jakiro
author:TaxDAO
Do Kwon was once known as the “king of cryptocurrency” in South Korea.But with the collapse of the UST and the legal allegations that followed, the name was linked to tax evasion and fraud.In May 2022, the South Korean State Taxation Department issued a tax fine of 100 billion won (about US$78 million) to Do Kwon, co-founder and CEO of Terraform Labs. As early as June 2021, Terraform Labs was suspected of tax evasion.It has attracted the attention of the South Korean tax authorities.Since his arrest in Montenegro, Do Kwon has been waiting for a final extradition decision.This article will talk about the huge tax penalty that this former cryptocurrency tycoon and the former glorious Terraform Labs empire, and Do Kwon.
1. The ins and outs of the Do Kwon case
1.1 The glory of Do Kwon and the rise of Terraform Labs
Born in Seoul, South Korea in 1991, Do Kwon received his bachelor’s degree in computer science from Stanford University in 2015 and has since worked briefly as a software engineer at Microsoft and Apple.However, before working for a long time, Do Kwon was disappointed with the current situation of large companies’ lack of “entrance” and decided to start his own business.In January 2016, Kwon returned to South Korea to develop and decided to set up his own startup Anyfi.However, Anyfi’s success is not the story we are going to tell today. A true crypto legend began with him and his college friend Nicholas Platias starting to study blockchain technology and finally decided to create Terraform Labs.Terraform Labs’ vision is to create a new type of monetary system, that is, to create a decentralized, stablecoin—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 casting UST, the user needs to destroy the equivalent LUNA (i.e., 1:1 redemption); similarly, when redeeming the LUNA, the user needs to destroy the corresponding number of UST.At this time, there is arbitrage space between LUNA and UST. Traders can destroy and cast when the price of UST or LUNA deviates from 1 USD based on the incentives of interest, thereby ensuring the stability of UST prices through the price-supply and demand relationship.This also means that UST does not have collateral support for external assets, but maintains its price stability through market supply and demand and incentive mechanisms. This is the biggest difference between UST and Tether, USDC or DAI: UST is not in fiat currency or on-chainAssets are collateralized.
1.2 UST’s Crash 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 complex and cruel.In 2022, the collapse of the Terra ecosystem is precisely because this mechanism fails to effectively stabilize the price of UST amid market panic, as giant whales sell UST, and when the market’s oversupply of UST sharply decreases, the price of UST begins to dean, but the system was unable to adjust the supply of LUNA in time, resulting in a sharp drop in LUNA price, so that it was impossible to buy back enough UST through LUNA to make the latter continue to be pegged to the US dollar.Eventually, LUNA and UST went to a double collapse of death spiral and triggered a plunge in the cryptocurrency market, while LUNA fell 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 and even lost all their money.This unexpected collapse not only destroyed the UST at its peak, but also made Do Kwon’s empire crumbling.
With the collapse of UST, Do Kwon began his 10-month escape life.During this period, South Korean prosecutors issued an arrest warrant against him in September 2022, and Interpol also issued a red warrant.On March 23, 2023, Montenegro police detained Do Kwon at the airport for forging documents.After learning about the news, the federal prosecutor of New York quickly accused him of fraud, including conspiracy to fraud, commodity fraud, securities fraud, wire fraud and conspiracy to manipulate the market. According to this, the U.S. Department of Justice asked Montenegro to extradite him toU.S.In addition, South Korea and Singapore, which have legal jurisdiction, have also filed extradition claims.At present, although the Montenegro court has not yet made a final decision, Do Kwon is most likely to be tried in South Korea.
2. Tax evasion charges and potential legal liability facing Do Kwon
In addition to fraud charges, Do Kwon and Terraform Labs are also facing huge tax evasion charges.The South Korean State Taxation Department launched a special tax investigation into Terraform Labs’ parent company The Ancore Company and Terraform Labs in June 2021 on suspicion of tax evasion.In the tax investigation, the South Korean State Taxation Department found that Do Kwon owns 92% of Terra Singapore, the Singaporean legal entity of Terraform Labs.It was verified that the Singapore company secretly transferred a large amount of profits to the British Virgin Islands (BVI) in order to use BVI’s loose tax policies to avoid taxes, and Do Kwon, as the largest shareholder, is naturally the biggest beneficiary of this tax evasion.This tax avoidance strategy is not uncommon. Samsung Electronics Vice President Lee Jae-yong was summoned by South Korean prosecutors in 2021 for setting up shell companies to transfer profits. This type of overseas tax evasion has always been a key crackdown on the South Korean government.Object.
The first step in judging tax evasion should be to clarify jurisdiction.In the Do Kwon case, although Do Kwon transferred most of the profits of crypto assets to BVI through the company’s equity structure design, greatly reducing the actual tax burden, according to the actual business principles adopted by South Korea, Do Kwon InstituteAlthough the company controlled by the company is registered abroad in South Korea, it is essentially still engaged in crypto asset management activities in South Korea, so it should pay relevant taxes in South Korea.
South Korea’s judgment criteria for tax evasion are similar to those commonly used by countries.The first point is to judge whether there is any tax evasion, that is, not declare or declare less income, property or other taxable items; the second point is that the taxpayer knows that he is reducing or evading tax payments and intentionally does it because of tax evasion.Generally, it cannot be caused by negligence, misunderstanding or unconscious behavior; the third point is to meet a certain amount standard.According to the official case details, Do Kwon is aware of the company’s equity structure and tax arrangements. Although South Korea has not clearly stipulated the specific amount standards for tax evasion crimes, Do Kwon’s tax evasion amount is not small.So if South Korean prosecutors can list legal and sufficient factual evidence, then it is almost inevitable that Do Kwon will be sentenced to tax evasion, which means he will face a long prison term and be sentenced to a huge tax penalty of about 100 billion won..If allegations of his financial fraud and other behaviors are also valid, then Do Kwon will not only lose all his money, but will also spend the most prosperous time in his life in prison.
3. Reflection on Do Kwon’s Tax Evasion Case: From the King of Cryptocurrency to the Prisoner
在加密货币的世界里，Do Kwon 事件犹如一颗重磅炸弹，引发了加密行业对加密资产监管尤其是税务合规监管的深刻反思。An increasingly prominent contradiction is that on the one hand, the crypto industry is full of vitality, but has been growing at a geometric level after several bull and bear cycles, which has produced a huge wealth effect that is rare in human history; on the other hand, governments and监管机构掌握着一套相对成熟但却传统的监管规则，试图将加密行业置于自己的控制之下。面对加密资产这一新兴事物，各国政府的监管举措固然有维护金融秩序、维护经济稳定的考量，但却可能累及加密资产行业的正常发展。正如特朗普在批评美国SEC前任主席 Gary Gensler时所说的，SEC过去的严格监管措施很可能使得美国在全球加密货币和区块链领域的竞争力不断下降。或许对于一个新生事物而言，最有效的帮助便是静观其变、审慎干预。
From the perspective of tax collection and management, the tax rules for crypto assets in various countries are not clear and clear enough. The endless innovations in the field of crypto assets have made the application of relevant rules vague, which objectively increases the tax burden of the crypto industry, one that is in line with crypto assets.行业特点、透明稳定的税收框架势在必行。In fact, Do Kwon is indeed dissatisfied with the South Korean tax system and believes that he has taken on an excessive tax burden under the Korean tax law. Compared to this, transferring profits and wealth to the BVI, which is known for its zero tax rate, is obviously a moreEconomical choice.However, Do Kwon still overestimated his tax avoidance ability 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. It is just that this collapse has accelerated the arrival of tax allegations.In a sense, crypto assets are not just a symbol of wealth and status for Do Kwon and millions of other crypto rich people, but also a potential bondage once they decide to evade taxes or violate other regulatory requirements.These bonds will become shackles of reality
Even though the tax rules on crypto assets are not perfect enough, we still need to pay attention to current tax compliance issues before the tax rules change to avoid unnecessary penalties and losses.To ensure transaction compliance and avoid tax risks, investors in the crypto assets field should pay attention to:
First,Improve internal tax management system.For crypto enterprises, 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 income, to the monitoring of cross-border capital flows, each link must be included in the scope of tax compliance considerations.Through a complete internal management system and audit mechanism, ensure the accuracy and completeness of tax information and effectively prevent potential tax risks.
second,Sharp insight into policy dynamics and flexibly adjust strategies.The crypto asset industry is still in its early stages of development, with frequent changes in tax policies and great differences between regions.Investors and businesses must pay close attention to policy trends in 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 use professional power to improve compliance.The tax issues of crypto assets are highly professional and complex, and it is wise to seek to work with a team of professional attorneys, accountants or tax consultants familiar with crypto assets tax regulations.These professionals can provide accurate tax consulting services, formulate personalized tax compliance plans based on the actual situation of the company 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 a large number of complex transaction data, greatly improving the efficiency and accuracy of tax declarations, and effectively avoiding tax risks caused by human errors.
