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I have a good friend in South Korea. He's been my friend for 15 years and I trust him more than I trust my own family. We even lived together once.

My friend in South Korea is asking me if I'm willing to do Bitcoin arbitrage since the price of Bitcoin in South Korean exchanges is at a 18%+ premium at the moment. However, I'm not sure how I pay tax for the profit since there is no way I can prove how much I made exactly.

  1. Buy Bitcoin in the US.

  2. Send it to my friend's account in South Korea exchange and sell it right away for 18%+ profit. My friend does not have to pay tax for cryptocurrency profit in South Korea.

  3. Convert KRW to USD and send it back to the US.

How do I prove that I made a profit since Bitcoin was sold from my friend's account?

Is this even legal?

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    How is your friend expecting to convert the KRW to USD and send it back? A quick google suggests that South Korea has strict capital controls which are the reason for the price premium in the first place.
    – GS - Apologise to Monica ♦
    Commented Apr 6, 2021 at 6:21
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    For example ccn.com/… - and more generally, why do you think this premium exists if the arbitrage you describe is as easy as you think?
    – GS - Apologise to Monica ♦
    Commented Apr 6, 2021 at 8:41
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    @RodrigodeAzevedo There is also an article about how FTX exchange CEO made profit by using Korean exchange's premium tokenpost.kr/article-52624
    – 왕뚜껑
    Commented Apr 6, 2021 at 17:51
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    @RodrigodeAzevedo I don't think I should. This question isn't about whether this is legal or not. I think this comment section is going that way. My question is about how the tax system works for such trade. I think it's separate.
    – 왕뚜껑
    Commented Apr 6, 2021 at 17:55
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    @RodrigodeAzevedo I don't want to go over why my friend can't buy bitcoin in the US in details. Simply put, you can't open an exchange account without SSN. You can use credit card, but there is limit for most people. Exchanges also charge high fee for foreign credit card purchase.
    – 왕뚜껑
    Commented Apr 6, 2021 at 18:04

4 Answers 4

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You may be overthinking this. From a tax standpoint, your situation isn't conceptually much different from buying a used car for $1000 and selling it the next day for $1200.

The key is going to be good documentation. Use some sort of spreadsheet or software to keep accurate records of every transaction you make. I assume you'll be splitting profits with your friend, so you should keep track of your friend's transactions too so you always have both sides of the numbers in front of you at all times. This is also important so you can track the margin spread vs time delay, to see if you're truly getting 18% markup on average.

You'll know your profit and that's what you'll declare on your tax return. If you were buying and selling stuff for cash, the burden of proof would be similar- it's your documentation, but you also have banking transactions to prove your numbers if anyone ever questioned them.

Regarding your last question:

Is this even legal?

I can't think of any reason it would be illegal from your point of view. However, your friend might be breaking some laws in South Korea, or at a minimum entering a gray area. Why does such a premium exist? Is it legal for your friend to obtain Bitcoin from another source to circumvent the premium?

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  • I believe that TTT is correct that bitcoin can be treated similarly to used cars. Quoting irs.gov/pub/irs-drop/n-14-21.pdf : "For federal tax purposes, virtual currency is treated as property. General tax principles applicable to property transactions apply to transactions using virtual currency. " . I encourage OP to consult that document (as well as irs.gov/businesses/small-businesses-self-employed/… ) for official guidance on how to report such transactions to the IRS. Note that it's possible that your state tax laws are different.
    – Brian
    Commented Apr 7, 2021 at 17:22
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Have you met this friend in real life? This sounds exactly like a scam. Bitcoin doesnt substantially vary in value from place to place save a few countries who heavily restrict it. Beware and double check this really is a friend and not a scammer.

Even if it was not directly a scam this could easily.be a money laundering scheme you could get in serious trouble for.

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    Yes..he's been my friend for 15 years..
    – 왕뚜껑
    Commented Apr 6, 2021 at 6:14
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    I mean..even if I don't intend to, it sounds like money laundering because I can't legally prove how much money I made because Bitcoin was sold from his account and South Korea does not pay tax for Bitcoin.
    – 왕뚜껑
    Commented Apr 6, 2021 at 6:15
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    @왕뚜껑 A US federal money laundering conviction requires the source of the money to be illicit. Simply moving money for random reasons is only controversial in the minds of the people that we don't want to ever improve their circumstances, but it has no basis in legal reality. There are plenty of other issues with you and your friend's plan though, but money laundering isn't one of them, unless the source of the funds are illegal as well. It is up to the accuser to prove the source, and it is up to the accused to pay taxes which may reveal the source.
    – CQM
    Commented Apr 6, 2021 at 8:24
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Assuming it isn't a scam, because you said you have known them for 15 years. Assuming that the opportunity for that 18% gain is also true.

You are proposing the following:

  • You buy $1,000 in bitcoin.
  • You transfer it to your friend.
  • They sell it for KRW equivalent to $1,180.
  • They don't owe any tax on the gain.
  • They convert to back to USD, and transfer the money to you.

Now some would argue there is no gain to put on your 1040 because it was an exchange of gifts. Except the strings attached to the "gift" make not a gift and you would have to claim the income.

The transfer from an international source could be reported by the bank. So the idea that it would not be noticed isn't valid.

To establish the amount of profit, you would have to get copies of the paperwork from your friend, they would have to show how much it was sold for, and what it was converted to. You would want to collect this paperwork at the time of the transfers. You would also want to document the purchase price of the bitcoin. Then keep this paperwork for years.

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This is a very well-known scam.

Be aware that when you fall for a scam there are two disastrous outcomes,

  • You become listed - there's literally a scammer's database of "unbelievably stupid idiots we have been able to scam". You then become subject to far more serious criminal activity, in particular, house robbery and physical attacks.

  • Be aware that you yourself can very easily be prosecuted for money laundering. You are dealing with criminal funds, generally from the most unsavory crime worlds. If you think the authorties in your country will laugh, smile and say "oh gosh, 왕뚜껑 just plain didn't know what they were doing - that dumb kid!" please think again. Even if you don't go to jail it's completely normal that for the rest of your life your every financial move will be scrutinized (at the bare minimum you'l never again be able to use any crypto platforms).

If you actually know the person and they are suggesting such a thing, "friend" is certainly not what they are.

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    Can you suspend judgement for more than 5 seconds?
    – Rodrigo de Azevedo
    Commented Apr 6, 2021 at 11:26
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    And who is the scammer? You don't even know whether the transactions would be exchange-based or OTC. You don't know because the OP forgot to mention it. Until the OP clarifies, the question is unanswerable.
    – Rodrigo de Azevedo
    Commented Apr 6, 2021 at 11:30
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    This isn't a scam and is a known effect in many capital controlled markets on all types of currencies and commodities.
    – Philip
    Commented Apr 8, 2021 at 10:43
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    This answer is nonsense and throws in random fearmongering to boot.
    – BrenBarn
    Commented Apr 10, 2021 at 6:24
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    @BrenBarn Yep, it's a Fattie answer.
    – Brady Gilg
    Commented Apr 13, 2021 at 17:24

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