Tax is withheld on Bithumb’s foreign clientsThe National Tax Service (NTS) has said it will withhold tax from foreign customers of Bithumb, Korea’s largest cryptocurrency exchange.
“We confirmed Nov. 25 that the NTS will impose 80.3 billion won [$69.3 million] of withholding tax on our foreign clients,” said a notice uploaded Friday on the Financial Supervisory Service’s data system by Vident, Bithumb’s largest shareholder.
“Bithumb Korea is planning to take legal action against the tax claim so the final payment can be adjusted in the future,” it added.
This is the first confirmed instance of the Korean government taxing cryptocurrency transactions. At the moment, Korea lacks specific laws and taxation standards for crypto assets.
Earlier this month, the Ministry of Strategy and Finance announced that next year’s tax law reforms will include income taxes on crypto assets like bitcoin and ethereum. Industry analysts think the NTS’s move on Bithumb hints at the government’s plan to tax cryptocurrency transactions.
The tax office’s first target is foreign customers trading cryptocurrency on the Bithumb exchange. Withholding tax is paid to the government by the party that pays money in a transaction, in this case the Bithumb exchange, rather than the recipient.
“The taxation follows the principle of where there is income, there is tax,” said Kim Woo-cheol, a University of Seoul professor of taxation, describing the development as a “tax bomb” for the crypto exchange. “Bithumb can pay 80.3 billion won and [theoretically] afterwards collect the amount from its foreign clients, but practically it’s impossible,” he added.
What’s notable about the NTS’s move is that it categorized foreign customers’ crypto-trading earnings as “miscellaneous income.” That category refers to irregular income such as rewards or lottery gains. In domestic tax law, income gained from trading in real estate or stock is recognized as capital gains. Crypto asset trading was not put in this category.
Capital gains tax is collected for every deal, but tax for miscellaneous income is collected once each year. Putting income from cryptocurrency trades under capital gains would have required the government to receive every trading record from domestic exchanges.
“Keeping track of capital gains means [the government has] to know about the principal and profits gained from it, but it’s realistically difficult,” said Ahn Chang-nam, a taxation professor at Kangnam University. “It seems like the NTS took a practical approach in categorizing gains from crypto asset trading as miscellaneous assets.”
Then what was the basis for the 80.3 billion won amount withheld? The NTS based the tax withheld on the amounts withdrawn from accounts by Bithumb’s foreign clients. The withholding tax rate for miscellaneous income is 22 percent including local tax. This means the government’s estimate of foreigners’ withdrawals from Bithumb so far was 401.5 billion won.
“Before the government’s ban on minors and foreigners opening crypto exchange accounts and trading cryptocurrency in December 2017, foreigners in Korea were free to use domestic exchanges,” said a crypto exchange source that requested anonymity.
“So were transactions using fake names. Even for the exchanges, it’s difficult to know who the investors actually are and how much their trading profits are. It’s questionable what the taxation was based on.”
With the withholding having been done without a specific law, it is likely to be challenged. In regards to foreigners that live abroad, the local government can impose taxes on all kinds of income that is not mentioned in tax treaties.
But domestic law also has a rule that taxation cannot be imposed on incomes that are not defined under tax law, which is the case for crypto currency. Another unresolved question is whether cryptocurrency should be seen as a currency or asset.
BY KIM KI-WHAN [firstname.lastname@example.org]
More in Economy
Gangbuk beats Gangnam
600,000 jobs added last year, but many public or welfare
Consumer price gains pick up speed in November
Life expectancy up 7 months for Koreans born in 2019
OECD knocks tenth of a point off Korea's 2020 growth