Q&A: How Will the New CARF Tax Regulations Affect Chinese Crypto Investors?

Editor | Wu Talks Blockchain

This interview provides an in-depth analysis of the background and implementation of the CARF (Crypto Asset Reporting Framework) and its impact on users in Mainland China and Hong Kong. Fintax founder Calix explained the basic framework of CARF, which is similar to CRS (Common Reporting Standard), aiming to strengthen cryptocurrency tax regulation through cross-border data exchange. Notably, Hong Kong plans to implement CARF starting in 2026, which could significantly affect tax residents. The discussion also covered tax residency status, risks of tax avoidance strategies, and how to plan for crypto asset tax compliance. Additionally, Kelly addressed whether users in Mainland China will be affected and how to conduct tax planning within a compliant framework.

FinTax mainly offers financial and tax solutions related to cryptocurrencies, assisting multinational crypto companies and high-net-worth individuals with tax consulting.

The guest’s personal opinions do not represent Wu Talks’ views and do not constitute investment advice. Please strictly follow local laws and regulations.

Audio transcription by GPT may contain errors. Please listen to the full podcast on platforms like Xiaoyuzhou, YouTube, etc.

Xiaoyuzhou:

Background and Mechanism of CARF

Wu Talks Aki: First, please briefly introduce the background and core content of CARF, as well as its progress in Mainland China and Hong Kong.

Calix: CARF can be seen as the crypto version of CRS. CRS, issued by OECD, is a set of standards for cross-border tax information exchange. After member countries sign CRS, they are required by their national laws to have financial institutions collect user account information and exchange data internationally.

In the crypto space, OECD noticed that crypto holds large amounts of wealth, with high privacy and ease of hiding untaxed assets. Therefore, based on the CRS framework, they developed the joint reporting standards of CARF. After signing, countries have an implementation cycle. For example, Hong Kong has begun soliciting public opinions, with legislation expected to be completed by 2026, and plans to start collecting transaction data from local financial institutions from January 1, 2027. These data will be submitted to the Hong Kong tax authority and exchanged with other CARF signatories, with data exchange possibly starting as early as September 2028. The public consultation period ends on February 6, 2026, and legislation is expected to be enacted in 2026.

Global Expansion of the CARF Framework and Signatory Countries

Wu Talks Aki: Will common tax havens like the UK and Cayman Islands be included in the CARF framework? Are there still other avenues for tax avoidance?

Calix: Cayman Islands signed CARF in 2024 and joined the framework. Currently, 54 countries have signed CARF. The UK is expected to sign around November 2024. There are about fifty to sixty countries planning to sign by 2027, with another twenty to thirty in 2028 and 2029. Therefore, the signatory countries largely overlap with CRS.

This reporting standard will advance rapidly under OECD’s global anti-avoidance framework. There are many ways to avoid taxes, but I believe tax planning should be reasonable. Excessive avoidance carries high risks and the possibility of retroactive collection.

Wu Talks Aki: If non-compliant, the risks are high, right?

Calix: I deliberately avoided using the word “risk” because it’s been discussed extensively. The definition of risk varies greatly; it depends on what you do and the tax laws of your country. Tax rates differ significantly—Hong Kong and Singapore have low rates; the UAE and Cayman Islands have almost no personal income tax; whereas China, the US, and Europe have heavier tax burdens. Therefore, the tax rate is closely related to one’s living and working environment. Paying the appropriate taxes allows access to public services, which is the return on taxes.

If the tax burden is too heavy, long-term identity and wealth planning can be considered. For high-net-worth individuals, financial planning is especially important. For ordinary people, following compliant methods may be more efficient in terms of effort and resources, reducing future tax penalties and other costs. Short-term measures might lower tax burdens, but sustainability is uncertain.

For Mainland tax residents, the current situation is relatively favorable because China has not yet committed to signing CRS. Mainland tax authorities cannot automatically access overseas crypto transactions of Mainland residents. This creates an arbitrage window worth seizing.

Of course, if crypto transactions involve China’s individual income tax law—especially if large sums are earned—taxes must be paid, particularly when converting to fiat currency. Without information exchange mechanisms, Mainland tax authorities’ oversight over overseas crypto assets will be greatly weakened. Many tax collection cases are actually based on data obtained through CRS.

I believe Mainland residents currently have a favorable window, but it requires proper planning. Crypto assets hold substantial wealth, and future trends will attract more capital, especially with the rise of tokenized deposits, RWA, and stablecoins, further eroding traditional fiat and financial systems. The crypto industry’s capital absorption will accelerate, and tax issues will become clearer.

From a global perspective, taxing cryptocurrencies is inevitable. Different regions are at different stages of implementation—some are faster and more comprehensive, with more thorough tax enforcement.

Post-CARF Asset Traceability

Wu Talks Aki: For many Chinese users already holding assets overseas, the biggest concern might be “retrospective taxation.” After CARF is implemented, will previous holdings be subject to tax collection? How is the look-back period generally calculated?

Calix: Under the CARF framework, data collected before signing are theoretically not exchangeable. For example, CRS started data collection in 2017, and data from 2017 was exchanged starting in 2018; data before 2017 cannot be exchanged. CARF follows a similar principle: financial information of tax residents before signing is usually not exchanged.

However, from a tax law perspective, worldwide income is generally taxable. If taxes are unpaid, authorities can pursue back taxes, sometimes going back many years. Although these rules are strict, practical enforcement is complex. Suppose Mainland China signs CARF at a certain point; data before signing will be difficult to obtain. But data after signing can be traced through other means. For example, if authorities find someone’s account holding 100 bitcoins (just an example), they might request an explanation of the source.

Additionally, Mainland China has foreign exchange controls. Overseas investments require prior approval; only approved investments are permitted. If someone suddenly acquires large amounts of crypto through an offshore channel, authorities might investigate the source and whether taxes were paid. Whether past assets can be traced depends on the depth of information collection and enforcement rigor.

If enforcement is strict, authorities can trace back through transaction records and assets unless the information chain breaks at some point. Even if encrypted assets are emptied in exchange data, authorities can trace through fiat conversions. For example, if you sell crypto and convert to fiat, then deposit into a bank account, authorities can track the funds similarly to CRS.

Ultimately, whether past assets can be traced depends on how assets are stored, where they are stored, and whether they fall within regulatory scope. This is complex; enforcement agencies will decide based on available information and their objectives, making precise predictions difficult.

Details of Crypto Asset Tax Data Exchange

Aki: The next question concerns data synchronization and privacy concerns. Do major foreign exchanges automatically share Chinese user transaction data with Chinese tax authorities? How does their data exchange mechanism work?

Calix: Hong Kong’s situation is close to us, so I’ll use Hong Kong as an example. First, which entities are obliged to report information to the local tax authority? These include entities providing crypto trading services—exchanges, brokers, ATM operators, market makers, underwriters, etc. Some may be registered in Hong Kong, others not. An important principle here is the “connection rule,” often used in US tax law and reinforced in the CARF framework. Specifically, if an entity is a Hong Kong tax resident, or registered and filing taxes in Hong Kong, or even if not registered but its main management and operations are in Hong Kong, then it has reporting obligations.

The EU’s situation differs. The EU’s CARF implementation law is DAC 8, which is broader than Hong Kong’s scope. If you provide similar services to EU tax residents, you may also need to report to the EU under DAC 8.

What information must be reported? The scope is very detailed, including KYC (know your customer) info, nationality, tax residency, tax ID, and other data that help tax authorities determine tax status.

Specifically, reporting includes fiat and crypto exchange info, trading data between different currencies, crypto transfer details and prices, and possibly lending, DeFi activities, etc. If exchanges have other financial activities, those are included too. Currently, DAC 8’s scope is more detailed than Hong Kong’s, which is relatively broad and mainly focused on trading-related info. In practice, laws still have gaps; if authorities find certain definitions incomplete, they may request additional info.

Overall, CARF covers major crypto trading activities, especially common exchange operations, with little issue. It also requires market prices for crypto inflows and outflows, and may even infer profits and losses based on transaction costs and market prices.

How Hong Kong Investors Should Prepare for CARF Compliance

Aki: Since we’re discussing Hong Kong compliance, some tutorials on Twitter suggest opening Hong Kong bank accounts for operations. Many users consider using Hong Kong for compliant activities. Calix, how should Hong Kong investors prepare for CARF compliance?

Calix: First, if your tax status is Mainland China resident, using Hong Kong exchanges and bank accounts mainly depends on asset size. Enforcement efforts are costly. Taxes owed must be paid, but larger assets attract more scrutiny. High-net-worth individuals should pay more attention to asset activity. If Mainland residents use Hong Kong accounts and exchanges, and Mainland joins CARF, data could be linked, allowing authorities to access transaction info.

In a good scenario, authorities might check taxable or untaxed data for the year and verify tax payments. In a less ideal case, they might trace account balances over time to see if tax obligations were met historically. Long-term tax planning is advisable for high-net-worth individuals.

For non-high-net-worth individuals, the long-term cost difference is minimal. Some may be unlucky and get caught early; others might not be caught at all. It depends on luck and enforcement intensity. This is a practical consideration.

Mainland investors’ tax compliance and the vacuum period

Aki: Since Mainland China has not yet joined CRS, does this create a tax vacuum? Are Mainland investors relatively safe for now?

Calix: There is indeed a tax vacuum, but I’m unsure how long it will last. Cryptocurrency laws and related issues may need further clarification. At least for now, crypto tax regulation in Mainland China is not fully implemented, providing a temporary window of opportunity. During this period, I suggest understanding tax issues, planning ahead, and possibly optimizing tax burdens within legal limits. But these operations often involve high costs, especially for non-high-net-worth individuals. Many online tax avoidance tutorials are unrealistic and often “empty promises.”

I can explain how to avoid taxes and save on taxes, but the core depends on “luck.” The first gamble is whether you get caught; the second is whether authorities pursue further if they do. I believe it’s better to adopt prudent tax measures and not rely heavily on avoidance strategies. Focusing on business growth and proper compliance can bring more positive effects and even support resources. From a societal perspective, paying reasonable taxes contributes to social development. When you bear a fair tax burden, you’re also contributing to social order, which benefits all business activities.

Legal Risks for Mainland China Residents Holding Crypto Assets

Aki: For Mainland Chinese investors, given the current ban, could personal crypto holdings lead to legal consequences? For example, if someone invests with personal funds, could they face criminal liability?

Calix: This involves legal issues. I’m not a legal expert, so I can’t give a definitive answer. Based on discussions with lawyers like Simon from Guofeng Law Firm, Liu Honglin from Mankun Law Firm, and others from Tongshang, King & Wood, Zhonglun, etc., the consensus is that personal crypto holdings are not illegal per se.

However, caution is needed depending on asset size. If you invest with offshore funds, the situation becomes more complex. The key question is the source of the offshore funds—whether proper investment filings were made. This involves foreign exchange management. Many people do this, but whether all details are traceable remains a practical concern.

In general, investing in crypto with domestic funds is tightly controlled. Crossing that line is difficult. Regarding offshore funds investing in crypto, based on legal consultations, it’s unlikely to involve criminal liability at present.

Tax Implications for Small Investors and Long-term Holders

Aki: For small investors or long-term holders, will they face additional taxes once CARF is implemented?

Calix: The core principle of taxation is that actual gains must be realized to incur tax. Whether under US law, Chinese law, or others, this is the basic rule. For example, if I bought Bitcoin for 100,000 RMB in 2018 and held it long-term without selling, I haven’t realized any profit, so generally no tax liability. Only when you sell—whether for RMB, USD, or other assets like cars, real estate, or ETH—do you realize gains or losses.

The value upon sale is measured at fair market value, and profit or loss is calculated accordingly. Long-term holding without selling usually means no tax.

Aki: So, long-term holding generally isn’t a taxable event? Does that mean CRS mainly concerns crypto-to-fiat flows, which might involve taxes, while CARF focuses more on taxable activities between exchanges and investors?

Calix: Exactly. CRS mainly manages fiat-related assets, including other financial assets like central bank digital currencies (CBDC), which might also fall under CRS 2.0. CARF, on the other hand, focuses on native blockchain assets like Bitcoin (BTC), Ethereum (ETH), and related financial products or derivatives. The tax treatment of these assets is the core of the CARF framework.

Hong Kong Residents’ Crypto Tax Compliance

Aki: How should Hong Kong residents handle CARF compliance?

Calix: Hong Kong residents are in a relatively better position. Hong Kong’s personal income tax is low, and there’s no capital gains tax. Even frequent trading is unlikely to be classified as profits tax. So, the tax burden is relatively light.

For crypto, the main tax obligation is salary tax. If salary is paid in USDT or other digital currencies, it’s subject to salary tax. Buying and selling crypto or engaging in quantitative trading and other crypto financial activities generally don’t trigger additional personal income tax.

Of course, if you conduct foreign trade and settle in crypto, profit and loss are calculated normally. The form of currency (crypto vs. fiat) doesn’t affect the income and expense calculation.