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By Elaine Ramirez
South Korea’s National Tax Service is weighing value-added tax, corporate tax and inheritance tax on bitcoin and other cryptocurrency-based income, as leaders get serious about establishing regulations after a year of explosive activity in South Korea’s digital currency scene.
The government hopes to “clarify criteria” for taxation, an NTS official who spoke on the condition of anonymity told Bloomberg Tax Dec. 6.
South Korea is one of the world’s biggest markets for bitcoin and ether, but digital coins are unregulated because the Financial Services Commission doesn’t recognize them as legal tender or financial products.
“The domestic cryptocurrency market is expanding extremely quickly, and as the market grows, it becomes more difficult to allow an asset with liquidity circulating within the market without imposing tax,” the official said. The NTS and Ministry of Strategy and Finance are also considering requiring cryptocurrency exchanges to submit their transaction data, the official said.
The idea aligns with suggestions from a Dec. 5 NTS forum, according to a Dec. 5 statement. South Korean leaders, including Prime Minister Lee Nak-yeon, have previously warned money laundering, drug trafficking, and pyramid schemes could balloon if cryptocurrency remains unregulated.
The Ministry of Justice on Dec. 4 took over a Financial Services Commission task force—which includes the NTS and other agencies—working to establish policy in the area. That handover is a signal that the government is focusing on tackling crime, said Steve Ahn, a senior foreign attorney at Seum law firm. The group includes government representatives from tax, finance, and trade focused on issues like identity verification, Ponzi-type multilevel marketing schemes, speculative gambling, and initial coin offerings — a means of selling a new digital coin as a fundraising tool for companies.
“The FSC is more focused on financial products and services while the Ministry of Justice is looking at it from a different angle — used to being strict, taking harsh positions and wanting to prosecute crimes. So I think this is a big change,” Ahn told Bloomberg Tax.
The NTS aims to clarify when VAT can be imposed on cryptocurrency. Taxation is appropriate when it is a good, but not if it is a means of payment in place of money, the NTS said in the Dec. 5 statement. It is also considering whether to tax the buying, selling, and mining of cryptocurrency.
The NTS will also consider whether business income related to cryptocurrency can be subject to income tax or corporate tax under the current taxation law, although separate accounting standards such as asset classification and fair value measurement method of cryptocurrency are required, it added.
Inheritance tax may also be applicable as cryptocurrency can be regarded as property with economic value, the NTS said. But it added the current income tax law does not list them as subject to taxation, so supplementary regulations are needed.
Exchanges earn a commission in virtual currency trades, but there is no taxation because there is no relevant tax base, Kim Byeong-il, a professor in Kangnam University’s Department of Economics and Tax Administration, said in remarks at the Dec. 5 forum. Income and corporate tax could be applied once separate accounting standards for crytocurrency-related income are established, he said.
There are gray areas because the government had been largely hands-off cryptocurrency regulation before it created a task force in September. That means the NTS, which is part of wider governmental efforts on regulation and taxation, first needs to define tax rates for cryptocurrency gains before it can tackle money laundering, Ahn said.
“What they need to do is come up with a classification so they can tax gains,” Ahn said.
Koo Tae-eon, managing partner at Tek & Law, told Bloomberg Tax that if it is a currency “it may be subject to tax on transactions, but because it isn’t recognized as an official medium for financial transactions, it cannot be regulated in its current form.”
And in order to impose income tax, the government would need to amend its law so cryptocurrency could be considered a listed asset, said Kim Jin-hwa, co-representative of the Korea Blockchain Association.
“For that to become a reality, it takes a lot of time,” he said. “Even before that, regulations on the cryptocurrency exchange must precede it, so in my opinion, the actions from the NTS seem like a gesture or signal to the market.”
Regulating crimes such as money laundering through tax policies may be difficult to impose, Prosecutor Choi Jee-seok of the Ministry of Justice’s Office of Policy and Planning told Bloomberg Tax. “As of now, the side effects are quite big, so it may go through directions that block side effects.”
Part of the challenge stems from the many nuances of money laundering, Ahn said. Individuals who want to transfer money abroad can buy a digital currency with Korean won and send it to a cryptocurrency account abroad to cash it out in other fiat currencies. With a bank-to-bank transaction, the paper trail is clear and banks are strictly regulated. But Korean regulators don’t have a grip on how to regulate the crypto trail, he said.
Regulators may try to impose a transfer limit among Korean exchanges or require an identity verification system, Ahn said. Most, if not all, the local exchanges already voluntarily require identity checks for new user accounts, he said.
On Dec. 6, the Korea Blockchain Association said its member associations, including two crypto exchanges, would in 2018 begin barring individuals from holding multiple accounts to fight fraud.
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The National Tax Service's statement can be found, in Korean, at http://file.nts.go.kr/wtsnts_upload/html_result_new/201712/388985/f5edfb133ed1f611ab198049c5c9000d.htm
Copyright © 2017 The Bureau of National Affairs, Inc. All Rights Reserved.
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