South Korea’s crypto tax law — which was supposed to impose a 20% tax on cryptocurrency gains starting Jan. 1 — is being postponed for a year and won’t go into effect until Jan. 1, 2023, according to an amendment approved by the South Korean National Assembly Strategy and Finance Committee.
With both the ruling Democratic Party and the conservative People Power Party agreeing on the amendment, delaying the start of South Korea’s crypto tax is now all but assured. The National Assembly granted only some of the changes crypto investors demanded, however, and critics want the government to use this coming year to fix the remaining issues.
Back in January, South Korea’s Ministry of Economy and Finance announced that it wanted to tax crypto profits. Causing immediate backlash from Korean crypto investors, the amendment to the nation’s income tax law would tax at a rate of 20% any profit from virtual assets over the amount of 2.5 million won, or about US$2,100.
Protests from crypto investors flooded the official presidential Blue House website, where petitions that gather over 200,000 signatures within 30 days get a direct response from the government. One petition criticizing the tax plan and calling for the financial regulator to step down gathered 201,079 signatures in 25 days.
The petitioners opposed the 20% tax levy mainly for two reasons. One, they claimed the government had not yet created protective measures for crypto investors, so taxation was premature. Another was that crypto investors would be taxed more heavily than Korea’s stock investors. While virtual asset income above 2.5 million won would be taxed under the new law, the threshold for taxing capital gains from stocks begins at 50 million won, or about US$42,016. On top of that, stock capital gains taxes will be levied beginning in 2023, a year later than taxes on virtual asset gains.
As crypto investors continued condemning the crypto tax plan, lawmakers from both the ruling Democratic Party and the conservative People Power Party made proposals to defer the crypto tax by one to two years. It became a national elections issue when the presidential candidate for the Democratic Party, Lee Jae-myung, announced in early November that he would push for a virtual asset tax delay.
While the delay of crypto tax implementation was approved, the proposed amendment to raise the tax-free threshold for virtual asset income to the same level as stock gains did not receive a green light, due to persistent opposition from the Ministry of Economy and Finance.
The ministry’s position is that virtual asset profits are different from stock gains because they are categorized as “other income” where profit is made haphazardly, such as in lottery wins.
Tax experts weigh in
Cha Dong-joon, a professor at Kyungbok University, told Forkast.News that he believes the discrepancy goes against fair taxation.
Oh Moon-sung, professor of tax accounting at Hanyang Women’s University, says that virtual asset gains should be recategorized as financial income and given the same taxation threshold of 50 million won.
“In reality, investing in stocks and investing in virtual assets are very similar,” Oh said, in an interview with Forkast.News.
Oh says that during the one-year delay, Korean tax authorities should mend loopholes in their crypto tax plan. For instance, they aim to tax crypto gains based on the information they collect from trading exchanges.
“Peer-to-peer (P2P) transactions take up a fair amount of crypto transactions today. And when taxation starts, many will move away from exchanges to P2P transactions to avoid paying taxes,” said Oh, adding that the National Tax Service does not have measures to track down P2P trades.
Other loopholes in the amendment include being unable to track trades of unlisted cryptocurrencies, and difficulty acquiring investment information from foreign companies used by Korean citizens. The discussion on what type of NFTs (non-fungible tokens) — another form of crypto asset — should be taxable is also incomplete.
“There is a principle in the criminal law that it is better a hundred guilty persons should escape than having one innocent person convicted,” Oh said. “Tax is due on virtual asset profits, but if we tax unfairly without a proper system, it could create chaos for taxpayers.”