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Is it possible to tax cryptocurrencies?

Administrator | 2018-01-16 | Views 3586

 

A translation of a column published in the Aju Business Daily at http://www.ajunews.com/view/20180108100012417 by Kim Sang Jun, Certified Public Accountant and member of HMP Law’s Tech & Comms team.

As cryptocurrencies have come into spotlight in Korea, investors may ask whether they are taxable. In this connection, the following taxes should be considered: income tax, corporate tax, capital gains tax, inheritance tax, gift tax, value-added tax, and transaction tax.

First, we must examine whether personal earnings from cryptocurrencies trades fall under business income or capital gains. If a person engages in trading or investments in cryptocurrencies for business purposes, earnings generated will be classified as business income, which will be included in global income and be subject to a progressive tax as part of the total income of individuals. Thus, income tax will be levied on such earnings. On the other hand, if a person does trading only for investment purposes, similar to investments in stocks, earnings have the nature of capital gains. 

According to the Income Tax Act (adopting the positive system regarding capital gains), capital gains tax is deemed difficult to be levied on proceeds from the sale of cryptocurrencies. Given this, tax laws should be rearranged to impose taxes on capital gains. In other countries, capital gains tax is levied on investment returns and income tax is on business activities. Therefore, as the government decides its position, capital gains tax could be levied on cryptocurrency trades.

If a corporation earns income cryptocurrency trades, corporate tax can be levied in accordance with the current Corporate Tax Act. The Corporate Tax Act stipulates that increased assets of a corporation shall be deemed corporate income, regardless of the source, and shall thus be subject to the imposition of corporate tax.

Value-added tax is the most controversial issue. Korean tax authorities show a somewhat equivocal position: if cryptocurrencies are used as a service, they are taxable; but if used as a currency, they are non-taxable.  

In connection with the imposition of value-added tax, there are 2 theories: i) cryptocurrencies are deemed as either an intangible asset with a financial value, or as a work of art and should thus be subject to value-added tax; and ii) crytocurrencies are deemed as a currency, means of payment or financial instrument, and should be thus exempt from value-added tax. Another theory is that either taxation or exemption should apply, in accordance with the details of the trade concerned. In foreign countries, cryptocurrencies are generally exempt from value-added tax. 

Cryptocurrency trading is typically based on a high degree of anonymity. The tax authorities may have practically difficulties in obtaining relevant data. For the purpose of reasonable taxation, proper measures to identify and collect gains on which taxpayers did not file tax returns should be decided upon. The type and details of tax to be imposed on cryptocurrency exchanges are of great importance to secure such measures. The attention of the public is now keenly focused on precisely what taxation policies the government will declare to deal with cryptocurrencies.  


 

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