Finance Minister-designate Hong Nam-ki indicated last week that the government would levy a tax on cryptocurrencies. Now investors are consulting with lawyers and certified public accountants (CPAs) about the impact of the taxation.
Here are the four scenarios under the current law.
Firstly, the government cannot retroactively levy a tax on income on cryptocurrencies. Thus if the taxation starts in January 2020, the tax office could not impose an income tax on cryptocurrency investment made till December 2019.
Secondly, the tax office could collect inheritance and gift taxes on cryptocurrencies because Korea adopts a negative system in collecting these taxes. In other words, all assets and income, even though not specified in the tax code, are subject to the inheritance and gift taxes, according to lawyers and CPAs.
Thirdly, the tax office has yet to build an infrastructure to collect taxes on the electronic currencies. However, it might be difficult to monitor cryptocurrencies, they added.
For example, the tax office has no way of collecting tax when you buy cryptocurrencies in South Korea and sell them overseas.
The government also has no way of monitoring cryptocurrency trading between individuals as the trading takes place in the decentralized cyber world, they said.
Lawyers and CPAs predicted that global standards and cooperation are necessary for taxation because you can buy and sell cryptocurrencies at any place at any time in the cyber world. They said the government might have difficulty in establishing a mechanism on monitoring money laundering and capital flight.
Lastly, the tax office might arbitrarily interpret the current tax code to impose an income tax on cryptocurrencies retroactively, they said. Under the current law, the tax office can collect tax on income made for the past five years. This is called the five-year statute of limitations for taxation.
