Crypto Asset Custody in Taiwan: Tax Implications and Legal Risks

Crypto Asset Custody in Taiwan: Tax Implications and Legal Risks

Introduction

Crypto asset custody is a common practice but carries substantial risks due to the complexity of the parties involved and multiple potential tax liabilities. This article aims to provide a thorough analysis of Taiwan's cryptocurrency tax policies, focusing on the risks associated with custody arrangements, and offering valuable insights for investors.

Overview of Taiwan's Crypto Tax and Regulatory Policies

Taiwan's Crypto Taxation Landscape

In the absence of specific crypto tax laws, Taiwan relies on existing tax legislation. Unlike the U.S. or Germany, crypto gains are subject to income tax rather than capital gains tax, similar to practices in India and Japan.

Taiwan's Crypto Regulatory Overview

• In 2021, the FSC extended anti-money laundering (AML) laws to include crypto platforms, mandating transaction monitoring and reporting requirements.
• In 2022, Taiwanese financial authorities announced increased scrutiny of crypto asset transactions by high-net-worth individuals, aimed at combating tax evasion.
• In September 2023, the FSC issued the "Guiding Principles for Virtual Asset Platform and Transaction Business Enterprises (VASP)" to guide operational compliance.
• In 2024-2025, the FSC and Taiwanese financial regulatory bodies significantly increased research and development for crypto tax regulations.
• The "Virtual Asset Service Act" is expected to be submitted to the Legislative Yuan in June 2025, with legislation currently underway.
• On January 13, 2025, Taiwanese financial authorities submitted a written report to the Legislative Yuan's Finance Committee outlining the tax framework for cryptocurrencies in Taiwan.
• In July, the Legislative Yuan's Legislative Affairs Bureau published a special report suggesting specific tax laws for cryptocurrencies, emphasizing the need for clearer regulations and enforcement.

These developments indicate a trend towards regulation and standardization, aiming to provide a fairer and more transparent market environment for the local crypto industry.

Tax and Regulatory Risks of Crypto Asset Custody in Taiwan

The Jay Chou case reveals the challenges crypto assets face under traditional tax laws. A custody arrangement may trigger multiple taxes, including income tax and gift tax, in addition to the risk of scrutiny by tax authorities. As the FSC pushes forward with the "Virtual Asset Service Act," the increased transparency in crypto asset transactions will challenge traditional custody arrangements.

Taxes Involved and Legal Basis

Comprehensive Income Tax

According to the Taiwanese financial authorities' report, profits from non-security crypto transactions are classified as property transaction income. This tax is levied on any profits realized from the sale of Bitcoin. Comprehensive income tax is calculated as follows: Taxable Income = Total Sales Revenue - Original Cost - Necessary Expenses. For large profits, the highest tax rate of 40% may apply.

Gift Tax

If there is insufficient evidence of an "entrusted investment" relationship, the transfer of funds could be interpreted as a "gratuitous gift." Tax authorities reserve the right to presume this based on economic facts. Gift tax is subject to progressive tax rates ranging from 10% to 20%, with the highest rate applying to assets exceeding NT$50 million. Gift tax is calculated as follows: Tax Payable = (Total Gift - Tax Exemption - Deductions) × 20%.

Tax and Legal Risks of Custody

As Taiwan shifts towards specialized tax legislation for cryptocurrencies, it is crucial for investors to stay informed. The "Virtual Asset Service Act" pushed by the FSC is setting up a registration system for platforms and enhancing reporting mechanisms, making it easier for tax authorities to access transaction data. Investors should closely monitor announcements from the FSC and Taiwanese financial regulatory bodies to adjust their strategies accordingly.

Additionally, crypto asset custody arrangements can result in additional tax liabilities and potential asset losses. Under Taiwan's Taxpayer Rights Protection Act, the person who receives the income is responsible for paying taxes. If a custody relationship cannot be proven, tax authorities may impose taxes on the custodian, leading to asset losses for the principal.

To mitigate risks, investors should declare crypto asset gains, maintain detailed transaction records, and implement written agreements clearly outlining the rights, obligations, and tax responsibilities of both parties.

Conclusion

The Jay Chou case illustrates the inherent risks in crypto asset custody arrangements in Taiwan. Despite the decentralized and anonymous nature of cryptocurrencies, the responsibility for tax compliance lies firmly with each investor. By staying informed and proactive, investors can navigate the complexities of Taiwanese crypto tax laws and protect their investments.