Even with the recent precipitous decline of cryptocurrency prices, early investors have cashed in dozens of times on their investment in the past several years to join the ranks of a newly rich. Some, in their early twenties, have bought houses worth over NT$100 million and fancy sports cars with their newfound wealth.

As more people get rich from cryptocurrency, tax authorities in countries around the world are racking their brains trying to squeeze tax money out of them. Among them, the U.S. government got the earliest start, issuing an official tax guide in 2014, and in 2020 requiring that all taxpayers declare crypto assets in their tax forms. And this year, the U.S. government announced its intention to boost related auditing. And although Taiwan’s National Tax Administration is not as proactive as Uncle Sam’s, it is practically following the U.S. approach to taxation to the letter.

No taxes, even claimed as parents’ dependent

In the United States, taxation on income from cryptocurrency trades is divided between short- and long-term income. Trades made within the past year are listed as individual income, which is taxed progressively up to a maximum of 39.6 percent; trades made over a year ago are taxed at a flat 20 percent capital gains rate. As Taiwan does not levy taxes on capital gains, crypto trades are considered income from property transactions and declared as individual income for taxation purposes.

In reality, most Taiwanese choose to report crypto trades as “overseas income” due to the NT$6.7 million tax-free allowance per year, as well as the flat 20-percent tax rate on overseas income. For many of those people with over NT$100 million in cryptocurrency assets, this can save them 50 percent over the general income tax rate of 40 percent in their higher tax bracket.

Still, only a tiny fraction of people honestly declare such income, and all sorts of tax evasion tips are shared throughout the blockchain community.

Kunchou Tsai, partner at Enlighten Law in Taipei, relates that the typical client who inquires about crypto legal issues is around 40 years of age. He adds that not all are involved with the blockchain industry, and that some are simply investors.

One unnamed blockchain company director in his early thirties relates that he draws NT$50,000 per month from his company, but that 99.99 percent of his assets are in cryptocurrency. He adds that last year his net worth approached NT$100 million, but that this year he will only need to pay the minimum income tax rate of five percent at tax time.

And he is not the only one. “Binance has 300 people in Taiwan who draw salaries in Tether (a type of cryptocurrency). So officially speaking, they do not show income in Taiwan and do not need to pay taxes. And some are even claimed as dependents of their parents,” the director relates.

Binance responded that not all staff members draw wages in Tether crypto, and that adjustments are made based on local regulations where staff are located.

There are many active tax evasion methods. For instance, transactions outside the Taiwan exchange withdrawn in NT dollars can be made extraterritorially, meaning that both sides engage in a private transaction via online remittance or the exchange of goods for currency.

However, even more people do not even need to make cash withdrawals, opting instead to apply for credit cards calculated in cryptocurrency for purchases in Taiwan. The CRO Visa debit card, issued jointly between cryptocurrency company crypto.com and financial services firm Visa, is practically standard issue among Taiwanese blockchain users.

The CRO Visa debit card can be used with any merchant worldwide that accepts Visa cards, as well as for cash withdrawals at ATMs around Taiwan.

Those applying for a card must first open a crypto.com account and purchase CRO coins through the site for deposit in their account. Cardholders are classified into five different levels, according to their CRO assets.

Black Card holders, the highest level, not only get eight percent back on all charges, but enjoy VIP lounge access along with another guest at airports around the world, as well as additional benefits on private flights.

“A lot of people like me have substantial assets and are still wearing Uniqlo and taking the MRT,” says Reno Du, founder of Hooky Finance.

Hiding money abroad and charging transactions in Taiwan is no different from a time-tested tactic long practiced by rich tax evaders. Since Taiwan’s tax authorities have trouble tracking overseas assets, this is a popular approach to tax evasion.

“Money placed in crypto can make more than 30 or 40 percent in annual interest, so there is no reason for most people to remit the money back, which would involve the risk of getting taxed,” relates one anonymous blockchain industry professional.

Are current tax authorities toothless?

The latest tax evasion method among blockchain aficionados is to move funds to Puerto Rico. This is done by opening a local exchange account, depositing cryptocurrency assets, and getting a local tax completion verification. Puerto Rico does not actually collect taxes, but when “proof of taxation” is furnished when the funds are remitted back to Taiwan the “tax” can be deducted.

However, according to accountant Paulson Tseng, a partner at PwC Taiwan, this trick does not work in Taiwan as currently only income from cryptocurrency transactions by U.S. citizens is exempt from tax in Puerto Rico, not foreign nationals. Consequently, even if a Taiwanese citizen obtains proof of taxation, the income is still subject to taxation as overseas income.

Still, what emboldens this group of people to relax their vigilance is their certitude that tax assessors lack the ability to audit.

Hanlin Chang, director of blockchain startup Empty Sea Technology, relates that the exchange must assist the Investigation Bureau and criminal police to look into the flow of funds along the chain. Pulling no punches, he states that tax authorities simply lack the capacity to trace that flow at this time.

“It will be another ten years before the National Tax Administration will be able to tax cryptocurrency,” predicts one investor.

Even tax audits of crypto in the United States have been seen as a joke. So what about Taiwan?

Actually, not only Taiwan’s tax administration but tax authorities worldwide face similar challenges. Japan declared its intention to tax cryptocurrency transactions at the rate of 55 percent, only for Japanese investors to flee Japan and severely damage the local cryptocurrency industry. And even the IRS’s efforts to verify taxpayers’ transaction records has been mocked within the crypto community.

Consequently, the OECD announced its intention in March to adopt the conventional approach to track the overseas income of the wealthy, implementing the Common Reporting Standard (CRS).

Paulson Tseng explains that, before CRS, overseas transactions by Taiwanese went unreported. However, once international regulations took shape, Taiwan was able to trace the overseas capital flow of Taiwanese businesses through bilateral tariff and tax networks, increasing people’s vigilance.

If a crypto version of CRS is rolled out, it would greatly increase the visibility of transnational currency flow.

In Taiwan, those willing to report income honestly are taken aback by the government’s attitude.

Numerous people interviewed complained that the government is treating crypto as a commodity, resulting in divided opinions towards tax authorities and planting the seeds for future tax conflicts.

A cryptocurrency investor himself, Kunchou Tsai believes that cryptocurrency is a financial product in nature, and that as a means of asset deployment it would be more appropriate to treat it as an asset than a commodity.

Currently, cryptocurrency is taxed in line with financial products like stocks. As there is no capital gains tax in Taiwan, only a transaction tax is exacted, such as 0.3 percent on stocks.

However, some people claim that transaction taxes only benefit investors in a bull market; in a bear market, where investors are obviously losing money, it makes no sense to pay taxes on transactions.

Tax agencies should be more proactive if they want to get people to open their wallets and cough up money. For instance, how should taxes be assessed as blockchain systems are upgraded from one to two chains, and investors’ assets increase? While the United States has issued a tax guide, Taiwan has done nothing of the sort.

It goes without saying that governments should punish tax evasion. But taxation agencies are also responsible for upgrading their systems to keep up with the demands of the times.

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Have you read?

• Taiwan’s new Web3 upstarts
• Meet Taiwan’s “Phygital” Mavericks
• Paradise lost? How Taiwanese crypto businesses are fighting the bear

Translated by  David Toman
Edited by TC Lin
Uploaded by Penny Chiang