South Korea’s 5 million cryptocurrency investors were up in arms last year when the government considered slapping a 20% tax on crypto profits, until the authorities postponed the plan to 2025. The next target looks to be crypto airdrops. 

Airdrops are typically used by cryptocurrency projects as marketing tools to attract users and involve dropping tokens into users wallets, often for free. But South Korea has a tax for that – the Inheritance Tax and Gift Tax Act that covers any goods that can be converted into cash.

The Ministry of Economy and Finance on Monday said airdrops fall under the gift tax rule. But how to implement the law on digital transactions involving private wallets? Cha Dong-joon, professor of tax accounting at Kyungbok University in South Korea, said that is going to be difficult.

The ministry is making a statement of intent, Cha told Forkast in an interview. “At least for the next two, three years, actual taxation is practically difficult,” he said. For one thing, tax authorities are not able to calculate the price of cryptocurrencies that are not listed on exchanges, he added. 

Secondly, “according to the Adjustment of International Taxes Act, local tax laws cannot touch virtual assets gifted from an entity overseas.” Cha explained that’s the case if the country of the sender, a non-affiliate of the recipient, does not levy a gift tax.

See related article: South Korea’s upcoming all-encompassing crypto law — what we know

Oh Moon-sung, professor of tax accounting at Hanyang Women’s University, agreed that taxing airdrops is problematic.

“We need to identify the characteristics of the airdrop first,” Oh said in an interview. “Some airdrops are given to those who are holders of specific tokens, in some other cases they just give out tokens for promotion.” 

Oh said Korea lacks a definition of airdrops, unlike stocks where the method of tax calculation is specifically detailed. He agreed that it would be problematic to apply the gift tax on crypto assets moving from one private e-wallet to another, because they are difficult to track.

Taxing Chaebol

While these experts explained the problems of imposing tax laws on digital assets like airdrops, it’s also true that South Korea’s gift tax law has real teeth.

Some scholars and tax experts have suggested the law evolved over the years with a particular community in mind: the ultra-rich families that run the country’s leading conglomerates, such as Samsung Group and Hyundai Motor Group, and are known as Chaebol.

In 1996, South Korea amended its laws to tax indirect gifts after Lee Jae-yong, the current de facto leader of Samsung, received 6 billion Korean won (US$4.4 million today) from his father and then Samsung Chairman Lee Kun-hee. He paid the gift tax on the funds and then reinvested the remainder in two unlisted subsidiaries under Samsung. The two companies soon went public which earned the younger Lee 58.7 billion won.

The laws were toughened again in 2004, or before Lee Jae-yong took over at Samsung when his father became ill.

“I think it’s no coincidence that South Korea strengthened tax requirements and made room for broader interpretation in time for [Samsung’s] succession,” said Cha.

See related article: S. Korea’s 20% crypto tax delayed by two more years

“In the past, rich families used antiques or paintings that were difficult to calculate in value to hand down wealth. More recently it was passing down unlisted, or soon-to-be listed stocks,” Cha explained.

“Authorities find it difficult to tax the gains from gifted stocks, never mind virtual assets that haven’t been clearly defined by the government.” Cha said, adding that the Chaebol may see this as a digital loophole to take advantage of.

Oh at Hanyang Women’s University said crypto gifts could be utilized by the ultra rich, but added that the price volatility of digital assets makes it unlikely that such practices would spread to the middle-to-upper classes in Korea.

South Korea’s tax laws need to change to encompass cryptocurrencies, airdrops and other digital assets, Cha said.

“The right thing is to institutionalize these activities and build the tax laws around them that Korea is lacking today.”