South Korea is one of the world’s most active nations for cryptocurrency investment and adoption. Although the nation accounts for only one percent of the world’s population, it accounts for approximately thirty percent of trading. This activity has prompted understandable concern from the government, which has placed significant restrictions on crypto activity. Now, South Korean authorities have announced plans for crypto taxation.
Incoming finance minister Hong Nam-ki announced the plans as part of a tax reform package that redefines the status of ICOs and other blockchain-based innovations. For some time such ventures have been classified as “start ups,” which under Korean law carries significant tax exemptions. Now, this classification will end.
Whereas details are unknown, it is likely that taxes will be levied at the exchange level, with individuals taxed on trades. Such a move would work in concert with recent regulations on South Korean exchanges that require confirmed user identification and prohibit foreign accounts. The exchanges themselves could also be subject to business taxes.
South Korea may be the first nation to announce a crypto tax, but many others are exploring the idea. India, for example, is considering an eighteen percent tax on trading. Britain is also exploring the idea, which could be part of larger regulatory legislation expected next year.
The concept of taxing cryptocurrencies is understandable, yet attempts to do so will present tremendous challenges. One of which is certain to be a backlash by much of the public. Already most nations have income taxes that require profits to be claimed after crypto is exchanged for fiat. Also, many nations require profitable crypto trades to be taxed, even if fiat was not part of the transaction. Adding another layer of taxation onto crypto use would thus be unpopular.
More fundamentally, enforcing taxes on cryptocurrencies will be extremely difficult, if not impossible, on a technical level. Crypto is a supranational currency that, by design, cannot be regulated by a government authority. Likewise, its decentralized nature enables anonymity, or near-anonymity, for most transactions. Without the ability to know the names behind the actions, it is folly to assume that governments can successfully force tax payments.
South Korea’s present solution to the anonymity issue, which requires cooperation from exchanges, highlights the core problems behind attempting to put any government regulations on crypto use. Simply put, Koreans that wish to avoid prying eyes can easily use exchanges based in other countries. No doubt many will should their government attempts to tax their trading.
The exchanges themselves could also push back against unwanted regulation by merely relocating outside of the country. Such moves have already taken place elsewhere. Notably, Binance relocated from Hong Kong to Malta after the Chinese government began to interfere with its operations. In fact, using decentralized exchanges, which are growing in popularity, renders any attempt to regulate crypto on the exchange level impossible.
Thus, the only possible means to effectively tax crypto use is to seek to collect revenue when users exchange cryptocurrency for fiat. However, mainstream use is expected to involve people using crypto to purchase goods and services, avoiding fiat altogether. In fact, governments, and their tax authorities, are not presently equipped to regulate the complex scenarios envisioned for blockchain assets. For example, the Internet of Things (IoT) is expected to involve billions of microtransactions between autonomous devices, smart contracts will automate complex activities that cannot be audited, and atomic swaps could seamlessly transfer value across various blockchains. Attempting to tax such actions would be an exercise in futility. In fact, given the incredible benefits of this advancing technological sector, governments would be foolish to even make such an attempt.
The South Korean government is expected to unveil more details on its upcoming tax policies in a few months. This information will reveal how serious the authorities are at regulating crypto use. More importantly, it will reveal the extent to which these leaders understand the true possibilities of blockchain technology.
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