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Taxing digital assets in Hong Kong

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Lewis Lu and John Timpany of KPMG analyse the challenges related to the taxation of digital assets in Hong Kong

Fluctuations in the value of many digital assets such as Bitcoin and other cryptocurrencies have interested the likes of crypto-miners and technology start-ups in recent years.

To date there has been no guidance to how cryptocurrencies should be taxed, which has led to divergent approaches on how general charging provisions in the Inland Revenue Ordinance (IRO) should apply to the various forms of cryptocurrency. The issuance of the revised Departmental Interpretation and Practice Notes No. 39 (DIPN 39) is therefore welcomed and a positive sign for the digital asset service industry in Hong Kong. 

Inland Revenue Department (IRD) views 

The taxation of gains (and losses) arising from digital assets will depend on both the type of digital assets and how the assets are used in a taxpayer’s business. The IRD classifies crypto-assets into three categories: 

  • Payment tokens such as Bitcoin which are used as a means of payment for goods and services.

  • Security tokens which provide the holder with ownership interests in the business, such as a debt or a right to a share in the profits of the business. Where the digital tokens constitute “securities” as defined in the Securities and Futures Ordinance, the tokens and activities involving such tokens would be subject to the regulation by the Securities and Futures Commission (SFC).

  • Utility tokens which provide the holder with access to goods or services, and whereby the issuer of the utility tokens normally commits in the future to accepting the tokens as payment for goods and services.

In the case of initial coin offerings (ICOs) involving the issuance of digital tokens in exchange for crypto- or fiat currency to fund the development of a digital platform, the nature of the tokens issued will determine how the tokens should be treated from a tax perspective, rather than the purpose to which token issuance proceeds are put. 

If the tokens represent a security token offering equity or ownership interests in the company, proceeds received from the issuance will be treated as capital in nature and non-taxable. On the other hand, if the tokens only give the holders the right to goods or services without any equity or ownership interests (utility tokens), the issuance proceeds will be treated as a prepayment for goods or services, and the timing of the revenue recognition should generally follow how the token proceeds are reflected in the profit and loss (P&L) statement in accordance with applicable generally accepted accounting principles.

For investors who hold digital assets for long term investment purposes, the proceeds will not be taxable. Whether the assets should be regarded as capital assets or trading stock of a business is a question of fact, having regard to degree, frequency of activity and level of system and organisation, and whether the purpose of the activity is in fact to make a profit. If a business is considered to be carried on, say by trading, exchanging or mining assets, it will only be Hong Kong-sourced profits that are subject to profits tax. Again, this is a question of fact and will require an analysis of where the profit generating activities have been undertaken. 

For taxpayers using cryptocurrency as consideration for ordinary business transactions, for example in the receipt of cryptocurrency to purchase goods or services, the market value of the cryptocurrency at the date of transaction should reflect the amount of sales and purchases.

Finally, employees who receive cryptocurrency as remuneration will be taxed under the salaries tax provisions. The amount to be reported in the employee’s tax return should be the market value of the cryptocurrency at the time of accrual.


The clarification of the IRD is welcomed by the growing digital asset and fintech community in Hong Kong, and will help Hong Kong continue to grow as a centre for institutionalised digital asset investors and service providers.

Whilst the IRD’s approach is consistent with the general profits tax and salaries tax charging provisions, there are many issues which Hong Kong-based taxpayers persons carrying on a cryptocurrncy business would need to consider. Some of the key considerations include: 


Hong Kong-based technology firms who have issued utility tokens by way of ICO through offshore structures will not be able to treat token issuance proceeds as non-taxable simply because the token issuing company is established outside of Hong Kong. If Hong Kong-based teams have a general authority to enter into contracts on behalf of the offshore token issuing company, that company should generally be regarded as carrying on business in Hong Kong.

If the provision of goods or services which attach to the utility tokens are done in Hong Kong, the profits from the ICO will be Hong Kong-sourced and taxable. On the other hand, if services are rendered from outside Hong Kong, or contracts for the purchase and sale of goods are affected from outside Hong Kong, a portion or all profits may be treated as non-Hong Kong-sourced and thus non-taxable.

The IRD’s comments on security tokens that represent ownership interests in the token issuer are clear, namely, that consideration received for the issuance of such interests should be non-taxable capital receipts. This is consistent with how ordinary share issuances are taxed. However, the DIPN does not address security type tokens which legally do not constitute shares or debt in a company but may be akin, to say, a total return swap. In such cases, the terms and conditions of these tokens and their accounting treatment to the issuer will need to be carefully considered.

Sale of cryptocurrency: 

The sale of cryptocurrency would ultimately depend on the facts and circumstances under which the cryptocurrency was sold. If the cryptocurrency is said to have been received by the issuer of tokens for the provision of goods or services, case law would suggest that the character of such gains should generally remain ‘revenue’ in nature if there has not been a separate application of the funds for an investment purpose. Although where the cryptocurrency is no longer needed in the business and there is no intention to trade the cryptocurrency speculatively, there may be grounds to treat such gains as non-taxable. 

If the cryptocurrency is not considered to be held on capital account, any gain on eventual sale will only be taxable if the gains are Hong Kong-sourced. This is not only relevant for ICO issuers but all taxpayers who purchase and sell cryptocurrencies, but all owners of cryptocurrencies who trade for their own account.

For taxpayers carrying on a cryptocurrency business more broadly, the DIPN provides little guidance other than to say the question of whether such profits are Hong Kong-sourced is a question of fact. 

For a detailed discussion on this topic, please see the Hong Kong Tax Alert – Issue 8.

Lewis Lu

T: +86 10 8508 5002 


John Timpany

 T: +852 2143 8790


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