Taxation of Bitcoin, Cryptocurrencies and Tokens in Hong Kong
Hong Kong officially recognized Bitcoin and Cryptocurrencies as ‘virtual commodities’, though the term ‘virtual currencies’ is more and more frequently used.
Taxation issues around Bitcoin are not difficult to understand and generally easy to handle by yourself. When you are accepting, holding or trading cryptocurrencies through a Hong Kong registered company it is most important to find consistent and fair accounting standards, and work with an auditor willing to work with this new type of payment vehicle.
Please be aware that the below assessment is only an overview over Hong Kong’s tax regime from the viewpoint of cryptocurrencies. This overview will apply to most cases, but your personal position may be more complicated. When in doubt, always talk to a professional!
Regardless of whether you are a corporation or individual, you owe income tax for profits derived in Hong Kong. If you are selling products, regularly employed or offering your services in exchange for Bitcoin in Hong Kong, you will need to declare this as income in your tax return.
It is irrelevant whether you or your company is formally registered in Hong Kong as a resident of branch. Income derived in Hong Kong is taxed in Hong Kong, income derived outside of Hong Kong is tax free. The question of where profits are derived can also be complicated due to the borderless nature of Bitcoin. Considerable amount of planning is required if you want to argue that your profits are not coming from Hong Kong if you or your company are registered in Hong Kong.
When reporting your income, it is acceptable to report it in Hong Kong Dollars. You should be consistent in how you value your cryptocurrency income, for example by always taking the reference price from the same liquid exchange at the time of payment. If your invoice amount or salary is defined in HKD and the payment simply made in Bitcoin, this should be straightforward.
As a merchant, simply limit yourself to issuing HKD or USD invoices and book the Bitcoin income accordingly. Whether you hold onto your Bitcoin or immediately liquidate it is irrelevant (for professional trading outlets, see below).
If you are being paid in illiquid tokens instead of a popular cryptocurrency, coming up with a fair market valuation might be more difficult. You generally do owe income tax on income derived from advisory activities (you may need a license from the SFC!). It may be a good idea to sell at least enough of these tokens at the time of payment to cover your tax obligations.
Income from the sale of capital assets is tax free. If you buy a cryptocurrency, hold onto it and later sell if for profit, you do not owe any taxes on these profits. Similarly, you cannot deduct losses from your income tax. Furthermore, there are no reporting requirements on how many Bitcoin you bought, sold or own.
Hong Kong does not have a value added tax (VAT) regime, meaning you do not need to charge or pay a tax.
Income from Trading
If you trade cryptocurrencies professionally, you do owe income tax on your profits. Whether you are trading cryptocurrencies professionally or as a hobbyist can be a difficult question that will require the attention of a specialist. You are likely a professional trader if you:
- Live off your trading profits, e.g. there are no or little other steady streams of income
- Spend a considerable amount of time on it
- Rent an office or hire staff to support your trading activities
- Hold assets only for a very short time
Can only make deductions on costs incurred for which taxable profits are made later. In general, you cannot deduct costs incurred from buying or selling Bitcoin from your profit tax, unless you also pay taxes on the profits of these activities.
If you are a holder of Bitcoin, or a casual trader you will likely not owe any profits tax if you ever liquidate your holdings for profit. You cannot make any deductions.
If you are a professional trader and pay profits tax on your trading income, you may deduct expenses.
Income from Mining
As a proof-of-work miner you are be able to consider yourself the producer of a virtual commodity.
You are required to pay income on your profits (the HKD value of your Bitcoin at the time you are finding a block), but you may also deduct your expenses, such as electricity cost, maintenance fees and the cost of your hardware.
The tax perspective of a proof-of-stake miner is relatively complicated compared. A proof-of-stake platform may be considered a security, with your staking income similar to a dividend. Dividends are not taxable, but their trade is relatively restricted and you may not be able to openly sell them to the public.
Hong Kong Tax Advisors Accepting Bitcoin
This post was written by Leonhard Weese, and for obvious reasons does not constitute legal advise. For corrections, suggestions and inquiries contact the author via @LeoAW or leo (at) bitcoin (dot) org (dot) hk