The Ministry of Finance's proposal that "income tax will definitely be levied on domestic investment in virtual asset transactions" has raised concerns among cryptocurrency investors. How should we view the relevant tax issues under the current tax system? The author of this article is Lin Shang-lun, a professional lawyer in virtual assets. (Background: South Korea has postponed the taxation of cryptocurrency capital gains until 2027; will this affect Taiwan's tax process?) (Supplementary Background: Ministry of Finance: Profits from buying and selling Bitcoin must be taxed! Within three months, a plan for 'strengthening tax audits' will be drafted.) Recently, at a meeting of the Legislative Yuan's Finance Committee, Kuomintang legislator Lai Shih-pao questioned the Ministry of Finance's taxation measures on personal trading income from crypto assets. In response, the Ministry of Finance stated: "Related transactions will definitely be subject to income tax, but the methods of verification are still under discussion." The Ministry of Finance's response has sparked a discussion on whether to adopt a taxation mechanism for "unrealized gains." This tax system is a method previously used by Japan to tax specific corporations holding crypto assets. The Japanese tax authority would directly tax the appreciated value of crypto assets held by corporations at the end of the fiscal year. For example: "If the market value of Bitcoin rises from 1,000 to 1,500 yen, the 500 yen increase in value is considered unrealized gain and is subject to tax. At the end of the year, the amount of appreciation of crypto assets is directly considered the annual operating income of the company and taxed as corporate income tax." The author opposes the taxation mechanism for "unrealized gains" because Japan's past policy essentially punished entities holding crypto assets; it not only hindered industry development but also led to unsatisfactory tax results due to overly harsh taxation mechanisms. Ultimately, the Japanese government abolished the "unrealized gains tax mechanism" at the end of the fiscal year in 2024. Japan's tax reform experience can evidently serve as a reference for Taiwan. To understand why legislators are dissatisfied with the current tax authority's treatment of crypto assets, one must first grasp how the tax authority currently taxes various crypto assets. Below, a few questions will illustrate this: If the Bitcoin I hold increases in value, will it be subject to income tax? The following is a typical scenario where an exchange user makes money: You bought Bitcoin three years ago, and today the exchange shows that you have made 30,000 USD. You successfully sell "the Bitcoin purchased from the exchange three years ago" and obtain a profit of 30,000 Tether (USDT) after the sale. You withdraw 30,000 from the exchange, transferring 30,000 USD to your bank account through the exchange's bank account. Question 1: At what stage will the National Taxation Bureau recognize it as "property transaction income" under Article 14, Paragraph 1, Item 7 of the Income Tax Act, and thus include the 30,000 USD in your income tax? The current view of the tax authority is that it is only considered "property transaction income" when you receive the 30,000 USD in fiat currency in your bank account. Simply selling Bitcoin on the exchange and earning 30,000 Tether does not count towards personal income. However, when you withdraw the 30,000 Tether and transfer the fiat currency worth 30,000 USD to your bank account via the exchange's bank account, that 30,000 USD becomes "property transaction income" and is subject to income tax. So back to the question, if Bitcoin simply appreciates in value, it will not be taxed; if it is sold on the exchange for Tether, it still will not be taxed. However, when you withdraw the profit in Tether, that profit will become your personal income. Question 2: "The profit from the appreciation of my house is not included in personal income tax; why should the profit from cryptocurrency transactions be included?" The profit from the sale of a house after its appreciation is indeed not included in personal income, but that does not mean the profit from the sale of the house is not taxable. This profit is taxed under the Income Tax Act, Article 14, Item 4 (i.e., the House Tax). Unlike "the profit obtained from selling crypto assets," which should be included in personal comprehensive income tax under a progressive tax system, the profit from the appreciation of a house is taxed separately under the House Tax, with different tax rates determined by the length of time the house is held. Question 3: "I conduct cryptocurrency transactions entirely on-chain, and the National Taxation Bureau does not even know where I trade; how will they tax me?" Currently, the tax authority does not face the issue of "unable to determine the transaction location" and therefore cannot collect taxes. On the contrary, the tax authority currently determines whether your income is domestic or foreign based on "the physical location of the fiat currency deposited into your account." For example, if you purchased Bitcoin from Binance three years ago and now sell it, ultimately earning 30,000 Tether. If you first transfer the 30,000 Tether to your wallet on Taiwan's MAX exchange and then withdraw 30,000 USD from MAX, this income will be considered domestic income because it was deposited into your account through MAX's Taiwan account; conversely, if you directly withdraw 30,000 Tether from Binance in the United States and wire 30,000 USD to your Taiwan account through a U.S. bank, this income will be considered foreign income because it was deposited into your account through a U.S. account. The biggest advantage of being recognized as foreign income is that you can benefit from the basic income tax exemption for "foreign income below 7.5 million is tax-exempt." Therefore, many people often use foreign banks to wire investment profits back to their Taiwan accounts legally to avoid taxes. Question 4: "Will virtual asset service businesses (such as exchanges) be taxed?" Many people currently question whether virtual asset service businesses are operating underground or evading taxes. However, for compliant virtual asset service businesses (such as exchanges), paying business tax and corporate income tax has been practiced for many years. Taking exchanges as an example, operators regularly charge transaction fees and other service fees from all traders, which falls under the category of sales services. The various service fees charged by exchanges (before deducting costs) are subject to a non-value-added business tax of 2-5% under the Value Added and Non-Value Added Business Tax Act; the income of the exchange (service fees collected - operating costs) is subject to a corporate income tax of 20% based on the Income Tax Act, Article 24. Question 5: "Will 'securities transaction tax' be collected when trading crypto assets?" I have also been asked whether "securities transaction tax will be collected when trading crypto assets?" Although this can indeed occur in Taiwan, most purchases or sales of cryptocurrencies will not be subject to securities transaction tax. In Taiwan, there are indeed crypto assets with securities characteristics, such as the 'Sunshine Green Benefit Debt-type STO' currently sold through Cathay Securities. According to Article 2 of the Securities Transaction Tax Regulations, when selling securities, a tax of one-thousandth of the price of the securities should be levied. Therefore, when selling 'Sunshine Green Benefit Debt-type STO,' the seller will be taxed one-thousandth of the price. Currently, Taiwan has not adopted an "unrealized gains tax" system, which I commend, and I hope the government will not hastily adopt the "unrealized gains tax" system. When government agencies adopt any tax system, they must consider the most extreme situation, that is, "investors in crypto assets can always trade through self-custody wallets to achieve asset concealment and tax avoidance." Because that would be the strategy investors would adopt when the government imposes harsh tax systems. Ultimately, not only would tax revenues not meet expectations, but Taiwan's virtual asset industry would also be severely hindered by strict tax systems, which would be counterproductive.

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