Absent crypto tax law has led to confusion in South Korea

Recently the South Korean government announced a tentative plan to categorize cryptocurrency trading gains under the capital gains tax scheme. Although the plan is not official, it is highly likely to be passed as law and come into effect for the 2021 tax year. Up until this point, though, there have not been any concrete discernible guidelines for how to tax gains and even purchases made with cryptocurrency trading earnings.

The case of Sung Park (name changed for privacy) is a perfect example of what happens when a country that represents 30% of global retail investments has no rules on how those investors can use their earnings.

Park hit the big time in 2017 by earning roughly $9 million trading Bitcoin in South Korea. In January the next year, he sold 333 Bitcoins on Bithumb worth roughly $4.1 million. He bought a small retail outlet with his earnings for which he paid roughly $400k. Things appear to have been going well for Park who likely expected to rely on the growing value of that building to fund his family’s lifestyle through old age but what he likely did not expect was the tax hassle involved.

The National Tax Service (NTS) last year asked Park for vocational data on the source of the funds he used to purchase the building. He duly submitted appropriate details concerning the Bitcoins he sold, how much they were worth at the time of sale, and other relevant transaction details related to the Bitcoin sale. He submitted an increasing number of documents including transaction data from the past 5 years four times since this April.

The result of his submissions was a holding tax on Park meaning he can’t actually pay taxes on his purchase. Park commented that he was confused by the process at the NTS since there was not yet a standard determining the taxable status of his trading revenue at the time of his purchase. This confusion is reminiscent of the ongoing Upbit fiasco in which the exchange claims that all non-Korean residents of South Korea must have earnings withheld from their funds withdrawals which were only reactivated early this month after being illegally deactivated on January 1st, 2020. Upbit claims that the NTS has guided them to withhold funds only from non-Korean residents but no such official announcement has been issued by NTS on the matter and officers at the service cannot even acknowledge that there is a special arrangement with the exchange.

Park isn’t the only individual spinning plate on the NTS’s fingers while they try to figure out what to do, Waters Kim (name withheld) reportedly transferred roughly $2 million in ETH to his wife’s wallet in December of 2017. The Kims earned nearly $6 million from their 2016 ETH purchase, all of which was kept between the couple and exchanges and sent between each other’s wallets. The transfer of ETH between their wallets would normally be considered a donation under tax law but the persistent ambiguity in South Korean tax law has created some confusion on the matter.

The wife cashed out ETH on three separate occasions to buy a luxury townhouse and land on Jeju Island in 2018. In Jeju, Kim said, “[It was not mandatory to submit a financing plan and the tax office didn’t require any separate materials.]”

Tax accountant Joonbum Won stated in regard to the donations between the couple, “[Currently, the limit for tax-exempted donations between married couples is about $500k. If Kim had donated that $2 million in cash, he would have had to pay tax on that.]” However, since the donation was made in ETH, no tax could be levied on it.

As it is, there is no tax on crypto trading in South Korea and won’t be until 2021 at the earliest. This gaping loophole in the tax scheme has clearly been exploited legally by citizens of the country while the NTS has been scrambling to come up with a way to capture funds anyway.

There has been a long-running disagreement between government entities and industry players over whether income from transactions would be viewed as transferable income, such as with stocks and real estate, or as ‘other income’ in the case of interest, dividends, and lottery winnings. The final decision came down to capital gains which is the taxation scheme adopted by the United States.

This decision ultimately clears up a debate which in the first quarter of 2020 had been speculated on widely and caused no small amount of confusion outside of the certainty that indeed crypto trading would be taxed.

Ultimately a concrete tax scheme regarding cryptocurrency trading will at least mitigate but likely eliminate confusion the likes that the Parks and Kims experienced while just going about their daily lives.

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