The National Tax Service (NTS) of South Korea confirmed that it will be withholding taxes worth an estimated 80.3 billion Korean won (appr. $70 million) from Bithumb, the nation’s largest digital asset trading platform.
Bithumb Holdings’ largest shareholder, Vidente, which operates Bithumb’s Korea division, confirmed the withheld amount and noted that the tax would be imposed on the exchange’s overseas clients. But that might not happen.
This is notably the first time South Korea’s tax authorities have ordered that taxes be paid on capital gains from digital currency transactions, the report confirmed.
The notice stated:
“Bithumb Korea is planning to take legal action against the tax claim so the final payment can be adjusted in the future.”
The amount of tax to be withheld was determined by taking into account miscellaneous income, meaning irregular revenue sources such as lottery gains, the Korea Joongang Daily noted. The tax will be collected at a yearly rate of 22%, which is reportedly based on the total amount of foreign withdrawals from Bithumb’s platform.
At present, it’s not clear exactly what specific consequences the move might have for the exchange’s customers or the trading platform itself. As mentioned in the report, the South Korean tax collector aims to impose taxes on foreign traders dealing in cryptocurrencies. The withholding tax will be paid to the nation’s government by the entity that transfers funds in a digital asset transaction (Bithumb in this particular case), instead of the exchange’s users.
Kim Woo-cheol, a University of Seoul professor of taxation, remarked:
“Bithumb can pay 80.3 billion won and [potentially] afterwards collect the amount from its foreign clients, but practically it’s impossible.”
The Korea Joongang Daily says that a source familiar with the matter at the exchange noted that even though the Korean government prohibited foreigners from creating accounts on local digital currency exchanges in December 2017, they continued to use the nation’s crypto trading platforms.
The source claims:
“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.”
South Korea’s Income Tax Act does not yet consider cryptocurrency transfers to be taxable and there are no guidelines on taxing digital assets.
Korea’s Ministry of Economy and Finance recently noted that it might create certain regulatory guidelines for taxing cryptocurrency transactions in 2020. The nation’s central bank has released a report noting it will recruit professionals to conduct research on distributed ledger technology (DLT), crypto-assets and central bank digital currencies (CBDCs).
Last year, South Korea’s government placed a ban on anonymous digital currency transactions. The nation’s Special Financial Transactions Information Act, which is presently being reviewed by the National Assembly, says that digital asset exchanges must register their business with the nation’s Financial Services Commission (FSC), and should they fail to submit appropriate registration documents, then they could face up to five years in prison.