After seizing $47 million from crypto tax dodgers, South Korea is looking to tighten the net

• South Korea will be able to seize cryptocurrencies held by tax evaders starting next year.
• The country’s current laws only apply to physical assets that make it difficult to access digital wallets.
• The move comes after tax authorities seized $47 million from crypto tax evaders last month.

Cryptocurrencies will no longer serve as a tax haven for investors in South Korea. The tax authorities have introduced a bill that will allow the seizure of cryptocurrencies from digital wallets starting next year.

This means that an estimated 10% of global crypto transactions will now be under the South Korean government’s purview. Most of the trading takes place over altcoins, but even Bitcoin is often traded at a premium of 20%.

The booming crypto exchanges at the centre of all this activity — especially those who have set up their headquarters overseas but are operating in the country — will be required to transfer the virtual assets of the tax evader to the government upon request as per the new law. According to Korea Times, denying that request could lead to search and seizure of sites ‘as deemed necessary’ by the authorities.

The peninsular nation amped up its crackdown on cryptocurrencies this year. Officials seized more than $47 million from 12,000 citizens accused of tax evasion in June, according to the Financial Times. The investigation was the largest “cryptocurrency seizure for back taxes in Korean history,” according to officials.

Why does South Korea need a new law to confiscate cryptocurrency?

Existing laws in the country only permit property and other physical asset seizures. Crypto assets, on the other hand, are stored with exchanges or wallet companies. This adds a layer of complexity since they are not ‘technically’ physical assets.

Since the existing laws don’t technically apply to digital wallets, tax dodgers could rely on crypto-assets to mask their dirty money.

Even current policies around allowing seizure of assets through a court-granted change in ownership records do not apply to digital or virtual assets.

This change will allow direct seizing of digital assets without any court-approved change. And, the spotlight on overseas tax evasion done by controlled foreign corporations — some of which are crypto exchanges — will intensify.

South Korea needs the additional revenue

South Korea’s Finance Ministry will proceed with 16 proposed revisions in the tax codes on September 3. The bill is expected to go through with minimal opposition since the governing party has a majority in the assembly.

And, having more money in the kitty is critical for the government right now. Tax revenues are currently a major source of income for the country to take care of its ageing population.

South Korea had the lowest birth rate in the world last year. And, just like Japan, it’s buckling up for the future where there will be more dependents within the population than those able to work. This, in turn, will put an impetus on the government to provide adequate social security.

South Korea is ready to accept crypto, but only on its own terms

South Korea has been highly focused on how one can leverage cryptocurrencies to potentially defer taxes, launder money, or fund illegal transactions. It's taking strict measures to ensure crypto exchanges are used for legitimate investment or payments purposes only.

In January, South Korea also began enforcing a requirement that the name on cryptocurrency investors' bank account matches their account at a crypto exchange. At the same time, exchanges were asked to partner with conventional banks to establish these "real name" accounts. Indirectly, creating a custodian service that incorporates cutting-edge technology from exchanges and trust via traditional institutions.

Under the toughened regulations, Korean financial firms have to report alleged illegal transactions to the state-run Korea Financial Intelligence Unit within three days after finding suspicious financial crimes.

While countries are mulling over cryptocurrency regulations for years, there's little progress, and it continues to be the wild west. However, South Korea has managed to gain a considerable lead and is already enforcing regulations in a phased manner.

The tiny country is famous for its technological capabilities due to homegrown giants like Samsung and LG. The new proposed regulations for crypto seizures align with recommendations by the Financial Action Task Force (FATF), a global intergovernmental organisation developed to combat money laundering.

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