Interview with Lawyer Huang Yashen | Should Taiwan Tax Cryptocurrency Income? How is it determined?

The U.S. infrastructure bill advances in the White House, potentially leading to taxation on a broader range of cryptocurrency activities in the future; meanwhile, Japan has already had regulations on taxation of cryptocurrency investment income since 2017. As cryptocurrencies gain more recognition, regulations will inevitably apply or reconstruct more detailed rules for management. On the tax topic, an exclusive interview with lawyer Huang Yashen addresses a series of common questions.

About Lawyer Arthur Huang

Lawyer, freelance Japanese translator, specializing in legal issues related to Fintech, startups, blockchain, and digital assets. Currently exploring the world of Metaverse and advancing towards the path of a Coding Lawyer. Website: https://codeandlaw.com

1. In the case of Taiwan, should individuals pay taxes on their cryptocurrency earnings? How is it determined?

Lawyer Arthur Huang:

This is a common misconception that many people have, thinking that there is no need to pay taxes due to the lack of regulations.

The current view of the competent authority in Taiwan is that, except for treating STO securities token issuance differently as securities for taxation, most virtual currencies are treated as virtual commodities.

Therefore, the discussion below specifically refers to "non-securities" virtual currencies, which are treated similarly to selling virtual items online. In this scenario, it usually involves issues related to income tax and business tax. For individual investors, the main question usually revolves around income tax reporting.

Under the current tax laws, if a natural person in Taiwan buys and sells such "virtual commodities" within the territory and makes a profit, it will be recognized as income from property transactions. The remaining balance after deducting the transaction price from the original acquisition cost and related expenses will be included in individual comprehensive income tax assessment. Additionally, if BTC is used as consideration for goods or services and a profit is made, income tax should be levied.

Another often overlooked aspect is that if a regular user is deemed to engage in business activities due to frequent buying and selling, then the issue of "business tax" may arise.

According to Taiwan's regulations, selling virtual commodities by individuals within the territory of the Republic of China is considered the sale of services. If the monthly sales amount exceeds NT$40,000, registration for business tax is required, and business tax must be paid. Another frequently overlooked aspect is that if virtual currency is used to purchase related goods or services, such as using BTC to buy goods, it is currently treated as "barter" and subject to business tax based on the recognized sales amount from the higher of the two.

2. Will cryptocurrency transferred back from foreign exchanges be subject to taxation?

Lawyer Arthur Huang:

If cryptocurrency is transferred back from foreign exchanges, it is considered a movement of virtual commodities. In theory, if no related profit is generated, then it should not be subject to taxation.

3. Will USD transferred back from foreign exchanges be eligible for tax exemption on overseas income? For example, FTX USD remittance

Lawyer Arthur Huang:

In this regard, according to Taiwan's current regulations, if USD is converted from foreign exchanges, it will be treated as income from overseas transactions. Of course, trading losses can also be deducted from overseas income. If the total of overseas income, including other sources such as overseas asset disposal, exceeds NT$1 million, it should be reported. Please note that reporting is for informational purposes and does not necessarily mean immediate tax payment.

Specifically, whether overseas income should be taxed depends on the "basic income" system, which should be included in the "individual basic income" category, including: overseas income exceeding NT$1 million, life insurance and annuity payments with different beneficiaries and insured parties, trading income from private equity investment trust fund beneficiary certificates, non-cash donation amounts, net comprehensive income, and the total amount of dividends and earnings subject to separate taxation after opting for separate calculation. If the individual basic income is less than NT$6.7 million, tax payment may not be required; if it exceeds NT$6.7 million and is higher than the general income tax amount, tax payment may be necessary based on the tax rate.

4. If only holding cryptocurrency without selling, will appreciation be taxed? Will depreciation be taxed?

Lawyer Arthur Huang:

This depends on how you acquired the coins. For example, there are two different possibilities for coins obtained through "purchases" and "mining."

Regarding purchases, if there is only appreciation without trading, and no property transaction income has been generated, then there should not be specific taxation, as that would be too painful...

As for coins obtained through mining, there are many legal and tax recognition issues involved in blockchain network mining. For example, as a mining node maintaining the blockchain network, providing computational power to the blockchain network, determining whether the service provided is domestic or foreign, domestic or foreign income, whether the mined coins have related value – well-known currencies may have, but what if the coins have no market value yet? – as well as how costs are determined, such as equipment depreciation, resource consumption, etc. This area currently has fewer relevant discussions, so whether appreciation of mined coins should be taxed is still pending future interpretations and determinations.

Referring to international experiences, some countries consider that if coins obtained through mining have a market price, they are considered profits. After deducting related costs, they should be reported for taxation. Other regions believe that taxation should occur when the cryptocurrency is actually traded. However, each country's system may vary, and actual implementation should seek advice from local tax experts.

5. In the case of Taiwan, should corporate cryptocurrency investment income be taxed? How is the income determined?

Lawyer Arthur Huang:

Corporate investment in cryptocurrency is similar to individuals. If a corporation makes a profit from cryptocurrency investments after deducting transaction costs, according to current regulations, if the corporation is a profit-making entity, domestic profits are recognized as having been made, and the profit should be subject to profit-seeking enterprise income tax. Income from foreign profit-making enterprises should have tax withheld by the obligated party at the time of payment.

6. In other countries, are there any aspects of Taiwan's cryptocurrency tax laws that are worth emulating or have advantages?

Lawyer Arthur Huang:

When it comes to legal systems that can be referenced from abroad, I believe the main ones to look at are the OECD and regulations in European and American countries. Personally, I think the regulations in Japan can also be referenced, but perhaps not their tax rates... as the country has legislated since 2017, with strict accounting and tax systems. However, whether the system is strict is another matter, but conceptually, it can be considered.

Recently, a government-recognized self-regulatory organization in Japan, the Japan Virtual and Crypto Assets Exchange Association, proposed tax reforms in August this year, such as exempting transactions below a certain amount from taxation to avoid stifling trading activity, or discussing separate taxation, among other things.

Taiwan currently has very simple classifications for cryptocurrency tax laws, dividing them into securities and non-securities. Some activities specific to the cryptocurrency industry, such as mining, salary payments, token rewards, etc., have not been discussed. Certain existing regulations may not be directly applicable to the virtual industry.

From a compliance perspective, taxation is not scary; what's scary is unclear taxation that creates uncertainty and risks for the people, potentially fostering abnormal channels and fraud incidents, such as heavily relying on private transactions, etc.

Possible practical issues include whether sales tax should be levied on the total amount of coins sold or the seller's fees, or whether there should be an exemption for specific virtual currencies similar to VAT in Japan or Singapore, avoiding Taiwan's business tax. These issues require detailed discussions and solutions in the future.

Another reminder of the risks in cryptocurrency taxation is that according to the "Tax Collection Act," the assessment period is five to seven years, with the normal assessment period being five years. If not reported, it extends to seven years. There is a certain probability of being retroactively taxed in the future, so users should be aware of this risk. If the amount is substantial, with planned withdrawals, it is recommended to consult relevant experts, proactively report, seek reasonable tax planning, and avoid potential risks in the future. Otherwise, just choose to HODL, and smile.