[Insight & Opinion] Normalizing the Virtual Currency Tax System Can No Longer Be Delayed

Reducing Market Volatility
Supporting Long-Term Investment

[Asia Economy] The government should conclude the tax deferral on virtual currencies and set taxation on virtual assets at the same level as other financial assets. Considering the principle of taxing all income generated from economic activities, the government must establish and promptly implement a tax system from the initial stage of incorporating virtual assets into the formal system. Resolving such uncertainties helps reduce market volatility and supports long-term investment.

The government initially planned to impose a 20% tax on income exceeding 2.5 million KRW from virtual asset investments starting in 2022 but postponed it twice?first to January 2023 and then for an additional two years until 2025. The three-year tax deferral was ostensibly due to insufficient preparation by related businesses such as virtual asset exchanges and inadequate investor protection measures, reflecting a lack of infrastructure for virtual asset taxation. However, the reason the political sphere, regardless of party lines, did not actively pursue taxation is primarily due to considerations of the votes and support of many young people participating in virtual asset investments, and it is highly likely that tacit lobbying by some large virtual asset exchanges also played a role.

The government has also postponed the introduction of the financial investment income tax, originally scheduled for next year, to after 2025. The controversy lies in the fact that this financial investment income tax allows a deduction limit of up to 50 million KRW for domestic listed stock investments, whereas the deduction limit for virtual assets is only 2.5 million KRW. The justification for the relatively high deduction limit for the former is the benefit given because the stock market contributes to capital expansion and financing for domestic companies. In contrast, the relatively low non-taxable threshold for virtual assets likely reflects the judgment that they are unlikely to serve as a source of capital supply. There is also an issue of fairness compared to unlisted stocks, bonds, derivatives, and overseas stock investments, which currently have a deduction limit of 2.5 million KRW. Ultimately, this supports the opinion that there is a lack of policy grounds and justification to foster the virtual asset market like the stock market, given the coexistence of high volatility and concerns about speculative activities.

However, the stock market also allows profits through short selling, inverse (investments expecting price declines), and leveraged funds, and applying the same deduction limit to these is a logical contradiction. The stock market is not free from speculative activities either. It is not fundamentally impossible for the virtual asset market to play a role as a source of corporate funding. It is just that the system is currently inadequate. Virtual currencies, along with rapid market growth, can bring positive functions such as liquidity supply and diversification of capital markets through DeFi. Currently, many domestic companies are developing various products and services based on virtual assets and linking them with existing businesses to generate profits, so viewing virtual currency trading simply as speculation is problematic. Additionally, there are many opinions, citing international accounting standards, that virtual assets should be treated as intangible assets or inventory rather than financial assets like stocks. However, this is merely a formal logic. The U.S. Internal Revenue Service has already defined virtual currencies as assets since 2014 and treats taxation on investment income the same as for stocks and other assets.

Earlier, President Yoon Suk-yeol also pledged to raise the non-taxable threshold along with the tax deferral on virtual assets. Considering the various opinions and arguments on virtual asset taxation, one alternative could be to integrate virtual assets with other financial assets and apply a single deduction limit. In other words, it is necessary to amend the current Income Tax Act to classify virtual assets as financial assets under tax law and simplify the related tax system.

Professor Kim Gyu-il, Michigan State University