[Kwon In-wook] Virtual currency taxation and the Act on Reporting and Using Specific Financial Transaction Information

[Kwon In-wook] My customers frequently ask about the relations between taxation on virtual currency and the Act on Reporting and Using Specific Financial Transaction Information. It’s not only because both the taxation and the enactment of the legislation takes place around the same time, but both impact not only the cryptocurrency industry, but also investors. However, the taxes levied on investment are not related to legislation. So here’s the details of the relationship between the two. # Purpose of the law The taxation law is the foundation on which the government can tax to prevent illegal infringement on personal property rights. The special legislation on reporting and using specific financial transaction information is focused on preventing illegal money laundering. Basically, it targets various criminal actions as well as tax dodgers. Therefore, in the taxation law it clearly details the period in which the government taxes income from investing in virtual currency as well as the way the taxation is calculated and the period in which the investors report profits made from such investments to the tax authority. The special legislation, on the other hand, details the ways financial companies — including the virtual asset exchange operators — report on money laundering. The investigative institutions conduct business according to the criminal law and the tax agency based on taxation law using information collected from financial institutions that report suspicious transactions. The taxation on profits made from virtual currency investment that will be levied starting January 2022 are based on reformed income tax legislation. The reason taxation on investors comes after the enactment of the anti-laundering legislation is because the government institutions will be able to retrieve information on virtual currencies transactions from business operators. The special legislation on virtual currency specifies the requirements related companies must have when filing their businesses to the authority including information security management systems (ISMS) as well as real-name bank accounts. Only those that meet the requirements can continue to turn in additional requests made by the government under the tax law and anti-money laundering laws such as the travel rule, anti-laundering mechanism and related taxation information. However, as it has become difficult to set up the taxable information system before the first report made by businesses on virtual assets, which starts in October 2021, the taxation on the profits that were made from the investment was decided to applied to transactions made after January 2022. # Registering businesses Under the special legislation, virtual assert businesses are defined as those that either sell, purchase, exchange, transfer or arbitrate virtual assets. And those that conduct businesses under the stipulated definition have to report their business to the Korea Financial Intelligence Unit (KoFIU) by Sept. 24 2021. If they don’t, they could face jail time or a fine. Those that fail to meet the basic requirements such as ISMS or real-name bank account, could have their application rejected. In order to conduct business under the tax law, these businesses have to register. While these businesses will be subjected to value-added tax, if they don’t register their businesses they could face an additional tax. The businesses also need to turn in documents that show that they are registered at district offices. Currently virtual asset companies can get a business registration as businesses that exchange or transit blockchain based cryptocurrency or as blockchain technology-related information services. However, if they register as such, it will be difficult to open a corporate bank account. While the enactment of the special legislation starts on March 25 next year, the government will give a six month grace period and officially launch the legislation starting Sept. 24. From then on, businesses will be required to report and get accepted as virtual asset businesses according to the special legislation to be officially recognized. After September, those that conduct virtual asset businesses without reporting to the KoFIU will face a prison sentence of a maximum five years or a 50 million won fine. The CEO of the companies will lose their position if they face more than a fine in relation to the financial laws and thus they will no longer be able to continue conducting a virtual asset business. As such, the number of businesses that commit fraud, especially against investors, is expected to shrink. Kwon In-wook, head accountant of IW Accounting Office

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