(Part 3) Legislation of Virtual Assets, the Next Step in the Passing of the Specific Financial Transaction Information Act is ‘Taxation’

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Analysis on the impact of passing of the Specific Financial Transaction Information Act on the virtual asset industry (Part 3)

In accordance with the amended Specific Financial Transaction Information Act, virtual asset service providers must toughen user verification and systematically maintain trade history to report suspicious transactions to the Korea Financial Intelligence Unit (FIU). As taxation authorities, the basic taxation infrastructure for virtual assets was established.

As a result, the Ministry of Finance and Economy (MOEF), which is preparing ‘taxation policies for individual virtual asset trading profits’, gained momentum for establishing policies. The MOEF is planning to include taxation policies for virtual assets in the ‘revised tax bill in 2020’ to be announced in late July. It will be an important task to find a reasonable application plan considering the attributes of the virtual assets under the tax law, and whether it is possible to track the transfer price and acquisition cost.

■The basic taxation infrastructure for virtual assets was established through the Specific Financial Transaction Information Act

At the end of last year, the National Tax Service (NTS) imposed a tax of 80.3 billion won on foreign users (non-domestic residents) in Bithumb, a virtual asset exchange, the government policy that the individual virtual asset trading profits were subject to taxation was formalized.

The MOEF countered the criticism that there was no legal basis for taxation on foreign users in Bithumb, and refuted that virtual assets could be interpreted as other income of non-domestic residents under the existing income tax law. Also, they announced that they would prepare a comprehensive taxation policies, including taxation on domestic virtual asset trading profits of domestic residents and non-domestic residents, to be reflected in the revised tax bill in 2020. They included ‘establishing a taxation policy for individual virtual asset trading profits’ in the main taxation policies to be carried out this year.

According to the amended Specific Financial Transaction Information Act, the virtual asset service providers must verify the user’s real name, maintain the trade history for each user separately, and report to the FIU any transactions of more than 10 million won or suspicious transactions. In In addition, they must collect both sender and recipient information when users transfer virtual assets worth more than 1 million won to other services. It is necessary for them to establish a system that records and maintains all trade history for each user and reports when financial authorities request it.

The MOEF is also establishing taxation policies with the expectation that a taxation infrastructure for virtual assets will be prepared through the passing of the Specific Financial Transaction Information Act. The MOEF announce that it will prepare for the development and construction of a technology infrastructure for the submission of information of taxation based on the Specific Financial Transaction Information Act that imposes obligations such as real name verification on the virtual asset exchange.

■It will take a long time to build a taxation infrastructure… Reasonable taxation policies need to be discussed

Since it is expected to take a long time to implement the taxation infrastructure, there are various opinions as to what tax items should be applied to the taxation on virtual asset trading in the revised tax bill to be established in July. The applicable tax items are ‘transfer income tax’ imposed on capital gains generated when disposing of financial assets or real estate, ‘other income tax’ imposed on temporary income such as lottery, and ‘transaction tax’ applied to securities transactions.

Experts agree that the application of transfer income tax is the most reasonable way, considering that the imposition of tax proportional to the virtual asset trading profits is the
main purpose of taxation.

In order to apply the transfer income tax, it is necessary to figure out both the acquisition cost and transfer price of the individual’s virtual assets, but there is a problem that it is difficult to establish a taxation infrastructure for this right now. In addition, it will be more difficult to figure out the transfer gains, as people may trade up to scores of thousands of times a year.

The adoption of transaction tax is a market-friendly policy because it imposes a tax as low as 0.1% of the transaction amount. However, some say that the transaction tax is in the process of being abolished due to the loss of taxation and double taxation, so it can be inappropriate to apply it to the virtual asset that is creating new tax bases.

Other income tax makes it easier to capture taxation because it imposes a tax equivalent to 20% of profits when selling virtual assets to realize profits in Korean won. However, traders must pay the taxes even if they lose money by trading virtual assets. For example, if a trader bought a virtual asset for 1 million won and sustained a loss of 900,000 won and withdrew only 100,000 won, the trader has to pay a tax of 20,000 won.

An alternative is proposed to apply the transaction tax or other income tax to the taxation first, and then convert to the transfer income tax after the taxation infrastructure is established.

Virtual asset service providers, including exchanges, regard taxation as a mandatory requirement to entry into the formal sector, but they hope that financial authorities will come up with reasonable policies as they can be a burden on market growth.

Lim Yoo-kyung(2020.03.12) 가상자산 법제화, 특금법 다음 수순은 ‘과세’
retrieved from https://m.zdnet.co.kr/news_view.asp?article_id=20200312145031&re=zdk

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