How should I pay tax for Bitcoin arbitrage?

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.

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.

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.

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?