Overseas financial account reporting rules for virtual assets to be tightened

Threshold below 500 million won likely to be lowered to widen net

Govt cites Korea-US tax treaty to address gap in US transaction data

[Created using ChatGPT]
[Created using ChatGPT]

With virtual asset taxation set to take effect next year, a growing number of investors are exploring ways to sidestep the levy — most notably by trading perpetual futures on overseas exchanges rather than holding spot crypto. In response, the government has told the National Assembly it can narrow enforcement blind spots through existing reporting requirements and cross-border information sharing, and has confirmed it is reviewing plans to strengthen disclosure obligations for virtual assets under the overseas financial account reporting regime.

The government's position was laid out in a document titled "Response Measures by Tax Issue," obtained Thursday through the National Assembly's Finance and Economy Planning Committee. According to the document, authorities said they can use the overseas financial account reporting system to identify individuals suspected of failing to report — or underreporting — virtual asset income, and to verify the accuracy of submitted disclosures. The document also stated that the government would "review, if necessary, measures to strengthen virtual asset-related reporting obligations when filing overseas financial account reports," though it did not specify the scope or method of any such tightening.

Under the current overseas financial account reporting regime, residents and domestic corporations must file a report in June of the following year if the combined balance of their overseas financial accounts exceeded 500 million won ($377,000) on even a single day at the end of any month during the previous year. Virtual asset accounts have been included in the reporting requirement since June 2023. A tax accountant said the obligation could be expanded by lowering the reporting threshold for virtual assets to bring more holders into scope, or by requiring more detailed information to be submitted.

The system can then be used to check for non-reporting or underreporting, officials said. According to the National Tax Service, virtual asset holdings reported through this year's overseas financial account filings totaled 10.5 trillion won, with 2,362 individuals and corporations combined submitting disclosures. The figure represents the value of virtual assets held in overseas accounts, not trading volumes or capital gains. Notably, 2,307 individuals reported holding 9.8 trillion won in overseas virtual assets this year — increases of 1.9 percent and 5.4 percent, respectively, from the previous year in both the number of filers and the amount reported.

A strategy dubbed the "overseas exchange perpetual futures 1x long method" has been circulating in investor communities. The approach involves taking a long position on perpetual futures markets at overseas exchanges such as Binance and Bybit with leverage set at 1x, rather than buying spot bitcoin on a domestic exchange.

The mechanics are straightforward. An investor buys perpetual futures on an overseas exchange with leverage set at 1x. For example, using 1 million won as margin to buy 1 million won worth of bitcoin futures, a 10 percent rise in the bitcoin price would yield a profit of about 100,000 won after costs — roughly the same price exposure as holding 1 million won in spot bitcoin.

Under the current Income Tax Act, next year's taxable events will be limited to income earned by buying, selling or lending spot crypto. A combined rate of 22 percent — comprising a 20 percent income tax and a local income tax — applies to annual income above the basic deduction of 2.5 million won. Because the Income Tax Act operates on an enumeration principle, profits from overseas perpetual futures sit in a regulatory gray zone. Tax authorities have also stated they can only enforce what is explicitly written in the law.

The government also plans to use the Crypto-Asset Reporting Framework, or CARF, alongside the overseas financial account reporting system to obtain overseas transaction data. CARF is a regime under which tax authorities collect virtual asset transaction data on foreign residents from virtual asset service providers and exchange it with partner jurisdictions; it is set to take effect in 2027. Information to be exchanged includes personal details such as the trader's name, address, jurisdiction of residence and taxpayer identification number, as well as the type of virtual asset, transaction type, total amounts paid and received, total transaction volume and number of transactions.

However, the United States is not scheduled to begin CARF information exchanges until 2029, raising concerns about a gap in transaction data for the years before that. The government said that because CARF exchanges the previous year's transaction data in the following year, it expects to obtain 2028 transaction data once the US begins exchanges as planned in 2029.

For transaction data from 2027 — the first year taxation is set to apply — the government said it is reviewing separate measures. It told the National Assembly it would consider strengthening virtual asset reporting obligations under the overseas financial account regime if needed, and is also looking at using the information exchange provisions of the Korea-US tax treaty. Officials explained that even before CARF takes effect, the treaty provides a legal basis for requesting information from US tax authorities on Korean residents where there are specific grounds to suspect tax evasion.

Cross-border virtual asset transfer records will also be used to trace tax sources. According to the National Tax Service, an amendment to the Foreign Exchange Transactions Act taking effect Dec. 3 will require virtual asset transfer service providers to report to the Bank of Korea any transfers of virtual assets to overseas operators or personal wallets. That information will be shared with the National Tax Service and other agencies for use in probing illegal transactions.

Investigations into the source of funds used to acquire high-value assets such as real estate and shares were also presented as an enforcement tool. Even if profits from virtual asset trading go unreported, authorities said they can detect undeclared income and pursue back taxes by tracing the origin of funds when those gains are used to purchase other assets.

Meanwhile, calls within the ruling party to delay the tax are gaining momentum. The government has maintained in principle that virtual asset taxation should proceed as scheduled next year, but the debate has intensified following the national audit season. Democratic Party of Korea leader Kim Min-seok said Thursday that "given the favorable revenue environment, this is not a matter to be decided on the basis of revenue collection," adding that "it is time to begin focused discussions on whether to proceed with taxation as planned or to refine the regime."

A shift in the government's tone is also becoming apparent. Finance Minister Lee Hyung-il said at his confirmation hearing last month that taxation should proceed as planned, but said more recently at the national audit that he would seek broad input from industry and experts. Financial Services Commission Chairman Lee Eok-won also weighed in, saying "various circumstances need to be fully considered" and signaling that a cautious approach to the timing of taxation and any refinements to the regime was warranted.


forest@heraldcorp.com
kyoung@heraldcorp.com