Flexible rules and API filing in crypto tax

As lawmakers finalize cross-border crypto tax rules, market participants are pressing for a more pragmatic approach to hong kong carf requirements in Hong Kong’s digital asset sector.

HKSFPA pushes for flexibility on CARF and CRS changes

The Hong Kong Securities & Futures Professionals Association (HKSFPA) has urged regulators to ease record-keeping and liability burdens tied to the Crypto Asset Reporting Framework and evolving CRS rules. The association set out its concerns in an advocacy paper published on Monday, highlighting operational and legal risks for firms and executives.

HKSFPA said it is largely supportive of the city’s CARF legislation. However, it called on authorities to apply flexibility on record-keeping requirements and liability exposure, especially for dissolved entities and senior officers. The group was responding to amendments aligned with the Organisation for Economic Co-operation and Development‘s framework.

CARF, proposed in December 2024, aims to enable cross-border exchange of tax information on crypto asset holders by 2028, according to the OECD. Moreover, the initiative will underpin Hong Kong’s participation in global data-sharing arrangements with other early-adopting jurisdictions.

Concerns over record-keeping for dissolved companies

In its submission, HKSFPA said it supports the proposed six-year record retention period, which matches existing Inland Revenue Department and CRS standards. However, the association objected to extending record-keeping obligations beyond the life of a company and onto individuals after dissolution.

“We generally agree with the six-year retention period to align with existing inland revenue and CRS standards, but we have concerns regarding the obligations placed on individuals post-dissolution,” the paper stated. That said, the association stressed that clarity on responsibilities is critical for compliance.

According to HKSFPA, forcing directors or principal officers to remain responsible for records after a company has formally ceased operations could create open-ended, and potentially indefinite, liabilities. Moreover, such a regime could discourage qualified professionals from taking senior roles in crypto-facing entities.

The association recommended that the government explicitly cut off the access of former officers to storage systems, funding, or any legal firm authorized to maintain client data. It argued that this would also clarify dissolved company recordkeeping liability and reduce legal uncertainty.

Citing issues flagged by PwC and the Financial Services Treasury Bureau, HKSFPA proposed appointing an independent third-party custodian to take over record-keeping duties. This custodian could be a liquidator or a licensed corporate service provider, tasked with holding records for the remainder of the statutory period.

Calls for proportional registration and lighter touch for nil returns

On registration, the association was asked about mandatory onboarding of RCASPs with any reporting nexus to Hong Kong. HKSFPA agreed that broader registration would help ensure fair competition and prevent compliant firms being undercut by unregulated operators, especially in the cross-border crypto market.

The group conceded that mandatory registration would assist the Inland Revenue Department in identifying the full population of RCASPs operating in or connected to the city. However, it warned that a one-size-fits-all approach might be excessive for entities that regularly submit nil returns, including many private investment vehicles.

“We recommend a lite registration or a simplified annual declaration process for RCASPs that anticipate filing Nil Returns, to reduce administrative costs while still satisfying the IRD’s oversight requirements,” HKSFPA wrote. Moreover, it argued that a streamlined route would encourage voluntary compliance rather than minimal engagement.

The association said numerous private investment entities fall into this low-activity category and could otherwise face unnecessary layers of administration. It suggested that entities already registered under CARF or holding a business registration number should be allowed to activate CRS registration via a simple portal selection, supporting nil returns simplified registration in practice.

Debate over penalties and reasonable excuse defense

On sanctions, HKSFPA backed the use of administrative penalties as the main tool to address non-compliance, instead of defaulting to criminal prosecution. According to the business rights advocates, this model would lower legal costs for both regulators and industry while still deterring misconduct.

However, the association expressed strong reservations about any “per account” penalty structure similar to rules in the United Kingdom. It specifically opposed a “$1,000 per account/user” model, warning that a single software fault could trigger a cascade of fines absent any intent to evade taxes.

HKSFPA argued that a pure carf penalty per account mechanism risks generating disproportionate outcomes for large platforms with extensive user bases. Moreover, the group suggested that penalties should take account volumes and fault severity into consideration to avoid punishing good-faith actors.

The group recommended that a clearly articulated “reasonable excuse” defense be embedded in the law. “A reasonable excuse defense can be clearly codified for cases where RFIs relied on valid self-certifications that later turned out to be false, provided the RFI performed standard due diligence,” the association said.

Such a clause, it added, would acknowledge the reality that even robust due diligence cannot eliminate all client misstatements. That said, HKSFPA stressed that firms must still demonstrate documented procedures and controls to benefit from any defense.

Push for electronic filing systems and API connectivity

Regulators also sought views on which filing systems crypto asset service providers should use for CARF submissions. In response, HKSFPA strongly favored electronic filing and urged the government to move beyond basic manual upload portals, especially for high-volume institutions.

The association pointed to api xml carf reporting as a more scalable solution for larger financial institutions with complex legacy systems. Direct API connectivity, combined with standardized XML file formats, would enable automated data transmission and reduce operational burdens on reporting entities.

According to HKSFPA, relying solely on manual uploads through an online portal would drag down efficiency for firms handling high transaction volumes and multiple asset types. Moreover, automation could materially cut error rates and improve overall data quality on cross-border tax flows.

The group said both manual and automated options should be fully supported, rather than choosing one at the expense of the other. It added that detailed XML technical specifications and robust testing environments should be provided at least one year before the reporting system goes live, ensuring smooth electronic filing carf submissions from day one.

Broader implications for hong kong carf rollout

As Hong Kong prepares to exchange crypto tax data with other early-adopting jurisdictions, HKSFPA’s feedback underscores the delicate balance between effective oversight and workable compliance. Moreover, the association’s proposals show how targeted adjustments could mitigate legal exposure for executives while preserving the integrity of the regime.

For policymakers, the debate over record-keeping, penalties, RCASP registration and technology standards will shape how market participants experience the new rules in practice. That said, industry input suggests that clear guidance, proportionate obligations and modern reporting infrastructure are crucial if the framework is to function as intended.

In summary, the consultation highlights strong industry support for international tax transparency goals, tempered by calls for proportional record-keeping, sensible penalties, flexible RCASP registration and robust electronic filing tools that reflect the realities of today’s crypto markets.