This interview provides an in-depth analysis of the implementation background of CARF (Crypto Asset Reporting Framework) and its impact on users in mainland China and Hong Kong. Fintax founder Calix explains the basic framework of CARF, similar to CRS (Common Reporting Standard), which aims to strengthen tax regulation of cryptocurrencies through cross-border data exchange. Hong Kong, in particular, is set to implement CARF in 2026, potentially having a significant impact on tax residents. The discussion also covers topics such as tax residency status, the risks of tax avoidance methods, and how to plan for tax compliance of crypto assets. Furthermore, Kelly answers questions about whether users in mainland China will be affected and how to conduct tax planning within the compliance framework. FinTax primarily provides cryptocurrency-related financial and tax solutions, while also offering tax advisory services to multinational companies and high-net-worth individuals in the crypto industry. The guest's personal views do not represent the views of Wu Shuo and do not constitute any investment advice. Please strictly adhere to local laws and regulations. The audio transcription was done by GPT and may contain errors. Please listen to the full podcast on platforms such as Xiaoyuzhou and YouTube. Xiaoyuzhou: https://www.xiaoyuzhoufm.com/episodes/697cd89b2fc7f49d09128fc3 Explanation of the Background and Operating Mechanism of CARF Wu Shuo Aki: First, could Calix briefly introduce the background, core content, and progress of CARF in mainland China and Hong Kong? Calix: CARF can be seen as a cryptocurrency version of CRS. CRS, issued by the OECD, is a set of reporting standards for the exchange of cross-border tax information. After member countries sign CRS, they need to require financial institutions to collect user account information and conduct cross-border information exchange through their national laws. In the cryptocurrency field, the OECD noted that cryptocurrencies, when holding large amounts of wealth, are highly secretive and easily conceal untaxed wealth. Therefore, based on the CRS framework, the OECD formulated the common reporting standards for CARF. There will be an implementation period after each country signs the agreement. Taking Hong Kong as an example, Hong Kong has begun soliciting public opinions, with legislation expected to be completed in 2026. It plans to begin collecting transaction data from local financial institutions starting January 1, 2027. This data will be submitted to the Hong Kong Inland Revenue Department and then exchanged with other CARF signatory member countries, with data exchange expected to begin as early as September 2028. The public comment period ends on February 6, 2026, and formal legislation is expected in 2026. Global Expansion of the CARF Framework and Member Country Signing Status Wu Shuo Aki: Will the CARF framework include common tax havens like the UK and the Cayman Islands? Or are there other tax havens? Calix: The Cayman Islands signed CARF in 2024, joining the framework.Currently, 54 countries have signed CARF, with the UK expected to sign around November 2024. Around 50-60 more countries are planned to sign by 2027, and another 20-30 more by 2028 and 2029. Therefore, the number of member countries joining largely overlaps with CRS. This reporting standard will be rapidly implemented under the OECD's global anti-tax avoidance framework. While there are indeed many methods of tax avoidance, I believe tax planning should be reasonable. Excessive tax avoidance carries high risks and a greater likelihood of being pursued for tax evasion. Wu Shuo Aki: If it's not compliant, the risk is very high, right? Calix: I deliberately avoided using the word "risk" because it has already been discussed extensively. The definition of risk varies greatly; the key lies in what you do and the tax laws of your country. Tax rates differ significantly between countries. Hong Kong and Singapore have low tax rates, the UAE and Cayman Islands have almost no personal income tax, while China, the US, and Europe have heavier tax burdens. Therefore, tax rates are closely related to an individual's living and working environment. Paying the corresponding taxes entitles you to corresponding public services, which is the return on taxation. If the tax burden is too heavy, long-term identity and wealth planning is advisable. Financial planning is particularly important for high-net-worth individuals. For the average person, adhering to compliance may save time and resources, reducing future tax penalties and other costs. While short-term measures may lower the tax burden, their sustainability is uncertain. The current situation is relatively favorable for mainland tax residents. Because China has not yet committed to signing the CRS agreement, mainland tax authorities cannot automatically obtain information on mainland tax residents' overseas cryptocurrency transactions. Therefore, this provides an arbitrage window worth seizing. Of course, if cryptocurrency transactions involve Chinese personal income tax law, especially if substantial profits are made through crypto assets, taxes must be paid, particularly when converting to fiat currency. Without an information exchange mechanism, the mainland tax authorities' oversight of overseas crypto assets would be significantly weakened. Many current tax collection cases are actually based on data obtained through CRS. I believe mainland residents currently have a relatively favorable window of opportunity, but this window needs careful planning. Cryptocurrencies carry significant wealth and will attract more funds in the future, especially with the rise of deposit tokenization, RWA, and stablecoins, which will further erode traditional fiat currencies and the financial system. The cryptocurrency industry will attract funds at a faster pace, and tax issues will become increasingly clear.From a global perspective, the taxation of cryptocurrencies is inevitable; the only difference is the pace of implementation in different regions, with some regions implementing it faster, better, and more comprehensively. The Issue of Retrospective Collection of Existing Assets After CARF Implementation Wu Shuo Aki: For many Chinese users who already hold crypto assets overseas, the biggest concern is likely "post-taxation." So, after CARF implementation, will existing assets face retroactive taxation? How is the retroactive period typically calculated? Calix: According to the CARF framework, data prior to signing is theoretically not exchangeable. For example, with CRS, data collection began in 2017, and data from 2017 began to be exchanged in 2018; data before 2017 cannot be exchanged. CARF's principle is similar; transaction information of domestic tax residents in other regions' financial institutions prior to signing is generally not exchanged. However, from a tax law perspective, globally earned income is theoretically taxable. If taxes are not paid, tax authorities can retroactively collect them, even going back a long time. Although these rules are relatively strict, the actual collection process is quite complex. Assuming mainland China signs CARF at some point in time, data prior to the signing is difficult to obtain. However, data after the signing can be traced through other means. For example, if tax authorities discover someone has 100 bitcoins in their account (this is just an example), they may require an explanation of the origin of these bitcoins. Furthermore, mainland China has foreign exchange controls. Overseas investment requires prior foreign exchange investment approval, and investment can only proceed after approval. If a large amount of digital currency is suddenly acquired from a cryptocurrency channel, tax authorities may trace the source of this wealth and confirm whether tax obligations have been fulfilled. The ability to trace existing assets depends on the depth of information gathering and the strictness of tax collection measures. If tax collection measures are very strict, tax authorities can trace past transactions and assets, unless the information chain breaks at some point. Even if the crypto assets have been cleared from the exchanged data, tax authorities can still trace them through fiat currency exchange. If you sell your crypto assets, convert them into fiat currency, and then deposit them into a bank account, tax authorities can trace the flow of funds through the bank account, similar to the tracking method used by CRS. Ultimately, whether existing assets can be traced depends on how and where the personal assets are held, and whether they fall within the regulatory framework. This situation is quite complex. In practice, tax authorities make decisions based on available information, tax collection targets, and other factors, making it difficult to draw accurate conclusions.Specifics of Crypto Asset Tax Information Exchange Aki: The next question is about data synchronization, and everyone is concerned about privacy. Do some commonly used foreign exchanges automatically synchronize the transaction data of Chinese users with the Chinese tax authorities? What are their data exchange mechanisms? Calix: Okay, Hong Kong's situation is closer to ours, so I'll use Hong Kong as an example. First, which institutions are obligated to report information to the local tax authorities? These institutions include entities that provide crypto asset trading services to clients, specifically exchanges, brokers, ATM operators, market makers, underwriters, etc. These institutions may or may not be registered in Hong Kong. There is an important principle here called the "connectivity rule." This rule is widely used in US tax law and is strengthened under the CARF framework. Specifically, if an institution is a Hong Kong tax resident, or is registered and files tax returns in Hong Kong, or although not registered in Hong Kong, its principal place of management and place of business are in Hong Kong, then it is obligated to report information. The situation in the EU is different. The EU's CARF implementation law is DAC 8, which is broader than Hong Kong's. If you provide similar services to EU tax residents, you may also need to report to the EU and file declarations according to DAC 8 rules. So, what information needs to be reported? The reporting is very detailed, including KYC (Know Your Customer) information, nationality, tax residency status, tax number, and other information that may help the tax authorities determine your tax status. Specifically, the report also includes information on the exchange between fiat currency and digital currency, transaction information between different currencies, the transfer of crypto assets and the transfer price, and may also involve lending, DeFi (decentralized finance), and other businesses. If there are other financial activities on the exchange, the scope will also be included. Currently, the scope of the EU's DAC 8 regulations is more detailed than that of Hong Kong, while Hong Kong's regulations are relatively broad, mainly focusing on transaction-related aspects. However, in actual implementation, some gaps still exist in the law. If the tax authorities find that certain definitions are incomplete, they may require more information for reporting and exchange. In general, CARF's scope covers the main business of crypto asset trading, especially the common business of exchanges, and there are basically no major issues. It also requires providing the market price for buying and selling coins, and may even be able to deduce possible profits and losses based on these transactions, including the cost price and market price of buying and selling.How Hong Kong Investors Should Prepare for CARF Compliance Requirements Aki: Since we're discussing compliance issues in Hong Kong, we sometimes see tutorials on Twitter suggesting using Hong Kong bank accounts for transactions. Many users might consider compliant operations through Hong Kong. So, Calix, how should Hong Kong investors prepare for CARF compliance requirements? Calix: First, we need to clarify that if you are a mainland tax resident and using Hong Kong exchanges and bank accounts, the core issue is asset size. All enforcement actions are costly. Tax law dictates that taxes must be paid, but we also understand that individuals with larger assets may be more subject to tax authorities' oversight. Therefore, high-net-worth individuals need to pay closer attention to their asset activities. If a mainland tax resident uses a Hong Kong bank account and Hong Kong exchanges for business, this data may become interconnected when mainland China joins the CARF framework, allowing tax authorities to obtain relevant information from the exchanges. In a favorable scenario, the tax authorities might look for taxable or untaxed data for the year to see if taxes were paid. In a less favorable scenario, the tax authorities might trace the formation of the account balance to see if tax obligations were fulfilled in past years. Therefore, high-net-worth individuals may need to plan their tax strategy in the long term. For non-high-net-worth individuals, I believe the cost difference in this regard will not be significant in the long run. The only difference is that some people may be unlucky and receive tax information from the tax authorities immediately; others may be lucky and receive it later, or even not at all. It all depends on individual luck or the strictness of the tax authorities' enforcement measures. In general, this is one possible scenario in practice. Tax Compliance and Vacuum Period for Mainland Investors Aki: Since we are talking about mainland China, China has not yet joined the CRS framework, right? Does this mean there is a tax vacuum period? Does it mean that mainland investors are still relatively safe? Calix: Indeed, there is a tax vacuum period at present, but I am not sure how long this window will last. Because the legal status of cryptocurrencies and related issues may still need further resolution. However, at least until now, tax regulation of cryptocurrencies has not been fully implemented in mainland China, which provides investors with a relatively favorable window of opportunity. During this period, I suggest that, if possible, you learn more about tax issues, plan ahead, see if you can optimize your tax burden, or conduct tax planning within a reasonable scope.However, it's important to note that these operations typically incur significant costs, especially for non-high-net-worth individuals, where these costs can be even higher. Furthermore, many online tax avoidance tutorials are often impractical, frequently just empty promises. I can explain how to avoid taxes and save on taxes, but the core issue remains "gambling." The first gamble is whether it will be detected, and the second is whether the tax authorities will re-investigate even if detected. Therefore, I personally believe that adopting prudent tax measures is more important, and one should not overly rely on these tax avoidance methods. In fact, more effort should be focused on business expansion; proper tax compliance will bring more positive effects and can even provide more resource support for enterprises. This is not just empty talk; from a social value perspective, reasonable tax payments contribute to social development. When you bear a reasonable tax burden, you are actually contributing to social rules and order, which will receive widespread support from various business activities. Legal Risks for Mainland Chinese Tax Residents Holding Crypto Assets Aki: For investors in Mainland China, considering the current ban, will individuals holding crypto assets be held accountable? For example, will individuals face criminal liability if they invest with their own funds? Calix: This question involves legal aspects, and since I don't specialize in law, it's difficult for me to make a direct judgment. However, based on my discussions with some lawyer friends, including Simon from Guofeng Law Firm, Liu Honglin from Mankiw Law Firm, and lawyers from Tongshang Law Firm, King & Wood Mallesons, and Zhong Lun Law Firm, the consensus is that holding cryptocurrency is not illegal in itself. However, there is one situation that requires special attention, which also depends on the size of the assets. If you invest in cryptocurrency with foreign funds, the issue becomes complicated. The key questions are: what is the source of the foreign funds? Has the corresponding investment registration been completed? This involves foreign exchange management. In fact, many people are doing this kind of operation, but whether these foreign exchange regulations can clarify all the details remains a practical question. Generally speaking, investing in cryptocurrency with domestic funds is strictly controlled. This line is inherently difficult to cross. As for investing in cryptocurrency with foreign funds, based on my communication with several lawyers, it seems that it should not involve criminal liability at present. Does personal and long-term holding of crypto assets incur tax burdens? Aki: For small investors or long-term holders, will they face additional tax burdens after the CARF is implemented? Calix: The core logic of taxation is that a tax burden will only arise if there is actual income.Whether it's US tax law, Chinese tax law, or tax laws elsewhere, this principle is basically the same. For example, if I spent 100,000 yuan to buy Bitcoin in 2018 and held it long-term without selling it, then my profit hasn't actually been realized, so it usually doesn't involve tax issues. Unless you sell the Bitcoin, but "selling" here doesn't necessarily mean converting it to RMB; you can convert it to USD, other fiat currencies, or even to a car, a house, or Ethereum, all of which count as "selling." The value after the sale needs to be measured based on the fair value of the consideration, and then your profit or loss is calculated. So, holding it long-term without selling usually doesn't incur tax liabilities. Aki: My understanding is that long-term holding of crypto assets usually doesn't constitute a taxable event, right? So, can I understand that CRS mainly involves the circulation between cryptocurrencies and fiat currencies, which may involve tax issues; while CARF focuses more on taxable activities of cryptocurrencies between exchanges and between investors, is that right? Calix: Basically, that's the idea. More precisely, CRS primarily manages fiat currency-related assets, but other financial assets are also included, such as central bank digital currencies (CBDCs), which may also be included in the scope of CRS 2.0. CARF, on the other hand, focuses more on assets on native blockchains, such as Bitcoin (BTC), Ethereum (ETH), and their related financial products or derivatives. The tax treatment of these assets is the core of the CARF framework. Tax Compliance of Crypto Assets for Hong Kong Residents Aki: How should Hong Kong tax residents deal with CARF tax compliance requirements? Calix: I think the situation is relatively better for Hong Kong residents. Hong Kong's personal income tax is relatively low, and there is no capital gains tax. Even if an individual engages in a lot of high-frequency trading, it is difficult to fall under the scope of capital gains tax. Therefore, the tax burden on individuals in Hong Kong is relatively light. For cryptocurrencies, Hong Kong's tax obligations mainly manifest in salaries tax. If wages are paid in USDT or other digital currencies, then it falls under the scope of salaries tax. If it involves the buying and selling of cryptocurrencies, or quantitative trading under an individual's name, or other cryptocurrency financial business, generally no additional personal income tax is involved. Of course, if you conduct foreign trade under your own name and use cryptocurrency for settlement, profits tax will still be calculated according to normal rules. However, since the currency you receive is cryptocurrency instead of fiat currency, this will not affect the calculation of your business revenue and costs. [Wu Blockchain]