The tax dilemma of the king of South Korea’s cryptocurrencies: the story of Do Kwon being chased for hundreds of billions of dollars in taxes

Author:TaxDAO

Do Kwon was once known as the "King of Cryptocurrency" in South Korea. But with the collapse of UST and the legal charges that followed, the name has become associated with tax evasion and fraud. In May 2022, the National Tax Service of South Korea issued a tax ticket of 100 billion won (about 78 million US dollars) to Do Kwon, co-founder and CEO of Terraform Labs. As early as June 2021, Terraform Labs was under the attention of the Korean tax department for suspected tax evasion. Since his arrest in Montenegro, Do Kwon has been awaiting the final extradition decision. This article will talk about this former cryptocurrency tycoon and the once glorious Terraform Labs empire, as well as the huge tax fines Do Kwon has to bear.  

1. The ins and outs of the Do Kwon case 

1.1 Do Kwon's glory and the rise of Terraform Labs 

Do Kwon was born in Seoul, South Korea in 1991. He received a bachelor's degree in computer science from Stanford University in 2015 and worked briefly as a software engineer at Microsoft and Apple. However, after working for a short time, Do Kwon was disappointed with the lack of "enterprising spirit" in large companies and decided to start his own business. In January 2016, Kwon returned to South Korea to develop and decided to establish his own startup company Anyfi. However, Anyfi's success is not the story we are going to tell today. A true crypto legend began when he and his college friend Nicholas Platias began to study blockchain technology and eventually decided to found Terraform Labs. Terraform Labs' vision is to create a new monetary system, that is, to create a decentralized, stable currency - Terra USD (UST). The birth of UST marked the rise of Do Kwon's Terra Empire, but when laying the foundation for the empire, Do Kwon at that time had a simple idea: to create "the most useful dollar possible." UST and LUNA are core components of the Terra ecosystem. UST is an algorithmic stablecoin pegged to the value of the US dollar. When minting UST, users need to destroy an equivalent amount of LUNA (i.e., 1:1 exchange); similarly, when redeeming LUNA, users need to destroy the corresponding amount of UST. At this time, there is an arbitrage space between LUNA and UST. Traders can destroy and mint UST or LUNA when the price deviates from $1 based on the incentive of interests, thereby ensuring the stability of UST prices through the price-supply-demand relationship. This also means that UST is not backed by external assets, but maintains its price stability through market supply and demand and incentive mechanisms, which is the biggest difference between UST and Tether, USDC or DAI: UST is not collateralized by fiat currency or on-chain assets. 1.2 The collapse of UST and Do Kwon's escape In theory, the mechanism between LUNA and UST should be able to cope with various market fluctuations, but the reality is often more complicated and cruel. In 2022, the collapse of the Terra ecosystem was precisely because this mechanism failed to effectively stabilize the price of UST in the market panic, because the whales sold UST and when the market supply of UST exceeded demand, the price of UST began to decouple, but the system could not adjust the supply of LUNA in time, causing the price of LUNA to fall sharply, so that it was impossible to buy back enough UST through LUNA to keep the latter pegged to the US dollar. Eventually, LUNA and UST entered a double-collapse death spiral, triggering a plunge in the cryptocurrency market, with LUNA falling from an all-time high of $119.51 to almost zero, losing about $45 billion in market value in a week. In South Korea alone, about 200,000 investors suffered huge losses or even lost their fortunes. This unexpected collapse not only destroyed UST, which was at its peak, but also made Do Kwon's empire shaky. With the collapse of UST, Do Kwon began a 10-month escape. During this period, South Korean prosecutors issued an arrest warrant for him in September 2022, and Interpol also issued a red notice. On March 23, 2023, Montenegrin police detained Do Kwon at the airport for forging documents. After learning the news, federal prosecutors in New York quickly charged him with fraud, including conspiracy to defraud, commodity fraud, securities fraud, wire fraud, and conspiracy to manipulate the market. The U.S. Department of Justice therefore requested Montenegro to extradite him to the United States. In addition, South Korea and Singapore, which have legal jurisdiction, have also made extradition requests. At present, although the Montenegrin court has not made a final decision, it is most likely that Do Kwon will be tried in South Korea. 2. Tax evasion charges and potential legal liabilities faced by Do Kwon In addition to fraud charges, Do Kwon and Terraform Labs are also facing huge tax evasion charges. In June 2021, the National Tax Service of South Korea launched a special tax investigation on Terraform Labs' parent company The Ancore Company and Terraform Labs on suspicion of tax evasion. During the tax investigation, the National Tax Service of South Korea found that Do Kwon held 92% of the shares of Terra Singapore, the Singaporean legal entity of Terraform Labs. According to verification, the Singaporean company secretly transferred a large amount of profits to the British Virgin Islands (BVI) in order to take advantage of the BVI's loose tax policy to avoid taxes. As the largest shareholder, Do Kwon is naturally the biggest beneficiary of this tax evasion. This tax avoidance strategy is not uncommon. Samsung Electronics Vice Chairman Lee Jae-yong was summoned by the South Korean prosecutors in 2021 for setting up a shell company in the BVI to transfer profits. This type of overseas tax evasion has always been the focus of the South Korean government. The first step in judging the crime of tax evasion should be to clarify the jurisdiction. In the Do Kwon case, although Do Kwon transferred most of the crypto asset profits to the BVI company through the design of the company's equity structure, greatly reducing the actual tax burden, according to the actual business principles adopted by South Korea, although the company controlled by Do Kwon was registered outside South Korea, it was actually still engaged in crypto asset business activities in South Korea, so it should pay relevant taxes in South Korea. The judgment criteria for tax evasion in South Korea are relatively close to the common standards of various countries. The first point is to judge whether there is tax evasion, that is, not declaring or under-declaring its income, property or other taxable items; the second point is that the taxpayer knows that he is reducing or evading taxes and does so intentionally, because tax evasion generally cannot be caused by negligence, misunderstanding or unconscious behavior; the third point is to reach a certain amount standard. According to the details of the case disclosed by the authorities, Do Kwon was aware of the company's equity structure and tax arrangements. Although South Korea has not clearly stipulated the specific amount standard for tax evasion, the amount of tax evasion by Do Kwon is not small. Therefore, if the South Korean prosecutors can cite legal and sufficient factual evidence, it is almost inevitable that Do Kwon will be convicted of tax evasion, which means that he will face a long prison sentence and be fined a huge tax amount of about 100 billion won. If the charges of financial fraud and other acts are also established, Do Kwon will not only go bankrupt, but also spend the most prime time of his life in prison. 3. Reflection on Do Kwon's tax evasion case: from the king of cryptocurrency to a prisoner In the world of cryptocurrency, the Do Kwon incident is like a bombshell, triggering a deep reflection on the regulation of cryptocurrency assets, especially tax compliance, in the crypto industry. An increasingly prominent contradiction is that, on the one hand, the crypto industry is full of vitality and has been growing exponentially after several bull and bear cycles, producing a huge wealth effect that is rare in human history; on the other hand, governments and regulators have a relatively mature but traditional set of regulatory rules, trying to put the crypto industry under their control. Faced with the emerging crypto assets, the regulatory measures of various governments are certainly considered to maintain financial order and economic stability, but they may affect the normal development of the crypto asset industry. As Trump said when criticizing Gary Gensler, the former chairman of the US SEC, the SEC's past strict regulatory measures are likely to cause the United States to continue to decline in the global cryptocurrency and blockchain fields. Perhaps for a new thing, the most effective help is to wait and see and intervene prudently. From the perspective of tax collection and management, the tax rules of various countries for crypto assets are not clear enough, and the endless innovations in the field of crypto assets make the application of relevant rules ambiguous, which objectively increases the tax burden of the crypto industry. A transparent and stable tax framework that conforms to the characteristics of the crypto industry is imperative. In fact, Do Kwon is indeed dissatisfied with the Korean tax system and believes that he bears too heavy a tax burden under Korean tax law. In comparison, transferring profits and wealth to BVI, which is known for its zero tax rate, is obviously a more economical choice. However, Do Kwon still overestimates his ability to evade taxes and the level of investigation by tax authorities in various countries. In other words, whether UST collapses or not, Do Kwon will inevitably be investigated for tax evasion, but this collapse has accelerated the arrival of tax charges. In a sense, crypto assets are not only a symbol of wealth and status for Do Kwon and thousands of other crypto tycoons, but also a potential bondage. Once they decide to evade taxes or violate other regulatory requirements, these bonds will become real shackles. Although the tax rules on crypto assets are not perfect, before the tax rules change, we still need to pay attention to current tax compliance issues to avoid unnecessary penalties and losses. In order to ensure transaction compliance and avoid tax risks, investors in the crypto asset sector should pay attention to the following: First, improve the internal tax management system. For crypto companies, it is imperative to establish a comprehensive, systematic and rigorous tax management framework. From the issuance and distribution of tokens to the accounting of various business incomes and the monitoring of cross-border capital flows, each link must be included in the consideration of tax compliance. Through a sound internal management system and audit mechanism, the accuracy and completeness of tax information can be ensured, and potential tax risks can be effectively prevented. Second, be keenly aware of policy dynamics and flexibly adjust strategies. The crypto asset industry is still in its early stages of development, and tax policies change frequently and vary greatly from place to place. Investors and companies must pay close attention to the policy dynamics of various countries and international organizations in the field of crypto asset taxation, and keep abreast of the latest regulatory changes and regulatory trends.  

Third, actively leverage professional resources to improve compliance. The tax issues of crypto assets are highly professional and complex. At this time, it is wise to seek cooperation with a team of professional lawyers, accountants or tax consultants who are familiar with crypto asset tax laws and regulations. These professionals can provide accurate tax consulting services, formulate personalized tax compliance plans based on the actual situation of the enterprise or individual, identify potential tax risk points in advance, and provide effective response strategies. At the same time, professional crypto asset tax declaration software can be used for assistance. This type of software can efficiently and accurately process large amounts of complex transaction data, greatly improve the efficiency and accuracy of tax declarations, and effectively avoid tax risks caused by human errors.