[Tax Story] Cryptocurrency Taxation and Jultakdongsi

Amid the cryptocurrency investment frenzy, discussions on institutional incorporation and regulation are heating up. The number of cryptocurrency investors has surpassed 5 million, with daily trading volumes reaching approximately 30 trillion KRW, twice that of the KOSPI. It is estimated that there are currently about 220 domestic cryptocurrency handling businesses established without government approval, mainly centered around exchanges such as Bithumb, Upbit, Coinone, and Korbit. Cryptocurrencies, which previously lacked clarity regarding their asset status, legal standing, and responsible government departments, were incorporated into the legal system with the enforcement of the Act on Reporting and Using Specified Financial Transaction Information (“Specified Financial Information Act”) in March this year. The core of the system is the licensing of exchanges and real-name verification of exchange accounts by banks.

On the 7th, a virtual asset legislative bill was proposed, stipulating the registration obligations of trading operators, the duty to prevent hacking and liability for damages of businesses, and the obligation to protect customer deposits. Unlike institutional incorporation, cryptocurrency taxation is pioneering. Since 2017, the government has expressed its taxation policy and amended tax laws in 2020 to classify income earned from transferring or lending virtual assets exceeding an annual basic deduction of 2.5 million KRW as “other income,” subject to separate taxation at a 20% rate starting January 1 next year. A recent public opinion poll showed 53.7% support and 38.8% opposition to cryptocurrency taxation. With increasing calls for investor protection and regulatory inclusion of new assets generated by technological advancements, it is a crucial time for legislative action by the National Assembly, law enforcement by tax authorities, and cooperation from related industries and investors.

There is no universal definition of cryptocurrency. The Specified Financial Information Act defines virtual assets as electronic certificates and all related rights that have economic value and can be electronically traded. The number of cryptocurrencies worldwide has nearly quadrupled over the past two years, approaching 10,000, and they are divided into Bitcoin and altcoins excluding Bitcoin. By market value, Bitcoin ranks first, followed by Ethereum, Binance Coin, Dogecoin, and Tether. The market capitalization is approximately 2,739 trillion KRW, with daily trading volumes around 240 trillion KRW. Cryptocurrencies typically go through mining, electronic wallet storage, and trading stages. The transaction history of participants is grouped into blocks and linked to previously blockchain-recorded transaction histories. This blockchain technology verifies the authenticity of transaction histories, naturally enhancing security.

Cryptocurrency taxation is broadly divided into income taxation and consumption taxation. Regarding income taxation, the income amount from virtual assets is taxed as other income by deducting necessary expenses from the total revenue generated by virtual asset transactions. Electricity costs incurred during mining are recognized as necessary expenses and deducted from taxable income. The calculated virtual asset income is subject to separate taxation at a flat 20% rate. Losses and gains from multiple virtual assets within a one-year tax period are aggregated, and profits under 2.5 million KRW per tax period are exempt from taxation. The taxation method adopts an annual filing and payment system instead of withholding tax. Additionally, the amended tax law includes taxation at the point of asset withdrawal for non-residents and the inclusion of overseas virtual asset trading accounts in the overseas financial account reporting requirements. Regarding consumption taxation, there is only a fundamental interpretation that purchasing goods with cryptocurrency is not subject to cash receipt issuance, and if virtual assets become goods supplied by businesses, value-added tax obligations arise. However, mining and trading activities are not directly regulated.

Taxation systems for cryptocurrencies vary by country, but income taxation generally taxes business income or capital gains, while consumption taxation is exempted. In the United States, cryptocurrencies are regarded as assets, and capital gains from cryptocurrency transfers are subject to capital gains tax. Cryptocurrency mining is classified into business mining and non-business mining, with the former taxed as business income and the latter as ordinary income. Consumption taxes vary by state, but most states, including New York, treat cryptocurrencies as intangible assets and do not impose sales tax. The European Union exempts value-added tax on cryptocurrency trading following the European Court of Justice’s ruling. In Japan, cryptocurrency exchange income is generally taxed separately as miscellaneous income, with a progressive seven-tier tax rate up to 50%. Initially, Japan considered initial cryptocurrency sales subject to consumption tax, but excluded them from taxation through the 2017 consumption tax law amendment.

It is difficult to deny that imposing taxes on income earned from investing in virtual assets aligns with the principle of tax capacity, which states that taxes should be levied where income exists. However, introducing formal income taxation on cryptocurrency transactions at this early stage of institutional incorporation may be premature. Some argue that it is reasonable to focus on transaction taxes first and observe trends before implementing full income taxation. Classifying virtual asset transaction income as other income while recognizing its nature as capital gains is criticized for not aligning with global standards. Unlike financial investment income, which exempts up to 50 million KRW, allowing only a 2.5 million KRW basic deduction for virtual assets is considered excessively low. Alternatives such as classifying virtual asset transaction income as capital gains to allow carryforward loss deductions or categorizing it as financial investment income from 2023 could be considered. Furthermore, while electricity costs for virtual asset mining are deductible as necessary expenses, the taxation method treating mining businesses and non-business miners equally needs more precise refinement. The current consumption tax system remains silent on virtual asset transactions, but adopting overseas legislative examples to explicitly exempt cryptocurrency purchases at exchanges from taxation would enhance predictability. As virtual asset investors and trading volumes rival those of the regulated financial market, it is timely to establish a taxation system consistent with the tax capacity principle while ensuring investor protection. Leadership that simultaneously addresses taxation system establishment and investor protection is urgently needed.

Baek Jeheum, Attorney at Kim & Chang