Taxing virtual asset gains may be the hottest topic right now in South Korea, the country where the cryptocurrency market is estimated to be the third-largest in the world by market capitalization. The country’s plan to tax 20% on income from cryptocurrency trading starting next year has angered many investors, causing lawmakers and even one presidential candidate to push for a delay in the tax law. All the while, South Korea’s finance minister stands by his original plan.
In January this year, South Korea’s Ministry of Economy and Finance announced the amended Income Tax Law that soon received backlash from virtual asset investors. The amended law stipulates that the National Tax Service will levy 20% on crypto trading profits over the amount of 2.5 million Korean won, or about US$2,120. Crypto investors criticized many aspects of the new tax plan and the announced schedule.
Many investors had difficulty accepting that crypto investors are going to be given a lower threshold for tax deduction compared to stock investors. Compared to virtual asset income’s tax deduction threshold of 2.5 million won, stock capital gains are given 50 million won, which is approximately US$42,408. On top of that, stock capital gains will be levied from 2023, a year later than virtual asset gains tax.
Considering the public sentiment, 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. Even the presidential candidate for the Democratic Party, Lee Jae-myung, announced Monday that he will push forward delaying the virtual asset tax in his campaign.
The reason behind both political parties supporting the delay could be interpreted as efforts to win over voters in their 20s and 30s. Votes from these age groups are considered the critical factor for the upcoming presidential election on March 9, 2022 — many younger voters who were traditionally dedicated supporters of the Democratic Party have shifted to the opposing conservative party during the current administration.
“With the presidential election next year, both parties are eager to decide on policies to win the votes of people in their 20s and 30s, who are very sensitive about the tax on virtual asset gains,” said Kim Hyoung-joong, head of the Cryptocurrency Center at Korea University.
Meanwhile, finance minister Hong Nam-ki said today at the National Assembly that delaying the crypto tax law “damages consistency within policies” and that it is rightful to tax where there is profit — once again repeating that crypto taxation should go as planned. He then spoke on behalf of the government that “even if there’s an agreement between the ruling and conservative party, the government is not in favor of the delay in taxation.” Hong also reiterated that the government is able to fully construct the taxation system by the end of this year.
However, one expert says that is unlikely. “[The government] can tax virtual assets on exchanges but as we all know, that’s not all. If you think about it, peer-to-peer (P2P) transactions are also a large part of crypto trading. If it taxes crypto on exchanges when it’s not able to do the same to P2P transactions, less will be using exchanges,” said Oh Moon-sung, professor of tax accounting at Hanyang Women’s University, who said a hurried taxation on virtual assets will lead more to seek ways in evading taxes.
Oh says another problem lies in difficulty identifying the price of the crypto token upon initial acquisition by the investor to tax an accurate amount of gains from trading. “If one moves a token from one exchange to another, and then several more times in different exchanges, it’s very hard to specify the original acquisition cost,” Oh said. “There needs to be a system where the exchanges share the information about the initial acquisition price of the token. But I believe the system is not ready.”