【CityLinkers Business School】Crypto Assets Are No Longer Invisible: How CARF Sees Through On-Chain Transactions

Over the past few years, many investors and high-net-worth individuals have regarded virtual assets as a grey area for asset concealment or tax isolation. However, as the global tax transparency process accelerates, this regulatory vacuum may soon be officially declared over.

The Hong Kong government has submitted the “Inland Revenue (Amendment) (Crypto-Asset Reporting Framework and Amended Common Reporting Standard) Bill 2026” to the Legislative Council for scrutiny. If passed by the Legislative Council, the Crypto-Asset Reporting Framework (CARF) is expected to be implemented from 1 January 2027; the first automatic exchange of information is expected to commence in 2028.

Service Providers Must Disclose 4 Key Categories of Data

This means that virtual wealth will no longer be invisible, and the Inland Revenue Department’s regulatory reach has extended into the on-chain world.

The traditional Common Reporting Standard (CRS), which moves from checking balances to checking trajectories, targets the traditional financial system and mainly monitors the annual balances of accounts and related income, making it easy to create loopholes whereby funds are moved before year-end to evade scrutiny.

CARF formally incorporates virtual assets into the existing global tax information exchange network, and its penetrating power lies in tracking transaction trajectories throughout the entire process.

Under the new framework, Reporting Crypto-Asset Service Providers (RCASPs) must disclose four key categories of data in detail to the Inland Revenue Department.

The first is a complete record of crypto-to-crypto transactions: converting Bitcoin into Ethereum or stablecoins such as Tether, whether or not fiat currency is involved, all fall within the scope of reporting.

The second is two-way tracking of fiat currency in-and-out funds: the trajectories of funds entering and exiting from purchases, sales and transfers cannot be concealed.

The third is asset transfer records: even if assets are transferred to non-custodial (private) wallets, as long as the transfer is conducted through a reporting institution, it must be recorded.

The fourth is monitoring of large-value consumption: transactions that must be reported include exchanges between crypto assets and fiat currency, exchanges between crypto assets, and transfers of crypto assets (including retail payments and external wallet transfers).

Many people in the market mistakenly believe that by withdrawing their assets before reporting and storing them in offline cold wallets, they can pull the wool over others’ eyes. This idea is extremely risky.

Virtual assets must ultimately be circulated and cashed out. When huge assets in cold wallets are later transferred back to licensed institutions for cash-out, or used to purchase real estate or equity, if complete on-chain trajectories, historical costs and proof of legitimate sources of funds cannot be provided, strict anti-money laundering scrutiny will be directly triggered, assets may be frozen and huge back taxes imposed, and liquidity will be lost.

In addition, deliberate tax evasion or misreporting may contravene the criminal provisions under the Inland Revenue Ordinance, and upon conviction may result in fines or even imprisonment; the specific penalties under the CARF framework are yet to be confirmed by legislation.

Proactively Prepare for Compliance

Facing the new compliance order of 2027, holders of virtual assets should abandon an evasive mindset as early as possible. First, they may inventory and retain historical on-chain transaction records, in-and-out fund flow statements and cost vouchers, and establish a clear asset ledger.

Second, they should review their tax resident status in different jurisdictions and assess the risk of cross-border double taxation that may arise after CARF information exchange.

In addition, they should review whether the trading platforms and custodial institutions they deal with fall within the scope of CARF regulation and understand their data-sharing mechanisms.

The author suggests that investors should proactively prepare for compliance and consult professional institutions with relevant experience on cross-border tax structures, which is a pragmatic move to safeguard asset security and long-term value.

 

Paxson Fung, Partner, CityLinkers Group