Hong Kong proposes crypto tax breaks to compete as global financial hub

Hong Kong has unveiled a proposal to exempt cryptocurrency gains from taxes for hedge funds, private equity, and family offices.

The tax exemption plan, currently under a six-week public consultation, also covers investments in private credit, overseas property, and carbon credits.

If implemented, the tax break could attract global liquidity and bolster Hong Kong’s digital economy.

According to a recent report, the move is a part of Hong Kong’s strategy to strengthen its standing as a leading crypto financial hub and position it competitively against contending jurisdictions which offer similar tax incentives.

For instance, Hong Kong faces competition from nations like Singapore, which implemented its Variable Capital Company (VCC) framework in 2020.

The VCC framework allows fund managers to consolidate multiple investment portfolios under a single legal entity, providing operational flexibility and tax efficiencies. It now hosts over 1,000 funds, attracting international investors.

In response, Hong Kong has been promoting its Open-Ended Fund Company (OFC) structure, which allows funds to be set up with flexible share issuance and redemption options while benefiting from tax exemptions on certain fund-related activities.

Since October 2023, over 450 funds have been launched under the OFC scheme.

The latest move to introduce tax breaks on crypto gains is an extension of Hong Kong’s efforts to make the city a more attractive destination for global fund managers and investors.

Commenting on the development, Justin d’Anethan, an analyst, described the tax exemption as a “strategic” move.

He noted that Hong Kong aims to attract “talent, capital, and innovation” in a decentralised, fast-moving industry through lower taxes and clear regulations.

Hong Kong’s focus on crypto investing 

As previously reported by Invezz, the proposal was first hinted at by Christopher Hui, Secretary for Financial Services and the Treasury, in late October.

Hui said at the time that the measure forms part of a larger strategy to enhance Hong Kong’s role in managing a broad range of financial assets, including cryptocurrencies.

This effort, he said, was essential for Hong Kong to remain competitive on a global scale.

Hong Kong has made additional strides to position itself as a global crypto hub.

ZA Bank, the city’s largest virtual bank, recently introduced services allowing retail users to trade Bitcoin and Ether. 

In July, the bank was authorised to hold reserve assets for stablecoin issuers under Hong Kong’s new regulations.

Adding to its crypto initiatives, the Hong Kong Exchanges and Clearing Limited launched a Virtual Asset Index Series on November 15.

This platform provides real-time benchmarks for Bitcoin and Ether, offering transparency and reliability for investors engaging in digital asset trading.

Meanwhile, Hong Kong’s Securities and Futures Commission has also shown its interest in licensing more crypto exchanges by the end of 2024. 

Currently, three licensed exchanges operate in the region, serving both retail and institutional investors.

The most recent approval was granted to Hong Kong Virtual Asset Exchange Limited in October.

During the 2024 Hong Kong FinTech Week, Eric Yip, the SFC’s Executive Director for Intermediaries, confirmed that a final list of fully licensed crypto exchanges will be released by year-end.