Will U.S. Stock Trading Be Taxed? Lawyers Explain the Scope and Standards for Taxation of Overseas Investment Income (AI Translation)

炒美股要征税？律师解读境外投资收入缴税范围与标准

Summary

Since March 1, 2024, China’s annual comprehensive individual income tax declaration period has commenced, prompting local tax authorities to intensify efforts to ensure individuals declare their global income, especially overseas investment gains. Many residents, particularly those engaged in U.S. stock trading, have received official reminders requiring them to self-examine and declare overseas earnings between 2022 and 2024. High-net-worth individuals with offshore brokerage or bank accounts holding over $1 million have been a primary focus, but even individuals with much smaller portfolios have been contacted by authorities and sometimes summoned for in-person discussions[para. 1][para. 2][para. 3].

Examples include Wuhan resident Liu Mo, who started trading U.S. stocks in 2021 with a trading volume of $15 million during 2024, though his account value never exceeded $1 million. Concerns center on whether taxes will be assessed on each transaction or on overall annual net gains, as taxing each profitable trade without accounting for losses would create an unfair, heavy burden for active traders[para. 3][para. 4].

Over the past year, Chinese tax authorities have significantly ramped up scrutiny of overseas income, with a notable uptick in inquiries related to foreign investment returns. Official data shows that residents in regions such as Hubei, Shandong, Zhejiang, and Shanghai have been asked to make back payments for undeclared overseas gains; the largest single repayment reached 1.413 million yuan, with the smallest at 127,200 yuan[para. 5]. The core legal grounds are longstanding: since the 1980 Individual Income Tax Law and its 2018 revision, residents have been required to declare all global income, including nine categories such as labor remuneration, dividends, and capital gains[para. 6].

Much of the recent enforcement relies on CRS (Common Reporting Standard) data, an OECD-designed global framework requiring financial institutions in over 100 countries, including China and its Hong Kong SAR, to exchange account and investment information. The CRS initially targets high-balance accounts (over $1 million), but the threshold may be lowered. Under CRS, brokerage firms like Futu Securities in Hong Kong report clients’ account balances, dividends, interest, and sale proceeds to Hong Kong’s Inland Revenue Department, which then exchanges that information directly with mainland Chinese tax authorities[para. 7][para. 8][para. 9][para. 10][para. 11][para. 12].

However, CRS is only a mechanism; the actual tax is determined and enforced according to Chinese law. While China’s tax law explicitly mentions taxation on interest, dividends, and property gains (at a flat 20% rate), there is no specific provision addressing capital gains from overseas stock trading. Since 2010, personal income from the transfer of restricted shares is taxed as property transfer income, but how to treat frequent or net losses from stock trading remains subject to interpretation and negotiation with local tax authorities. Some cases have resulted in no tax due after loss verification, and the retroactive collection period is generally between three and five years[para. 13][para. 14][para. 15][para. 16][para. 17][para. 18].

There are misconceptions that using brokers in jurisdictions not participating in CRS can conceal income, but such actions constitute tax evasion, not legal avoidance. Chinese law stipulates criminal penalties for substantial tax evasion—up to three years’ imprisonment for evasion over 10% of the tax due and up to seven years for especially large cases. Nonetheless, administrative penalties and back payments are more common than criminal prosecutions so far. The correct approach for taxpayers is to comply fully with self-assessment and seek expert guidance to resolve uncertainties, including the definition of Chinese tax residency for those with dual status or significant time abroad. Disputes over taxable amounts, recognition of income period, or residency status remain open for negotiation and, if necessary, formal challenge[para. 19][para. 20][para. 21][para. 22][para. 23][para. 24][para. 25][para. 26].