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On January 6, 2021, the government of the Republic of Korea unveiled a detailed amendment to the enforcement decree in relation to the taxation of cryptocurrency income in effect from 2022. According to the Ministry of Economy and Finance, the trading income of virtual assets will be included in 'other income' under the income tax law in consideration of international accounting standards and domestic laws. Even if you are not a citizen of the Republic of Korea, we think knowing about the amended enforcement decree is important because of the magnitude of the impact on the Korean cryptocurrency market it will have. In this post, we will cover the key elements of the amendment to the Enforcement Decree of Cryptocurrency Income Tax, which is scheduled to take effect from January 1, 2022.
1. Taxation Subject and Tax Rate
Subject: Profits generated from cryptocurrency trading, gifts received in cryptocurrency, inherited cryptocurrency assets
Rate: (If you profit from cryptocurrency investment) 20% of profits exceeding 2.5 million KRW (Approx. $2,200) per year are paid as other income tax.
2. Tax Base for Cryptocurrencies Purchased Before the Effective Date (January 1, 2022)
Trading profit refers to the difference between the selling price and the buying price (acquisition price) of cryptocurrency. From January 1, 2022, the cryptocurrency price you purchased on a spot exchange becomes the acquisition price. The buying price (acquisition price) of a cryptocurrency held before the effective date will be based on the higher price of the market price of the cryptocurrency on December 31, 2021, the day before the effective date, and the actual reported acquisition price. However, in this case, problems may arise since even the same cryptocurrency may have different prices for each exchange. To this end, the Korean government required all domestic cryptocurrency exchanges to register as a virtual asset business to the financial authorities under the Specific Financial Transaction Act by September 2021. Among the reported exchanges, the exchanges designated by the Director of the National Tax Service will announce the base prices of cryptocurrencies daily. The market prices of the cryptocurrencies on December 31, 2021, are determined as the average of the base prices announced as of 00:00 on January 1, 2022.
3. In case of Unlisted Cryptocurrency in Korean Exchange
In addition to exchanges, the Specific Financial Transaction Act requires all businesses that handle cryptocurrencies to register as a virtual asset business. If there are any businesses that handle cryptocurrencies that are not listed on Korean exchanges, the price disclosed by the businesses will become the tax base. An official from the Ministry of Economy and Finance said that "in the case of virtual assets that are difficult to calculate a reasonable base price because they are not handled in Korea, we will refer to the prices of data providers such as CoinMarketCap or other overseas exchanges."
4. When to Pay Cryptocurrency Transaction Income
For Korean Residents: Once a Year, in May
Profit from trading of Non-Residents such as foreigners: Cryptocurrency exchange will withhold taxes
5. For Accurate Taxation
The amendment of the Enforcement Decree of the Income Tax Act requires all Korean cryptocurrency exchanges to submit quarterly and annual transaction details of exchange users to the government from January 1, 2022.
6. For Decentralized Exchange Users
When this Income Tax Act is enforced, individuals are obligated to pay the related taxes. Therefore, additional tax may be imposed on the principal amount when the government seeks out tax evasion.
According to the amended enforcement decree, it is expected that investments, gifts, and inheritances of mainstream cryptocurrencies such as Bitcoin and Ethereum through Korean exchanges will be taxable. Nevertheless, it is still unclear whether this Act will be a positive opportunity to improve social awareness of the cryptocurrency market or will have the very opposite impact. All traders should have their keen eyes on this issue and see how the Korean cryptocurrency market will change around January 1, 2022.
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