Tax on crypto gains three months away… eliminate the ‘blind spots’ in overseas and person-to-person transactions - 경향신문

This article was translated by an AI tool. Feedback Here.

A view of the Bithumb Lounge in Seocho-gu, Seoul. Yonhap News

Starting in January next year, income earned from virtual assets will be taxed. After three postponements, the government will finally implement the taxation regime. However, on the 13th, there were calls to establish detailed standards and refine the system before implementation.

This is because it is uncertain whether the tax authorities can sufficiently secure transaction records made through overseas exchanges and personal wallets, and because criteria for taxing diverse transaction types, such as income from lending out virtual assets, remain unclear. The filing burden on taxpayers, limits on loss carryforwards, and an incomplete legal framework for digital assets are also cited as issues to resolve.

From January 1 next year, the government plans to tax income arising from the transfer or lending of virtual assets. Income from virtual asset transactions will be classified as ‘other income’ and taxed separately. After netting annual gains and losses, a deduction of 2.5 million won is applied, and a 22% rate, including local income tax, is levied on the remainder.

For example, if an investor earns a net profit of 10 million won from virtual asset trading over a year, tax of 1.65 million won would be due on 7.5 million won after deducting the 2.5 million won basic allowance.

The main rationale for taxing virtual assets is tax equity. Under the principle that where there is income there should be tax, income earned from virtual asset investment should also be taxed. When wages, business income, and real estate capital gains are taxed, excluding only virtual asset income from taxation is seen as inequitable. The fact that major countries already tax virtual asset income is also cited.

Will trades via overseas exchanges and personal wallets become tax blind spots?

Experts, however, point out that gaps must be closed before the tax takes effect. The first issue raised is how accurately the authorities can identify transaction histories conducted through overseas exchanges and personal wallets.

Transactions on domestic virtual asset exchanges can be verified through exchange-held data, but there are limits to securing tax data for transactions via overseas exchanges, personal wallets, decentralized exchanges (DEX), and decentralized finance (DeFi). The industry also warns that, once the plan is implemented, domestic investors may move en masse to overseas venues that are relatively harder to trace.

The government plans to use the Crypto-Asset Reporting Framework (CARF) developed by the Organisation for Economic Co-operation and Development (OECD) to obtain information on overseas virtual asset transactions. Under CARF, participating countries collect transaction information from in-scope virtual asset businesses in their jurisdictions and exchange it with foreign tax authorities.

However, the start dates for information exchange differ by country, and it is difficult to cover transactions from non-participating jurisdictions. Twenty-nine countries, including Canada, Switzerland, Singapore, and Hong Kong, plan to begin their first exchanges in 2028, and the United States in 2029. Even after exchanges begin, it is uncertain whether all transaction data can be captured, such as direct transfers between personal wallets or decentralized trades.

On the 7th, the government pre-announced legislation for a partial amendment to the Enforcement Decree of the Foreign Exchange Transactions Act to bring not only transfers between domestic and overseas virtual asset business operators but also transfers between domestic operators and personal wallets under the oversight of the foreign exchange authorities. Virtual asset transfer records would be reported to the Bank of Korea foreign exchange computer network, and the National Tax Service, Korea Customs Service, the Financial Supervisory Service, and the Financial Intelligence Unit (FIU) would share the information to strengthen monitoring.

How will staking and lending be taxed?

Another sticking point is the lack of detailed tax rules for the various types of virtual asset transactions. The current plan is designed around income from the transfer and lending of virtual assets.

In practice, however, income arises through many channels beyond simple trading, including ‘staking’, where investors receive rewards for helping operate a blockchain network with their holdings; ‘lending’, where virtual assets are lent to other users or platforms for consideration; and ‘airdrop’, where virtual assets are distributed for free, among others.

Park Jong-Su, president of the Korean Association of Tax Law, said, “Capital gains from trades should be treated as transfer income, lending as interest income, and so on, by breaking down and allocating income in line with the substance of each transaction, and the system should be redesigned in the form of a ‘Virtual Asset Investment Income Tax (tentative name)’.”

The burden of self-reporting on investors and the potential for tax avoidance are also cited as challenges. Investors must check their transaction histories and acquisition costs, calculate taxable income, and file directly with the tax authorities. Given the complexity of virtual asset transaction structures, taxpayers may find it difficult to calculate taxable income accurately on their own. The burden on taxpayers could increase, and omissions or errors in filings may occur.

Another controversy is that loss carryforwards are not allowed. The plan requires that gains and losses from virtual asset transactions within the same tax year be netted. However, it does not allow net losses incurred in a given year to be carried forward for deduction in the next year.

For example, if an investor records a loss of 30 million won from virtual asset transactions in 2027 and earns a gain of 30 million won in 2028, the cumulative result over two years is zero, yet the gain realized in 2028 is taxed.

Kim Kyung-Ha, a professor in the Department of Finance, Taxation, and Accounting at Hanyang Cyber University, said, “Given the high price volatility of virtual assets, there is a need to establish rules for loss carryforwards.”

A basic law on virtual assets has also yet to be established. Legislation for a Digital Assets Basic Act, which would cover issuance and distribution of virtual assets and rules for businesses, is delayed in the National Assembly. There are calls for legal work defining the legal nature of virtual assets and a regulatory framework to proceed in tandem with improvements to the tax system.

Experts say efforts should focus, before implementation, on clarifying ambiguous tax rules and upgrading taxpayer infrastructure.

Lee Jeong-Hoon, an analyst at the National Assembly Budget Office, said, “To broaden the tax base, incentives for using domestic exchanges should also be considered, and tax infrastructure that can support smooth filing and payment by taxpayers needs to be in place.”

On the 6th, Deputy Prime Minister and Minister of Finance and Economy Lee Hyung-Il said at the National Assembly inspection of state affairs, “Along with the various views raised in the National Assembly, we will broadly gather opinions from experts and the industry and other stakeholders.”

National Tax Service Commissioner Lim Gwang-Hyun also said at the inspection on the 13th, “We are preparing to issue a notice related to virtual asset taxation around November this year.”