[Today] Will there be a comprehensive bitcoin tax bomb next year?
[Today] It has been said that the Korean Finance Ministry is working on an income tax reform bill related to taxing cryptocurrency. The new reform bill will be announced in July and submitted to the National Assembly in September. It is most likely that the new taxes on cryptocurrency will be applied on bitcoin investment starting next year, assuming it passes the national assembly in September. #Crypto: Is income made from investing in bitcoin categorized as "other income?" Where there’s income, there’s taxation. The government’s principle is clear. But nothing has been determined yet. Some countries levy a capital gains tax. That meets that investors should pay taxes on the amount that they earn from their investment. The problem is, in order for the tax authority to levy the capital gains tax, the government needs to know how much the investor has profited. In other words, the authority has to know at what price the investors purchased the cryptocurrency and how much that person has sold it for. The question is, how would the authority obtain this information. For this to happen, the taxation on the profit made from the investment on cryptocurrency has to rely on the honest reporting of the investors, but it is questionable if investors will honestly report on the profit that they have made. Even if they make false claims, the limited resources and ability of the taxation authority at this point would make it difficult to flush out those false reports. As such, the Finance Minister is looking at categorizing taxation on cryptocurrency as "other income." Once categorized as other income, regardless of how much the investor purchased the cryptocurrency, the amount is taxed when the investor liquidates it into hard cash at the exchange. Since the exchange takes the taxed portion when delivering the liquidated cash, the investor doesn’t need to be concerned about having to pay directly to the tax authority. Currently, the basic tax rate on other income is 20 percent, although only 40 percent of that income is actually taxed. If this rule applies, a person withdrawing 1 million won of cryptocurrency from the exchange Upbit would be taxed at 20 percent on 400,000 won. That would mean Upbit takes 80,000 won in taxes and the investors pockets 920,000 won. But what if the 1 million won that the investor is withdrawing is actually a loss from a 2 million won investment? The 80,000 won tax would seem unfair. It is likely that the National Tax Service will refund the 80,000 won that it took as tax if the investors can prove that the 1 million won is actually an investment loss during the period when the tax agency accepts voluntary reporting on comprehensive income for taxation. Basically, the government will take the taxed portion and refund if the investors makes a claim. Other than the problem of being taxed when the investors didn’t make any profit, there’s another problem for investors. Unless there’s an exception in the regulation that means that other income is included when calculating comprehensive income tax. In this case, people with a high income could face a tax rate exceeding 20 percent. For example, if a person's annual salary exceeds 100 million won, they could face a comprehensive income tax rate of 35 percent. When withdrawing 10 million won from a bitcoin investment, the person would be taxed 800,000 won, 20 percent on the 4 million won. However, during May when comprehensive income tax has to be reported to the tax agency, a 35 percent tax rate is applied instead of the 20 percent imposed on other income. This would mean the person would have to pay an additional 600,000 won, 15 percent applied on the taxable 4 million won. The higher a person’s annual income is, the more they would have to pay in taxes on their cryptocurrency investment. However, all of this is speculation. The way things are going within the government seems unfavorable for investors. We will continue updates in regards to tax reforms and strategies that will help save on tax payments. #Insight: Cloud exchange? Won’t be possible in Korea While it’s mostly unknown here in Korea, cloud services are getting huge interest among overseas cryptocurrency exchanges. Not only do cloud services significantly lower initial costs in starting a cryptocurrency exchange and allow sufficient supplies of liquidities, the service is used not only by SME exchanges but also by major global exchanges. Major players such as Binance and Huobi have been expanding through cloud services. But for Korean exchanges, which once were the No.1 in the world, utilizing cloud services is a far-fetch pipe dream. First, there are issues related to the special financial regulations that are stringent on cryptocurrency exchange approval by the government, as well as taxation. It is sad for the country, which once dreamt of becoming the world’s crypto Wall Street.