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[KwonInwook] Explaining virtual assets to the tax man

[KwonInwook] Investors of virtual assets and business operators could always face investigations that look into where their funds come from. Investors don’t have to report their assets at the tax office but their wealth is likely to be suspected as inheritance from their parents. There is, however, no way to voluntarily report investment profit from virtual assets. People are likely to think that there are no ways for tax investigators to look into profit gained from virtual assets, however they should be prepared. According to laws related to inheritance and gift tax, those who gained wealth or paid debts with money that is unlikely to have been their own, are suspected of inheritance. Investigators can look into their source of funds. The National Tax Service unilaterally collects data related to age, job, income and state of wealth. Based on the data, the NTS’ internal system selects which one should be investigated. It is not clear what the standards are for the internal system, but the frequency of their selections have increased lately due to recent real estate regulations. In the past, investigations were rolled out for those who gain unusual wealth. The source of a 1 billion won deposit for jeonse that was obtained seven years ago would be one example. Lately, however, investigators look into sources of 200 million won that was obtained two years ago to buy a sports car. The standard for the amount of funds obtained has been lowered and investigators look into incidents that happened quite recently. Investors are obliged to report financial gain from virtual assets that happened from Oct. 2021 through the Korea Exchange. From 2022 at the earliest, financial investigation could be rolled out for these investors as well. Those who gain the most from virtual asset investment are professional investors. Among those, people in their 20s who haven’t earned that much money in the past are likely to be investigated. If one possesses assets in the form of virtual assets, the tax office cannot know if one has that asset or not. However, if the assets are exchanged into currency or real estate, their wealth is now exposed to the office. There are three ways to respond to tax investigation related to virtual assets. 1) You have to prove that you made an initial investment with your own seed money. If you inherited 100 million won and made it into 1 billion won through virtual asset investments, the difference of 900 million won is exempted from tax. However, you have to pay gift tax on the seed money of 100 million won. Therefore, you have to have evidence to prove that the seed money of 100 million won has been obtained by past income or through loans. 2) Confirm that the reason behind obtaining the virtual asset is investment. Only profit gained from investment on virtual assets is exempted from tax and those that gained for other reasons such as mining could be taxed. In that case, through the investigation, other fund sources such as inheritance or business could be revealed and income tax and gift tax could be levied at the same time. If the history of deposits and withdrawals as well as investment trade are organized chronologically, it is possible to figure out which assets are gained from investment or not. Prior to being investigated, it would be helpful to organize your income in advance. This could be done by a tax practitioner. 3) Don’t worry about the format but explain it all to the revenue officer. Suspicion of inheritance or gifts from parents means that it would be confirmed as inheritance unless you are able to explain that it is not. Therefore it is important to communicate with the officer that the asset or profit you have gained is not inherited. There is no official way to prove the virtual asset investment, but usually people submit their history of deposits and investment trades. Sometimes you have to explain the terms and capital flow to them. If you don’t cooperate with the officer, there could be unnecessary argument and you could be asked to submit more documents. Kwon In-wook, an IW tax office accountant

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