As the crypto space becomes even more prominent globally, we’re seeing more deliberate attention being paid to taxation and how these assets are treated by regulatory bodies. It has been a mixed bag, especially in Asia. On the one hand, you have China which has banned outside cryptos, opting to push its digital yuan project instead.
On the other hand, you have Hong Kong which seems to be positioning itself as a major force in the crypto world. The latest of its developments in that regard have to do with how crypto assets are taxed.
Hong Kong’s New Crypto Regulations
According to a report from Reuters, Hong Kong is on track to waive tax requirements for investment gains from cryptocurrencies and other non-traditional assets. This was stated in a consultation paper by the Financial Services and the Treasury Bureau and will also impact overseas properties, carbon credits, private credit, and virtual assets.
Between the rise of ETFs for crypto, the growing number of active wallets, and their visibility among consumers, more money is being made from crypto than ever before. And, in a bid to make itself more competitive as a centre for investment, Hong Kong is willing to forego this tax. It should be noted that this exemption doesn’t apply to everyone who invests in crypto.
Instead, it will only be for hedge funds, private equity funds and some family offices. The family offices are especially notable because over 2,700 of them operate in Hong Kong and a majority hold assets worth over $50 million. As such, keeping this business within the region is paramount and this was noted in the report.
“Taxation is one of the key considerations for the wealth asset management sector to decide where to base their operations,” it says.
The State of Crypto in Hong Kong
From this move, it is clear that Hong Kong wants to establish itself as a crypto hub in the East but how is crypto treated there even outside of investment tax? Overall, cryptocurrency regulation does not fall under the jurisdiction of a single entity. While the treasury bureau handles all things tax-related, other bodies in Hong Kong have put our guidance on crypto’s treatment. These have included the Securities and Futures Commission (SFC), the Hong Kong Monetary Authority (HKMA) and the Insurance Authority (IA). Much of these have to do with how crypto is seen and treated.
In terms of crypto being used as a security, the HKMA and SFC are charged with handing out licenses to businesses that want to deal in them like crypto exchanges. These exchanges are also subject to the typical Anti-Money Laundering (AML) and Know-Your-Customer (KYC) processes.
Cryptocurrency is not recognized as legal tender in Hong Kong but there is no law forbidding it from being used as you might find in other places. This has created an environment with many businesses take cryptocurrency for their goods and services and this is only increasing.
One of the notable examples is the gambling industry. Gambling in Hong Kong is rather restricted but online betting sites are finding an audience in and around the region. Many of these players are also taking a liking to crypto. With the chance to profit off the digital asset space, enjoy more privacy, and have control over their gambling, the asset class is only becoming more popular. As Michael Graw writes, crypto casinos are a global phenomenon and Hong Kong is not exempt, so that HK players have been registering to such websites in larger numbers.
In fact, a Hong Kong-based gaming firm called Boyaa was recently announced as one of the biggest holders of Bitcoin reserves in Asia, showing that this is not stopping anytime soon.
Investopedia reports that there are over 170 crypto casinos in Hong Kong and this empowers people to spend their assets with ease.
How It Compares to the Rest of Asia
Crypto adoption within Asia is a mixed bag but shows signs of promise. The Chainalysis crypto adoption index for 2024, for example, has India at the top of the list. Bolstered by a high population and an increasingly innovative tech landscape, it has become a leader in the crypto field. Other Asian countries ranked highly include Vietnam, the Philippines, and Pakistan. Low on the list, we have Cambodia, South Korea, and China. While Hong Kong is not exactly the biggest force in crypto at the moment, it benefits from the overall Asian crypto movement. Plus, its connection to China (which is notably hostile towards crypto) means that it looks better by comparison.
This comes at a very good time given how profitable 2024 has been to crypto. With the spot ETF approvals in the United States, a new all-time high for Bitcoin, and new token launches, the crypto appetite is higher than ever. Tensions between the East and the West mean that many investors might want to move their focus to Asia. Similarly, investors already in Asia might be looking to diversify their portfolios to include cryptos. Rather than deal with the unfriendly environment in mainland China, many might turn to Hong Kong instead.
The Future of Crypto Tax
The state of crypto in Hong Kong and Asia aside, this development shows the bigger role crypto is playing in global tax affairs. For as long as the mainstream financial system has existed, tax incentives have been a way to bring investment into different regions. Countries have become known for being tax havens and this practice continues to this day. Now that cryptos are becoming a staple in investors’ portfolios, regulators are working to court the industry via tax incentives as well. If Hong Kong succeeds in luring and keeping crypto investors, it sends the signal that digital assets are legitimate investments and could prompt other countries to take them more seriously.
In turn, better crypto tax laws will be passed in other countries and this will be to the benefit of crypto users around the world. All in all, this development shows how far the crypto space has come and how far it can go.
