ASIA: Korea postpones crypto taxing again. What’s next?

South Korea has postponed its cryptocurrency trading tax for the third time, following a last-minute agreement between opposing parties just a month before the policy’s scheduled implementation.

The original plan aimed to impose a 22 percent tax on annual crypto income exceeding 2.5 million won ($1,750) starting January 2022. However, the tax will now take effect in 2027.

While the delay allows for addressing structural issues and ensuring fair taxation, critics view it as a setback, noting that many advanced economies already tax crypto gains.

Investor backlash

The decision to delay comes amid growing investor concerns that taxation could dampen market sentiment.

As other capital markets stagnate, the cryptocurrency sector has emerged as a key investment avenue. Government data shows the market capitalization of virtual assets surged 27 percent on-year to 55.3 trillion won as of June, with daily trading volumes reaching 20 trillion won. The number of registered accounts on domestic exchanges rose 8 percent, to 19.61 million, compared to last year.

In contrast, Korea’s stock market has struggled, with margin deposits falling nearly 10 trillion won from 59.5 trillion won at the beginning of the year to 49.9 trillion in November. Daily trading volume in stocks, around 10 trillion won, lags well below the levels seen in crypto markets.

The delay also reflects the political sensitivity of the issue. With around three-quarters of South Korea’s 7.88 million crypto investors under the age of 50 — almost half under 40 — no political party wants to alienate millions of younger voters amid a period of political unrest and economic slowdown.

Furthermore, the recent cancellation of a proposed financial investment income tax, which had a higher threshold of 50 million won, has added to the sense of unfairness among crypto investors.

Taxing overseas transactions

A key regulatory challenge for cryptocurrency taxation in Korea is tracking overseas trades.

While the local tax authorities can currently access data from domestic exchanges, they depend on foreign platforms for information on offshore transactions.

This creates enforcement gaps, potentially driving investors to overseas exchanges and heightening risks of capital outflow, tax evasion and market contraction if taxation is implemented hastily.

Addressing this issue, the government has set 2027 as the target for crypto taxation, aligning with the OECD-led Crypto Asset Reporting Framework. Starting that year, 48 jurisdictions will adopt the framework, enabling automatic data exchange to improve global transparency in transaction information.

Redefining crypto income

More fundamentally, a comprehensive review of South Korea’s cryptocurrency taxation system is needed to address gaps stemming from the unique nature of virtual assets.

Cryptocurrencies can be acquired through various means, including mining, staking and airdrops, but current tax guidelines only address capital gains from exchange transactions.

“The tax system currently only covers exchange-based capital gains,” said Kim Kab-lae, senior researcher at the Capital Market Research Institute. “To reduce taxpayer uncertainty, clearer definitions of the various ‘lending’ income and guidelines for calculating acquisition costs must be actively interpreted in advance.”

Currently, all cryptocurrency income is classified as “other income,” with no distinct tax categories or industry classifications. Originally, cryptocurrencies were treated as intangible assets under international accounting standards, leading to their taxation as other income in Korea. Experts note that, while cryptocurrencies can now be classified as financial assets according to the updated international standards, this adjustment has not been reflected in the domestic tax plan.

Taxing all cryptocurrency income as other income presents further issues. Other income is typically incidental, yet cryptocurrency investment income, which is continuous, does not fit this definition. Additionally, taxing cryptocurrency as other income prevents loss carryforwards, which allows losses to offset gains—a benefit available to financial income.

In the US, income from cryptocurrency investments is classified as “capital gains,” allowing them to offset losses from other investments. A similar approach is used in the UK and Germany, with the UK taxing crypto gains as capital gains and Germany treating them as other income, yet exempting long-term investments from taxation and allowing indefinite loss carryforwards.

In contrast, Japan classifies crypto gains as miscellaneous income, preventing loss offsets and carryforwards like in the case of South Korea, but offers more detailed guidelines for various acquisition methods.

Legislative backing

Kim emphasized the urgent need for strong support from lawmakers amid South Korea’s leadership vacancy, as President Yoon Suk Yeol faces impeachment.

“The country is experiencing a difficult period and a potential leadership vacuum. In this context, it is essential for the legislature to enhance monitoring and communication with the executive to ensure the swift passage of bills agreed upon by all parties,” Kim said.

Meanwhile, bitcoin, the world’s largest cryptocurrency by market value, surged past $100,000 for the first time this month, rising 40 percent in just the past month, fueled by a rally triggered by Donald Trump’s reelection. The cryptocurrency is now the seventh-largest asset by market capitalization.