China’s Cryptocurrency and Blockchain Regulatory Environment

China’s cryptocurrency market – We give you an overview of legal regulations and tax implications in terms of Bitcoin-related business.

1. Background

Prior to 2017, China had the world’s largest cryptocurrency market—with 80% of Bitcoin, the world’s leading digital coin, transactions conducted in yuan ¹. Despite clampdown on cryptocurrency in China and the current bear market, the blockchain industry in the country still ranks #1 in the number of blockchain projects in world (263, according to Blockdata). With over 5,000 firms officially registered with “blockchain” in their name, up from 500 in 2017 ².

The global cryptocurrency market suffered a $706 billion lost in total market capitalization (CoinMarketCap), after hitting a peak in early January of 2018. The price of Bitcoin (went from almost $20,000 in Jan.2017 to approx. $3,500 in Dec. 2018) (Coindesk) . In July 2018, the Central Bank of China released that their ban on the domestic cryptocurrency had been highly effective, with only 1% crypto-trade activity involving Yuan ³.

Despite the banning of domestic cryptocurrency trading and initial coin offerings, China’s blockchain industry is still very much alive. Prime examples of China’s prominence in the blockchain industry can be seen in companies like Binance, Huobi, and OKcoin. The three rank as the largest cryptocurrency exchange platforms. Along with these companies, Bitmain Technologies , a Chinese-based firm, is the world’s biggest maker of cryptocurrency mining rigs, accounting for 75% of the equipment required to earn new units of digital money ⁴.

According to academic opinions, the lack of a centralized authority regulating domestic cryptocurrency platforms and cross-border payments via cryptocurrency were both critical concerns prompting the clampdown. In addition, the volatility of cryptocurrency prices and anonymous nature of cryptocurrency transactions also played a significant role in the issuing of the regulations ⁵.

2. Legal Basis

China does not recognize cryptocurrency as a legal tender and the banking system is not accepting cryptocurrency or providing relevant services. Since 2013, the government has issued regulations aimed at restricting the trade of cryptocurrency and any activities related to virtual currency in efforts to improve investor protection and financial risk prevention. Domestic cryptocurrency platforms and initial coin offering (ICO) have been banned and events related to cryptocurrency or ICO have been discouraged.

2.1 Currently, China has not passed any legislation regulating cryptocurrency but the 2013 circular on Bitcoin provides one of the official perspectives on how the Chinese government views cryptocurrency. The document mentions since Bitcoin is not issued from a monetary authority nor does it have the traditional characteristics of fiat currency, it is not to be recognized as a legal tender but instead as a virtual commodity. The document further mentions that citizens may participate in the trade of this commodity at their own risk ⁶.

2.2 The 2013 government notice also barred any financial or payment institutions from partaking in the trade of Bitcoin, while also restricting any insurance services working with any businesses Bitcoin-related.

2.3 Most recently, in September 2017, the People’s Bank of China issued (关于防范代币发行融资风险的公告) the Announcement to Prevent the Risk of Initial Coin Offerings, imposing stricter regulations on activities related to cryptocurrencies, specifically banning domestic cryptocurrency trading platforms and initial coin offerings ⁷.

2.4 In August 24, 2018 the People’s Bank of China, the Banking Regulatory Commission, the Central Cyberspace Affairs Commission, the Ministry of Public Security and the State Administration for Market Regulation – made announcement warning against illegal fundraising under the guise of events involving “cryptocurrency” and “blockchain”. (关于防范以“虚拟货币“ ”区块链”名义 进行非法集资的风险提示⁸)

2.5 In Hangzhou court case, a judge recognized Bitcoin as a “commodity” but not as a legal currency.

3. Implications on Individual Income Tax

In terms of paying taxes on income originating from cryptocurrency trading, the Official Reply of the State Administration of Taxation on Issues regarding Levy of Individual Income Tax on Individual Income Derived by Individuals from Virtual Currency Trading over the Internet (“Official Reply”) addresses relevant requirements.

According to the Official Reply, the income derived by individuals by purchasing virtual currency from game players and then selling it to others at a mark-up shall be the taxable income for individual income tax, which shall be computed and paid under the item of “property transfer income”.

Original price of the virtual currency sold by individuals shall be equal to the price for purchasing that virtual currency over the Internet plus the relevant tax and fee.
Where an individual fails to provide proof of original price, the competent tax authorities shall determine the original price of the virtual currency.