ANALYSIS Korea's crypto taxation plan receiving mixed reviews

Financial authorities asked to convince investors why tax makes sense

By Lee Min-hyung

Korea's financial regulators and tax authorities are focusing on the use of cryptocurrencies here for two reasons: they have deemed cryptocurrency transactions as taxable, and believe the conversion of cash into cryptocurrencies as a means of money laundering is accelerating.

After years of fluctuations, the global cryptocurrency market is seeing signs of rationalization, as a new order is starting to prevail, with a few major digital tokens, including bitcoin, establishing a controlling presence. Top investment banks are on track to sell investment products using bitcoin as a base, with central banks inching toward establishing CBDCs (central bank digital currencies).

In South Korea, the government is set to implement a policy for the taxation of cryptocurrency trading next year. The policy implements a 20 percent “income tax” from trading when revenue tops 2.5 million won ($2,120).

Behind the plan is the ongoing expansion of the country's cryptocurrency market in terms of transaction volumes, leading the authorities to decide the time was ripe for introducing taxes. The Ministry of Economy and Finance recently rejected a petition to delay these.

Data released by Rep. Kwon Eun-hee of the main opposition People Power Party, showed that investors traded cryptocurrencies worth 3,584 trillion won in the nation's four biggest exchanges in the first nine months of this year, a more than six-fold growth year-on-year.

The Financial Services Commission (FSC) recently ordered all of the country's cryptocurrency exchange operators to provide details on transactions they conducted, a requirement that forced minor operators to shut down.

Fairness amid the “crypto craze”

Amid the continued pandemic, central banks worldwide have maintained “accommodative” monetary policies through super-low interest rates ― a direction followed by the Bank of Korea. This situation has resulted in the local financial market seeing ample liquidity.

Because of soaring housing prices here, younger people, particularly those in their 20s and 30s, have been rushing into crypto trading, with analysts and officials dubbing the trend, a “crypto craze.” This saw the volume of trading between January and September of this year topping that of the benchmark KOSPI, backing up local regulators' claims that there was a need to tax “crypto-gains.”

Some lawmakers and industry officials have argued that the immediate implementation of taxation could cause adverse effects, because there are many loopholes in the current plan. Until more specifics are set, they say the financial authorities should reschedule the imposition of taxes.

“At least another year will be needed, as the financial authorities should convince crypto investors why paying the tax makes sense,” said one industry official.

Even some lawmakers from the ruling Democratic Party of Korea (DPK) having been talking about the necessity of a phased approach in terms of initiating the taxation plan. They are urging the authorities not to introduce the tax right away, as both exchanges and the tax authorities have not fully prepared a system for handling it.

“To collect a capital gains tax from crypto trading, one of the requirements is to calculate the purchasing price of each crypto asset precisely. But it is hard to do so for the time being, as cryptocurrencies can be transferred from one exchange to another,” Rep. Noh Woong-rae of the ruling DPK said.

He also took issue with legal loopholes surrounding crypto trading via overseas exchanges. “If a (Korean) investor uses an overseas exchange, they do not have to report the act of trading to the local tax authorities, so this can end up creating a method for tax evasion,” according to the lawmaker.

“Our position is that the financial authorities should allow a grace period of a year, and set up a better system. But they are pushing ahead with it at a time when the government is not even capable of collecting the tax,” Noh said.

Another reason to delay the imposition is due to fairness, he said. The financial authorities have decided to levy taxes on stock trading revenue from the beginning of 2023, but the basis for the tax on stock transactions is less strict than that for cryptocurrency gains.

Stock investors are liable to pay a capital gains tax only when their revenue tops 50 million won, which is considered a much more lax standard when compared with the cryptocurrency tax. Officials say that crypto investors are crying foul over the different standards for these two types of “non-taxable income.”

Despite such differences regarding the timing of implementing taxation on crypto-trading, Finance Minister Hong Nam-ki reiterated his determination to go forward with the earlier schedule.

“The government has prepared for the crypto tax for about two years, and it is hard for us to delay the introduction of the tax, as we have to maintain credibility for the policy,” Hong told lawmakers during a National Assembly audit last month.

National Tax Service Commissioner Kim Dae-ji also said that his agency was in the process of establishing a network for implementing the crypto tax in a timely manner by hiring more staff.

“We are making internal preparations to impose the tax next year without any problems,” he said early last month during the Assembly audit.

Officials have also called for the need to revise the hasty taxation scheme on cryptocurrency.

“The crypto industry is still in its infancy, but its trading volume is growing at an alarming pace. Investors will be confused once again if an incomplete tax policy comes into effect,” an official in the industry said.

According to data from Noh's office, the number of crypto exchange users here has soared to more than 7.23 million, as of the end of July, from around 1.5 million at the end of 2020. The daily average transaction volume of cryptocurrencies also reached 22 trillion won in April, which is close to that on the main bourse here.