Although cryptocurrency payment technology is becoming more and more mature, the exchange of fiat currency and cryptocurrency (i.e. "deposit and withdrawal") is still a core link that Web3 investors cannot avoid. Since cryptocurrency has not yet become a mainstream payment tool, if the crypto assets in investors' wallets or exchange accounts cannot be smoothly converted into fiat currency, their value can only be limited to specific scenarios. However, deposit and withdrawal are directly related to the security of funds. In the case of risks such as account freezing and fraud, how to choose safe and reliable deposit and withdrawal channels and prevent and control risks in all aspects before, during and after the event is a question that every Web3 investor must think about.
1. Compliance platforms: the preferred path for safe deposits and withdrawals
1.1 Why choose a compliance platform
Among the many deposit and withdrawal channels, compliance platforms have become the first choice for investors due to their security and reliability. They have the following advantages:
(1) Regulatory endorsement: Compliance platforms usually hold licenses such as MSB (Money Service Business) or VASP (Virtual Asset Service Provider), indicating that they have passed the review of regulators and are under their continuous supervision. This is both a constraint on the platform and a guarantee for its reputation.
(2) Anti-money laundering measures: Compliance platforms must comply with anti-money laundering (AML) regulations and be equipped with strict funds screening mechanisms to reduce the risk of user accounts being frozen due to the inflow of illegal funds.
(3) Transparent bank cooperation: Compliance platforms usually disclose information about their cooperation banks and accept public supervision. At the same time, they strictly review the qualifications and security measures of banks to ensure the safety of fund custody.
(4) Risk management: Compliance platforms intercept illegal funds through technical means and internal risk control systems to avoid becoming a transit point for money laundering or fraud.
Of course, due to the requirements of compliance supervision, when investors set up accounts and make withdrawals on compliance platforms, they will inevitably need to accept the platform's KYC certification and wait for a certain review period. Although this brings some inconvenience to investors, it can also be regarded as a compromise between the overall security of the platform and the convenience of users themselves. In the long run, the benefits outweigh the disadvantages.
In addition to compliance platforms, KOLs often claim to have channels for withdrawals on platforms such as X and Telegram, and there are also examples of investors making successful withdrawals on their homepages. However, it should be noted that the withdrawal channels provided by these KOLs are closer to over-the-counter transactions and are essentially P2P models.
Compared with withdrawals from compliant platforms, this P2P model of private contact between KOLs has higher risks - KOLs are guaranteed by their own reputation and word of mouth, and lack third-party supervision. When investors transfer crypto assets in their wallets to KOL wallets, they can only rely on them to remit fiat currency based on credit. Once there is a problem with the KOL's capital chain, investors cannot detect it in time and may find it difficult to recover their assets. In contrast, compliant platforms are regulated by national and regional regulatory agencies and are often strong in their own strength. Both security and protection are obviously better than P2P withdrawal channels. Therefore, at present, compliant platforms are still the preferred deposit and withdrawal method for most crypto investors.
1.2 How to identify compliant platforms
After understanding the advantages of compliant platforms for withdrawals, how should we identify and select compliant platforms? At present, there are a certain number of licensed platforms and companies that provide deposit services. Some platforms have even applied for financial licenses in remote areas, remote countries or small countries, and have also squeezed into this market to compete for customers. The large number of platforms often dazzles investors. In fact, identifying compliant platforms can be done in the following four steps: check the license, check KYC, review custody and observe signals. (1) Check the license. Formal platforms are all licensed, and relevant information about the license is generally announced on the official website of the platform. If the platform’s official website is not announced, investors can also first determine the local regulatory agency and then verify it on the relevant regulatory website. (2) Check KYC. Formal platforms generally clarify the KYC, user identity verification process and privacy policy. If you encounter a platform that does not require KYC or certification, then such a platform is likely to have very high risks. (3) Review custody. Fund custody is transparent. Some legal and compliant platforms will publish the names of cooperative banks and custodians, which provides investors and users with a basis for judging whether the platform is reliable. (4) Observe signals. There are also some more dangerous signals that can be easily identified by users. For example, some platforms require users to transfer their USDT to personal accounts. Some third-party intermediaries also advertise that they can bypass risk control and offer high rebates. These signals generally imply that the platform or service provider may not be compliant. 1.3 How to deal with disputes with the platform No matter which method is used to withdraw funds, investors cannot completely avoid the risk of disputes. Although the probability of disputes arising from withdrawals on compliant platforms is lower than that on other channels, this probability can never be 0. So, how should ordinary investors deal with platform disputes? First, users should keep all kinds of transaction vouchers in daily use and transactions, leaving traces of their activities to facilitate evidence when disputes occur; secondly, in terms of rights protection communication, they should also save communication records with customer service in the form of screenshots, recordings, etc., especially record work order numbers, communication time, communication content and other information. Finally, when the official dispute resolution process within the platform cannot achieve the appeal, users can also submit the dispute to the corresponding regulatory agency for appeal, which is another manifestation of the advantages of the compliance platform itself. 2. KYC: The "firewall" of the compliance platform KYC, or "know your customers", is a widely used procedure and practice in financial services, commercial transactions, network security and other fields. It is mainly used to verify customer identity, assess customer risks, and ensure the legality and security of transactions to prevent financial crimes and fraud. KYC is the most important concept in the compliance deposit and withdrawal process, and it is also one of the procedures that most compliance platforms need to authenticate platform users. The importance of KYC to compliant platforms is reflected in two aspects: From a regulatory perspective, the presence or absence of KYC measures is an important basis for regulators to judge whether a platform is compliant. At present, major global regulators have included virtual asset service providers in the anti-money laundering regulatory system. If the platform fails to fulfill its anti-money laundering obligations, it may be severely punished by the regulatory authorities. Previously, the US SEC issued a sky-high fine to a head exchange for such reasons. From the perspective of platform operation, KYC is also a risk prevention and control measure that can prevent illegal funds related to black industries and terrorist financing from flowing into the platform and avoid user accounts from being frozen. The risk of information leakage in the KYC process has caused concerns among some investors. However, "minimum" collection of user information has become the primary principle followed by most compliant platforms in the process of information collection. The laws and regulations of various jurisdictions, represented by the EU GDPR Act, have also put forward regulatory requirements for the platform to handle user data. In addition, compliant platforms such as OSL Pay will also take technical measures such as end-to-end encryption to ensure the information security of platform users: under end-to-end encryption, all information, whether it is user ID or facial data, is encrypted during transmission and storage, and even hackers cannot see the original information; de-labeling allows the user's identity information and transaction records to be separated, reducing the risk of data leakage. In terms of management processes, the platform will also set up authority control - personnel within the platform who are not related to KYC users have no right to view the collected user data, etc., to achieve internal user data isolation. Finally, compliant platforms will also use third-party audits and other measures to check whether their own data is stored legally and in compliance. For compliant platforms, maintaining user information security is consistent with the interests of the platform. While obtaining user information for KYC certification, the platform will also take various measures to ensure that this private information is not leaked. 3. Taxation: Compliance Obligations after Withdrawal 3.1 Why Taxation Is Required When investors withdraw funds through a compliant platform, questions arise as to whether they need to pay taxes and how they should pay taxes. In theory, no matter what type of investor, they need to deal with tax compliance issues in the country and region where they are located. In practice, tax authorities are often able to obtain tax-related information of tax residents through various channels. For example, when investors withdraw funds through a compliant platform, they generally receive cryptocurrencies in their bank accounts. If the bank is within the framework of CRS, then when the user receives legal currency, the bank or other relevant financial institutions will exchange information such as account balances on their accounts back to the tax resident country, and the tax authorities of the tax resident country may inquire about the source and method of obtaining the sudden increase in deposits in the account. Because the vast majority of investors belong to at least one tax resident country, it is almost inevitable to be investigated by the tax authorities and assume tax-related obligations. The idea that "cryptocurrency trading does not require taxation" is not valid, and decentralization does not mean that tax obligations can be eliminated. In order to protect their own rights and interests, Web3 investors can not only establish the awareness of proactive taxation and positive response, but also retain as many types of certification documents and transaction flows related to Web3 gains and losses as possible to respond to possible inquiries from tax authorities.
3.2 What taxes may be involved: Taking Hong Kong and Singapore as examples
To discuss the issue of what taxes may be involved after compliant withdrawals, we must return to the tax nature of cryptocurrencies. Although the regulations of various countries are different, cryptocurrencies are classified as a separate asset class in most cases. Therefore, the types of taxes involved in cryptocurrencies are mainly related to the way they are obtained and accumulated. The following will take Hong Kong and Singapore as examples to briefly analyze the types of taxes that tax residents in the two places may need to pay after compliant withdrawals.
Hong Kong is a typical territorial taxation area, which only taxes income from Hong Kong. This principle applies to most taxes, including profit tax and salary tax. Unlike most countries and regions, Hong Kong only imposes capital gains tax on commercial operations, but not on individual investors. Hong Kong has also established an offshore exemption mechanism for overseas income. For cryptocurrency tax matters, the Hong Kong Inland Revenue Department (IRD) has issued special regulations to guide residents to pay taxes. In addition, according to the "Interpretation and Implementation Guidelines No. 39 (Revised)" (DIPN No. 39) issued by the IRD, cryptocurrencies are divided into three categories: payment, securities and utility. Each type of token has different tax treatment methods. For example, if a security token is issued, the income is generally regarded as capital; if a utility token is issued, and the source of the income is in Hong Kong, it is generally taxable.
Therefore, when Web3 investors in Hong Kong withdraw funds through compliant platforms, they need to distinguish the income they obtain from the behavior of obtaining income and pay taxes: if it is a commercial business behavior (such as long-term and continuous mining), then the income obtained may be subject to capital gains tax; if the relevant income can be successfully classified under capital gains tax, then there is no need to pay taxes; if an individual receives salary, such as receiving a USDT salary, then there is still an obligation to pay salary tax after withdrawing funds. As for the Singapore tax system, it is basically similar to that of Hong Kong, that is, capital gains tax is not levied on individual investors, and business activities are taxed, etc., so the tax obligations for withdrawals are also relatively similar, and I will not go into details. It can be said that there is actually no direct connection between cryptocurrency assets themselves and taxes, and most countries have not specially opened new taxes. How to pay taxes after compliant withdrawals depends on which type of existing taxable income the relevant income is closer to.
It should be noted that if the investor's income comes from commercial mining and other business operations, special attention should be paid to the total deduction of costs, because each type of tax involves different business operations, and the way in which the costs are generated and the way in which they can be deducted are also different. Taking Hong Kong as an example, the income generated by mining is generally regarded as business income rather than capital gains in Hong Kong. At this time, the electricity costs, personnel costs, office costs, server costs, etc. related to this mining business can be used as pre-tax profit deductions and deducted before tax if certain conditions are met. If investors are ultimately unable to enjoy capital gains tax exemption, they can also consider whether they can enjoy Hong Kong's offshore exemption. However, if offshore exemption is claimed, investors may also need to respond to official follow-up inquiries to prove the rationality of the tax exemption claim.
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