during the trust’s existence, and related property transfers. It describes the relevant property as movable property, immovable property, and other categories of property, and also addresses transfers by individuals to offshore trusts or to overseas entities held, controlled, or managed by them. Related administrative rules are referenced in State Taxation Administration Announcement No. 15 of 2026.
Whether a tax obligation arises, and how original asset cost and market value should be determined, still depends on the specific structure, control relationship, and applicable rules, the article says. It recommends a separate tax assessment for individuals using such arrangements.
The article’s six-step response plan
Step 1: verify authenticity and procedural stage
The article says taxpayers should verify the reminder through the individual income tax app, the natural person e-tax bureau, 12366, or the official contact channels of the competent tax authority. They should confirm the review year, the issues involved, the submission deadline, the contact person, and the document requirements, and keep records.
Step 2: respond first and cooperate, but do not rush to confirm the tax item or amount
It says taxpayers can explain that they are organizing platform records, wallet details, and cost vouchers, while confirming the materials required, the submission method, and the deadline with the tax authority. Before the facts are clear, they should not promise that everything is "investment income" or "labor income," and should not deny offshore income without a basis.
Step 3: prepare a year-by-year transaction fact sheet
The article recommends listing at least the date, asset type, transaction quantity, transaction type, platform or wallet, counterparty, RMB valuation, original asset cost, related expenses, and supporting documents. It says taxpayers should distinguish between income received in digital assets, fiat used to buy coins, token-to-token swaps, transfers between self-owned wallets, sales for fiat, and other protocol income such as staking and airdrops. Transactions that cannot yet be confirmed should be marked separately rather than guessed for the sake of completing the table.
Step 4: prepare alternative calculation approaches where disputes exist
If there is a dispute over the nature of the income, source, tax year, or cost basis, the article says taxpayers should separately set out:
- The transaction facts that can already be confirmed.
- The legal basis for different characterizations.
- The differences in taxable income and tax due under different approaches.
- The evidence still missing and the issues that need further verification.
The focus of communication, it says, should be facts, evidence, and calculation differences rather than a broad claim that no tax is due.
Step 5: file, amend, or supplement materials in time
Once the facts and the applicable approach are largely clear, the article says taxpayers should make supplementary filings, amended filings, tax payments, or explanatory submissions as required by the actual situation and within the deadlines set by the tax authority. If the materials cannot be organized in time, they should communicate early, explain why, and where necessary request a reasonable extension or other procedural relief while keeping records. Whether there will be further review or penalties depends on the facts, legal basis, and procedure, and cannot be generalized.
Step 6: assess non-tax risks at the same time
The article says paying tax according to law does not mean the related virtual currency transactions or fund paths have been accepted by regulators. It cites Notice Yin Fa [2026] No. 42 issued by the People’s Bank of China and seven other departments, which states that business activities in China involving exchange between fiat currency and virtual currency, exchange between virtual currencies, acting as a central counterparty in buying and selling virtual currency, and providing information intermediary or pricing services for virtual currency transactions are strictly prohibited illegal financial activities. It also says offshore entities and individuals may not illegally provide virtual currency-related services to domestic parties in any form.
As a result, where large OTC transactions, frequent collection and payment on behalf of others, use of other people’s accounts, high-risk addresses, or frozen bank cards are involved, the article says the taxpayer should assess foreign exchange, anti-money laundering, civil, and criminal risks in addition to tax issues, based on the role played in the transaction, the source of funds, and the specific path of the money.
Four common mistakes the article says to avoid
Mistake 1: multiply the bank credit by 20%
The article says bank statements show the result of fund settlement, not taxable income. Income from property transfer requires verification of original asset cost and related expenses, while service income may be subject to different tax rules.
Mistake 2: call every on-chain inflow investment income
According to the article, on-chain inflows may correspond to service income, project rewards, loans, funds collected on behalf of others, or transfers between one’s own wallets. A wrong characterization can affect the income category, tax year, cost basis, and the tax treatment of later transactions.
Mistake 3: assume paying tax makes the transaction legal
The article says tax obligations and financial regulation are different dimensions of analysis. Completing a tax filing does not prove that an overseas platform’s operations, an OTC exchange, or a cross-border fund path is necessarily compliant.
Mistake 4: ignore the notice or casually state that there was no offshore income
Ignoring a formal tax document, or making statements that clearly conflict with objective records, may increase later enforcement risk, the article says. If some facts cannot yet be confirmed, they should be stated truthfully and checked further rather than answered with a rushed conclusion.
The article also lists situations where professional legal or tax assistance should be sought as soon as possible, including long historical periods with missing platform records, multiple exchanges and wallets and cross-chain records, mixed service income and investment trading, frequent token-to-token swaps, staking or DeFi income, digital assets held through offshore companies, partnerships, or trusts, OTC cash-outs through third-party settlement, receipt of a formal tax document, or simultaneous foreign exchange, anti-money laundering, bank card freeze, or criminal risks.
The closing point: respond first, classify next, reconstruct the facts before calculating
In its conclusion, the article says the two worst responses to an offshore income tax reminder are pretending not to have seen it and rushing to pay tax based on bank flows before the facts are checked. The proper order, it says, is to respond first and classify later; reconstruct the transaction facts before calculating income; verify cost and fund paths before filing or amending under the law.
The article ends by saying a tax reminder is not something to ignore, but it also does not mean the tax amount has already been determined. For Web3 workers and investors, the real issue is not only whether to make up tax, but what should be reported, for which year, under what income category, and whether the calculation can be supported by complete and verifiable evidence.
