During the COVID-19 pandemic, blockchain technology has gained a lot of attention over its use in vaccine passports and contact tracing systems. “Two major objections to a COVID-19 passport — privacy and security — are dealt with by putting the data on a blockchain ledger. It’s nearly impossible to fake data on a blockchain, and users’ information can be stored securely since information can’t be modified and third parties neither enter nor destroy the data,” according to George Connolly, the President of OneLedger Technology Inc., overseeing the successful development of the OnePass vaccine passport.

Indeed, blockchain has unique features: a distributed database without control by a single party; peer-to-peer transmission; irreversibility of records; and pseudo-anonymity. Blockchain, with these features, is also the technological framework behind the transactions of cryptocurrencies, such as Bitcoin, Ethereum, Ripple and Litecoin. The Financial Action Task Force defines “cryptocurrency” as “a math-based, decentralized convertible virtual currency that is protected by cryptography, i.e. it incorporates principles of cryptography to implement a distributed, decentralized, secure information economy. Cryptocurrency relies on public and private keys to transfer value from one person (individual or entity) to another, and must be cryptographically signed each time it is transferred.”

Cryptocurrencies traded on cryptocurrency exchanges are not “securities” under the Securities and Futures Ordinance as they are not subject to the authorization or prospectus registration provisions that apply to traditional offering of securities. They are more of an investment opportunity.

The taxation and compliance of transactions of these exchanges are of interest to tax professionals and regulators.


In Hong Kong, the Inland Revenue Department (IRD) Departmental Interpretation and Practice Note (DIPN) No. 39 Profits Tax – Digital Economy, Electronic Commerce and Digital Assets was revised on March 2020 to focus on digital assets, including cryptocurrencies. According to the revised DIPN, “profits arising in or derived from Hong Kong from the initial coin offering (ICO) can be charged to profits tax in accordance with the general principles in section 14 [of the Inland Revenue Ordinance].”

Six “badges of trade” apply to determine whether digital assets are capital assets or trading stock. If digital assets, including cryptocurrencies, are bought (e.g. through an ICO or an exchange platform) for long-term investment purposes (i.e. capital in nature), any profits from disposal are not chargeable to profits tax. DIPN 39 states that all the circumstances in the case of cryptocurrency transactions should be considered to determine whether a trade is carrying on, including the degree and frequency of the activity, a business-like manner transaction and the purpose of making a profit. Generally, the market value of cryptocurrencies should accrue to reflect the amount of sales and purchases at the date of transactions regarding payments from customers or for the purchasing of goods and materials.

DIPN 39 clearly states that new cryptocurrencies arising from events undertaken in the course of a business are regarded as business revenues and assessed for profits tax accordingly. These events include “airdrops” – when a new cryptocurrency token is deposited directly into users’ wallets and “forks” – when nodes of the newest version of a blockchain no longer accept the older version(s), which creates a permanent divergence from the previous version.

The Organization for Economic Cooperation and Development’s Tax Challenges Arising from Digitalization – Interim Report 2018 points out that cryptocurrencies and blockchain technology generally have tax evasion risks. To mitigate these risks, taxpayers of cryptocurrency trading are required to keep business records of income and expenditure for a period not less than seven years under section 51C of the Inland Revenue Ordinance. The IRD may consider providing more detailed guidance to educate taxpayers about the taxation of cryptocurrency transactions, such as record keeping, as Her Majesty’s Revenue and Customs in the United Kingdom does.

Regulatory developments

Previously, not all cryptocurrency exchanges operating in Hong Kong were required to have Securities and Futures Commission (SFC) licences, leading to concerns over know-your-customer requirements, safe custody of assets, and anti-money laundering compliance. To address concerns, the SFC issued a position paper in November 2019 and the Financial Services and the Treasury Bureau (FSTB) conducted a public consultation in January 2021 regarding the regulation of cryptocurrency exchanges. The SFC and FSTB proposed a new regime where by both local and overseas exchanges (excluding peer-to-peer platforms) that operate regulated activities in Hong Kong, should apply for a licence and only offer services to professional investors, mainly to strengthen investor protection and address anti-money laundering concerns.

On 24 September, the People’s Bank of China officially prohibited offering trading, token issuance and derivatives of cryptocurrencies, and announced that overseas cryptocurrency exchanges services in Mainland China are illegal. Subsequently, business operations of the cryptocurrency sector need to keep up with the evolving regulatory changes.

Tax professionals working in the cryptocurrency sector need to ensure the compliance of Inland Revenue Ordinance section 51C and DIPN 39 for both the businesses and customers as the industry evolves.

This article was contributed by Kang Li, a Blockchain Project Consultant at GF Digital Technology Pty Ltd., and Jim Wang, a research staff at the Department of Accountancy of Hang Seng University of Hong Kong.

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