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BlogsTax Obligations for Domestic Virtual Asset Trading
Currently, there is no explicit legal basis for taxing income from virtual asset trading under the current tax laws in South Korea. As a result, no taxation is imposed. Courts have also weighed in on this matter with rulings that clarify the legal stance. Seoul Administrative Court Ruling The Seoul Administrative Court ruled: "Under the current tax laws, income from virtual asset trading by individuals (residents and non-residents) and foreign corporations is not listed as taxable income under the Income Tax Act and is therefore not subject to taxation." The court provided the following rationale for its decision: Virtual Assets as Non-Tangible Domestic Assets Virtual assets do not qualify as "domestic assets other than real estate" under the former Income Tax Act (Article 119, Paragraph 12, Subparagraph (m)). As virtual assets are stored and maintained across a global network of computers connected through blockchain, they cannot be considered assets located within Korea. Exclusion from Economic Benefits Clause Income from virtual asset transactions does not meet the criteria for "economic benefits derived from assets located within Korea or similar income" under the same statute (Subparagraph (k)). Principle of Tax Legality Under the principle of legality in tax law, tax regulations must be strictly interpreted as written without expansion or analogy unless special circumstances justify otherwise. Enumerative Tax System The Income Tax Act employs an enumerative system, meaning only income explicitly listed in the law can be taxed. Unlisted income remains untaxed. Planned Taxation of Virtual Asset Trading Income The South Korean government plans to implement taxation on virtual asset trading income starting January 1, 2025. Key Provisions of the Revised Tax Laws Income Classification: Revised Income Tax Act (Article 21, Paragraph 1, Subparagraph 27) categorizes "income from the transfer or lending of virtual assets" as other income. Source of Income: Revised Income Tax Act (Article 119, Paragraph 12, Subparagraph (n)) designates this income as domestic source income for non-residents. Withholding Tax Rates: Revised Income Tax Act (Article 156, Paragraph 1, Subparagraph 8, Clause (b)) specifies withholding tax rates for virtual asset trading income, differentiating cases based on whether the acquisition cost is verifiable. Corporate Tax Inclusion: Revised Corporate Tax Act (Article 93, Paragraph 10, Subparagraph (k)) includes virtual asset income as domestic source income for foreign corporations. Implementation Timeline Initially scheduled for January 1, 2022, the enforcement was delayed twice and is now set to commence on January 1, 2025. The taxation will apply to transfers or lending of virtual assets occurring after this date. However, there remains a possibility of further postponement. Current and Future Taxation Implications As of now, there is no tax obligation for income generated from virtual asset trading due to the lack of explicit legal grounds. However, once the revised laws come into effect on January 1, 2025, tax obligations will likely arise. Monitoring and Considerations Tax regulations and their interpretation may evolve. Therefore, continuous monitoring is essential. Specific issues, such as the determination of acquisition costs, handling of transactions through foreign exchanges, and taxation of various virtual asset transaction forms (e.g., DeFi, NFTs), are expected to be clarified before the tax implementation. Stakeholders should stay informed on these developments.
2024-09-14 X (Twitter) -
Blogs
Claim for Damages Against a Domestic Cryptocurrency Exchange
If a cryptocurrency exchange failed to suspend transactions or halt trading despite being informed of a hack involving the issuing foundation of a listed token, resulting in investor losses, what liabilities could the exchange face? Breach of Duty of Care Cryptocurrency exchanges have a duty to protect investors by taking appropriate measures during incidents such as hacking. If an exchange was aware of a hacking incident but failed to suspend trading, this could be considered a breach of its duty of care. Relevant precedents also support this viewpoint. Breach of Contract If an exchange promised to replace an affected token with a new token at a 1:1 ratio but failed to fulfill this commitment, resulting in significant losses for token holders, the exchange may be held liable for breaching its contractual obligations. Unlawful Acts and Liability for Damages Exchanges are obligated to take proper measures to protect investors. If they neglect these responsibilities, their actions could constitute an unlawful act, making them liable for damages under applicable laws. Korean cryptocurrency exchanges are expected to prioritize investor protection. Failure to meet this standard could lead to legal claims for compensation.
2024-09-13 X (Twitter) -
Blogs
Risks of Domestic Cryptocurrency OTC Transactions
Definition of Cryptocurrency OTC Transactions Cryptocurrency OTC (Over-the-Counter) transactions involve the exchange of fiat currency, such as Korean won (KRW), into USDT (Tether) on a continuous, repetitive, and profit-driven basis. How It Works An OTC broker receives requests from specific organizations and facilitates transactions by: Receiving fiat currency (KRW) from individual customers into their account. Depositing the equivalent USDT from their holdings into the customer’s cryptocurrency exchange account as designated by the organization. Charging a commission fee, typically around 5% of the transaction amount. Violation of the Specific Financial Information Act (Special Act) Cryptocurrency OTC operators may be at risk of violating the Specific Financial Information Act (Special Act) in South Korea. If a business engages in repeated brokerage of cryptocurrency transactions for profit without proper registration, it constitutes a violation of the Special Act. The risks escalate significantly if the transactions involve illicit funds, such as those related to phishing schemes, drug money, or gambling proceeds. Special Act Article 7(1): Any business operating cryptocurrency transactions must register with the Financial Intelligence Unit (FIU). Special Act Article 17(1): Failure to comply may result in imprisonment of up to 5 years or a fine of up to 50 million KRW. Legal Precedent and Penalties Recent court rulings in South Korea have affirmed that individuals engaging in continuous, repetitive, and profit-driven cryptocurrency brokerage are classified as Virtual Asset Service Providers (VASPs) under the Special Act. In a notable case, the court imposed a 1 year and 6 months prison sentence based on the frequency and scale of transactions. This decision underscores the gravity of conducting cryptocurrency brokerage without proper registration. Key Takeaways Businesses conducting cryptocurrency transactions as a commercial activity must register with the Financial Intelligence Unit to comply with the Special Act. Violations can lead to severe penalties, including imprisonment and fines. Given the potential misuse of cryptocurrencies in criminal activities such as phishing and money laundering, stricter regulatory measures are necessary to ensure compliance and safeguard the financial system.
2024-09-12 X (Twitter) -
Media Coverage
Fraud Crimes Increased by 10% in the First Half of This Year, 'Online Scams Using Platforms like Telegram Surge'
The number of fraud crimes reported to the prosecution in the first half of this year increased by 10% compared to the same period last year. Experts have analyzed that fraud through social networking services (SNS) such as Telegram and Naver Band has surged. (omitted) Experts noted that scams using platforms like Telegram, Naver Band, and KakaoTalk open chat rooms have become more frequent, leading to a significant increase in victims. While messengers like Telegram were previously used mainly by younger people, more older users have recently joined, resulting in scams targeting people of all ages. Two prominent examples are stock-leading chat room scams and romance scams. Stock-leading room scams involve promising high returns and deceiving victims by claiming to share stock information. Victims are lured into paying to join paid chat rooms with the promise of receiving premium information, only to have hundreds of thousands of won stolen. Romance scams involve fraudulent activities disguised as romantic relationships. A recent example is the case of Jeon Cheongjo, who scammed former fencing national team member Nam Hyun-hee. Other common tactics include scammers posing as foreign military personnel or refugees, sending messages like "I want to come to Korea" or "I want to meet you" to lure victims into sending money. In online scams, while victims often send money via bank transfers, experts have noted an increase in cases where payments are made in virtual assets, making it nearly impossible to recover the stolen funds. Pureun “Ian” Hong, managing partner at Decent Law Firm, commented, "Recently, a wide variety of scams have surged on platforms like open KakaoTalk chat rooms, Telegram, and Naver Band. The common characteristic of these scams is that the perpetrators introduce themselves in an unverifiable online setting and then ask for money. People should be cautious about sending money to individuals they cannot verify."
2024-09-11 Financial News -
Blogs
Supreme Court Ruling: Legal Characteristics and Specificity of Virtual Assets in South Korea
The Supreme Court of South Korea has defined virtual assets as "digital representations of economic value that are not controlled by the state but are granted value through blockchain or other encrypted distributed ledgers, qualifying as property benefits" (referencing Supreme Court Decision 2021Do9855, November 11, 2021). The Court emphasized the distinct characteristics of virtual assets, such as the ability to verify only the addresses of electronic wallets without identifying the user's personal information, and the distributed recording of transaction histories, which set them apart from traditional assets. Furthermore, the Supreme Court noted that virtual assets are not subject to the same level of regulation as legal tender and involve inherent risks in transactions. Consequently, the Court concluded that virtual assets do not warrant the same level of legal protection as legal tender under criminal law.
2024-09-10 X (Twitter) -
Media Coverage
Unregistered Operator BTCC Engages in Illegal Activities Again: 'Korean Language Support and KRW Deposits Available'
It has been revealed that the unregistered virtual asset service provider (VASP) BTCC is promoting Korean language support and KRW transfers while proposing partnerships to domestic blockchain companies. On August 27, it was confirmed that BTCC sent an email to domestic blockchain company A on the afternoon of August 26, offering a partnership with BTCC, which supports the Korean language and accepts KRW deposits. (omitted) Hyeonsu “Elliot” Jin, managing partner at Decent Law Firm, pointed out, "KRW deposits, card usage, and bank account registration could potentially violate the Act on Reporting and Using Specified Financial Transaction Information (Special Act) and the Electronic Financial Transactions Act." Jin further stated, "Since BTCC has not obtained a business license under the Special Act, it seems clear that they are operating illegally." He added, "Since card companies block virtual asset payments, it's unlikely that payments will be processed normally, and there is a risk of involvement in money laundering through illegal means such as bypass payments."
2024-08-28 Digital Asset
