Overview: Hong Kong’s Virtual Asset Regulatory Environment

Hong Kong has positioned itself as a leading global hub for cryptocurrency and virtual assets, combining robust regulatory frameworks with tax advantages that attract international crypto businesses and investors. The regulatory landscape underwent significant evolution in 2025, with the Securities and Futures Commission (SFC) launching the comprehensive ASPIRe Roadmap in February 2025 and expanding licensing requirements to cover virtual asset dealing and custodian services.

As of February 2025, nine entities have been granted Hong Kong Virtual Asset Service Provider (VASP) licenses, operating under one of the world’s most sophisticated regulatory frameworks for digital assets. The jurisdiction’s appeal stems from its 0% capital gains tax on investment holdings, clear regulatory guidance from the Inland Revenue Department (IRD), and comprehensive licensing regime administered by the SFC.

Taxation of Cryptocurrency: IRD Guidance and Framework

DIPN No. 39: Digital Assets Taxation Guidelines

On March 27, the Inland Revenue Department issued revised Departmental Interpretation and Practice Notes (DIPN) No. 39 titled “Profits Tax – Digital Economy, Electronic Commerce and Digital Assets.” This guidance establishes the tax treatment framework for virtual assets in Hong Kong.

Three Categories of Digital Tokens

The IRD categorizes digital assets into three distinct types, each with specific tax implications:

Capital vs. Revenue Distinction

The critical tax determination hinges on whether cryptocurrency holdings constitute capital assets or trading stock:

Capital Assets (Tax-Free):

• Digital assets purchased for long-term investment purposes
• Profits from disposal not subject to profits tax
• No capital gains tax imposed on appreciation
• Intent at time of acquisition is determinative

Trading Stock (Taxable):

• Cryptocurrency acquired for trading or business purposes
• Profits subject to profits tax at standard rates
• Assessed using “badges of trade” principles
• Factors: frequency, volume, systematic organization, profit motive

Profits Tax Rates and Application

Key Principle: Profits tax applies only to Hong Kong-sourced profits from cryptocurrency businesses carried on in Hong Kong. The broad guiding principle examines what operations produced the profits and where those operations occurred.

Source of Profits Considerations

A critical tax planning consideration involves determining the source of cryptocurrency trading profits:

• Hong Kong-sourced: Trading conducted through Hong Kong platforms or operations
• Non-Hong Kong-sourced: Trading through offshore exchanges may potentially be treated as non-taxable if gains are sourced outside Hong Kong
• Similarity to securities trading: IRD guidance on source of gains from listed securities trading may provide analogous principles

Special Tax Situations

Airdrops and Blockchain Forks:

New cryptocurrencies received through airdrops (free distribution for publicity) or blockchain forks (protocol divergence) during a cryptocurrency business are regarded as business receipts and assessed accordingly to profits tax.

Salary Paid in Cryptocurrency:

Employment income received in cryptocurrency receives identical salaries tax treatment as fiat currency compensation. The taxable amount is the market value of the cryptocurrency at the time of accrual. Employees must report this on their tax returns as employment income.

Mining and Staking Rewards:

Cryptocurrency mining or staking conducted as a business activity generates taxable profits. Casual or hobby mining by individuals may not constitute taxable trading activity depending on scale and organization.

SFC Regulatory Framework: VASP Licensing Regime

Legislative Foundation

Hong Kong’s virtual asset regulatory framework operates under two primary ordinances:

• Securities and Futures Ordinance (SFO) Cap. 571: Regulates virtual asset trading platforms offering securities tokens
• Anti-Money Laundering and Counter-Terrorist Financing Ordinance (AMLO) Cap. 615: Requires all VASPs serving Hong Kong investors to obtain SFC licensing (effective June 1, 2023)

The ASPIRe Regulatory Roadmap (February 2025)

The SFC launched its comprehensive ASPIRe Roadmap on February 19, 2025, establishing a five-pillar framework to position Hong Kong as a global virtual asset hub:

VASP Licensing Requirements

Corporate Structure Requirements:

• Company incorporated or registered in Hong Kong
• Real local presence with operational substance
• Minimum two Licensed Representatives
• At least one SFC-approved Responsible Officer
• All key personnel must pass “fit and proper” assessments

Financial Requirements:

• Minimum HK$5 million paid-up share capital (HK$10 million for custodians)
• HK$3 million liquid capital requirement
• Excess liquid capital equivalent to at least 12 months of operating expenses

Operational Compliance:

• AML/KYC: Mandatory Know-Your-Customer checks and suspicious transaction reporting
• Travel Rule: Transfer of information for transactions exceeding HKD 8,000 (approximately USD 1,000)
• Asset Segregation: Client funds must be separated from company assets; 98% cold storage requirement
• Governance: Robust internal controls, risk management, and cybersecurity safeguards

Licensing Application Process

Applicants can submit a single consolidated application for both SFO and AMLO licenses simultaneously:

1. Phase 1 Report: External assessor produces report confirming reasonable prospect of full SFC compliance, submitted with application
2. SFC Review: Comprehensive assessment of application materials and corporate structure
3. Phase 2 Report: Second external assessor report confirming full compliance with all requirements
4. License Grant: SFC issues VATP license upon satisfactory completion

The SFC streamlined the application process in January 2025, extending swift licensing procedures to all new VATP applicants to accelerate market development.

2025 Regulatory Developments and Expansions

Stablecoin Licensing Regime (August 2025)

The Stablecoins Ordinance (Cap. 656) became operational on August 1, 2025, establishing a dedicated licensing regime for fiat-referenced stablecoin (FRS) issuers administered by the Hong Kong Monetary Authority (HKMA):

• Minimum paid-up share capital of HK$25 million
• Full reserve backing with high-quality, liquid assets
• Mandatory segregation of reserve assets
• Regular attestation and disclosure requirements

Expansion to VA Dealing and Custody Services (June 2025)

On June 27, 2025, the Financial Services and Treasury Bureau (FSTB) and SFC jointly published consultation papers to expand regulatory coverage to:

Virtual Asset Dealing Services:

• Over-the-counter (OTC) dealers
• Digital platforms facilitating VA transactions
• Mixed-mode operations (physical and digital)
• Brokerage activities including block trading and advisory services
• Simple VA-to-VA and VA-to-fiat conversions

VA Custodian Services:

• Standalone custody service providers
• Standards mirroring traditional financial custodians
• Enhanced capital adequacy requirements (HK$10 million for custodians)
• Cybersecurity and asset segregation mandates

The consultation period concluded on August 29, 2025, with full implementation expected upon statutory commencement with no transitional period.

Product and Liquidity Enhancements (November 2025)

On November 3, 2025, the SFC issued two circulars advancing the VATP regulatory regime:

1. Expanded Product Offerings:

• Modified token admission requirements
• Clarified distribution rules for tokenized securities
• Updated requirements for digital asset investment products
• Enhanced custody service parameters

2. Shared Global Liquidity Framework:

• Integration of SFC-licensed VATP order books with global affiliate platforms
• Cross-platform order matching and execution
• Access to institutional-grade international liquidity
• Robust oversight mechanisms for affiliated platforms

LEAP Framework: Commercial Growth Strategy

Following the ASPIRe Roadmap, Policy Statement 2.0 introduced the LEAP framework to guide Hong Kong’s commercial development as a VA hub:

• Linkage: Integration with real economy applications
• Ecosystem: Development of comprehensive VA infrastructure
• Attractiveness: Competitive positioning for international businesses
• Partnerships: Collaboration with global VA market participants

While ASPIRe focuses on regulatory compliance and investor protection, LEAP adopts a commercial and growth-oriented approach to ecosystem development.

Compliance Risks and Penalties

Unlicensed VASP Operations

Operating a virtual asset trading platform without proper SFC licensing constitutes a criminal offense under both the SFO and AMLO:

• Criminal liability: Prosecution for unlicensed regulated activities
• Significant fines: Substantial monetary penalties upon conviction
• Imprisonment: Potential custodial sentences for serious violations
• Reputational damage: Public enforcement actions and market exclusion

Tax Non-Compliance Risks

Failure to File Tax Returns:

• Mandatory declaration of cryptocurrency trading profits if activities constitute a trade
• Penalties for late filing or non-filing of Profits Tax returns
• Potential assessment of unreported income by IRD

Incorrect Classification:

• Mischaracterizing trading activity as capital investment to avoid profits tax
• IRD may reclassify transactions based on “badges of trade” analysis
• Additional tax, penalties, and interest on reassessed amounts

Source Misrepresentation:

• Incorrectly claiming non-Hong Kong source for trading profits
• Detailed examination of operational location and profit-generating activities
• Potential tax evasion charges for deliberate misrepresentation

AML/CFT Compliance Failures

VASPs must maintain robust anti-money laundering and counter-terrorist financing controls:

• Inadequate customer due diligence procedures
• Failure to report suspicious transactions
• Non-compliance with travel rule requirements
• Insufficient transaction monitoring systems
• Penalties ranging from license suspension to criminal prosecution

Current Market Status and Global Positioning

Licensed VASPs (February 2025)

As of February 2025, nine entities have successfully obtained Hong Kong VASP licenses, demonstrating the jurisdiction’s selective but functional licensing regime. The SFC continues to process applications from international and domestic operators seeking market access.

Global Crypto Readiness Ranking

According to the Worldwide Crypto Readiness Report, Hong Kong maintains its position as the most “crypto-ready” location globally in 2025. Key competitive advantages include:

• 0% capital gains tax for individual investors
• Clear and comprehensive regulatory framework
• Large number of blockchain startups and innovation
• Competitive corporate structure and business environment
• Favorable crypto legislation balancing innovation and protection
• Strategic positioning as Asia-Pacific financial hub

Investor Access Parameters

Current regulatory framework establishes tiered investor access:

Professional Investors:

• Full access to licensed VATP services
• Minimum asset threshold of HKD 8 million
• Institutional investors and sophisticated participants

Retail Investors:

• Limited but expanding access to regulated platforms
• Enhanced investor protection requirements for retail-facing services
• Ongoing regulatory development of retail access parameters

Practical Compliance Recommendations

For Cryptocurrency Traders and Investors

1. Document Investment Intent: Maintain clear records demonstrating whether holdings are capital investments or trading stock from acquisition
2. Track Transaction Details: Record dates, amounts, exchange rates, and purposes of all cryptocurrency transactions
3. Assess Trading Frequency: Monitor trading patterns to determine if activity crosses threshold into taxable trading business
4. Consider Source of Profits: Evaluate where profit-generating operations occur for source determination
5. Seek Professional Advice: Consult tax advisors for classification guidance and compliance planning
6. File Accurate Returns: Declare taxable cryptocurrency profits in annual Profits Tax or individual tax returns

For Virtual Asset Service Providers

1. Obtain Proper Licensing: Do not commence operations without SFC VASP license; plan 12-18 months for application process
2. Establish Compliance Infrastructure: Implement robust AML/KYC, cybersecurity, and asset segregation systems before application
3. Engage External Assessors: Retain qualified professionals for Phase 1 and Phase 2 compliance reports
4. Maintain Adequate Capital: Ensure minimum capital and liquid capital requirements are met continuously
5. Monitor Regulatory Updates: Track SFC circulars, policy statements, and consultations for evolving requirements
6. Prepare for Expanded Scope: Assess whether dealing or custody activities will require additional licensing when new regimes commence
7. Implement Travel Rule Compliance: Ensure information transfer mechanisms for transactions exceeding HKD 8,000

For Stablecoin Issuers

1. Assess HKMA Licensing Requirements: Determine if fiat-referenced stablecoins fall within scope of August 2025 regime
2. Establish Reserve Framework: Implement full backing with high-quality liquid assets
3. Meet Capital Requirements: Ensure minimum HK$25 million paid-up share capital
4. Prepare Attestation Mechanisms: Develop regular reserve attestation and disclosure procedures
5. Segregate Reserve Assets: Establish independent custody and segregation of reserve holdings

Future Regulatory Outlook

Expected Developments

Near-term (2025-2026):

• Implementation of expanded VA dealing and custody licensing regimes
• Finalization of financial influencer regulation framework
• Continued evolution of token admission criteria and product diversity
• Enhanced automated reporting and surveillance infrastructure
• Potential expansion of retail investor access with appropriate safeguards

Medium-term Strategic Goals:

• Position Hong Kong as primary Asia-Pacific virtual asset hub
• Attract major international platforms and institutional liquidity providers
• Integrate virtual assets with traditional financial infrastructure
• Develop comprehensive ecosystem linking VAs with real economy applications
• Strengthen international regulatory cooperation and information sharing

Industry Participants’ Considerations

Businesses and investors should adopt forward-looking compliance strategies:

• Monitor consultation outcomes and statutory implementation timelines
• Engage early with SFC for licensing guidance and application preparation
• Build scalable compliance infrastructure capable of adapting to regulatory evolution
• Participate in industry consultations to shape regulatory development
• Maintain flexible business models accommodating expanded product and service offerings

Note: This article provides general information on Hong Kong’s cryptocurrency taxation and regulatory framework as of December 2025. Tax and regulatory requirements are subject to change, and specific circumstances may warrant different treatment. Individuals and businesses should consult qualified tax advisors, legal counsel, and compliance professionals for guidance tailored to their particular situations. This article does not constitute legal, tax, or financial advice.