2.5 Million KRW Deduction Limit Too Low... Overseas Tax Evasion Loophole Too [Virtual Assets and Taxes]②

Equity Issues in Deduction Limits... Likely Included in Health Insurance Premium Calculation
Private Tax Credit Platforms for Individuals Also Insufficient
Concerns Over Tax Evasion in Overseas Financial Accounts... Verification Difficult

Experts point out that a comprehensive taxation system encouraging long-term investment is necessary in the virtual asset market as part of the government’s national agenda to "soundly foster the digital asset market." The virtual asset income deduction limit of only 2.5 million KRW, compared to the low tax rate (14%) applied to financial income under 20 million KRW, is said to be unfair. Additional discussions are also needed regarding the inconvenience faced by individual investors due to the lack of private tax credit platforms and concerns about tax evasion through overseas financial accounts.

Issue of Lower Income Deduction Limits Compared to Other Financial Assets

One of the main issues is the lower income deduction limit compared to income from other financial assets. The basic deduction for virtual assets is 2.5 million KRW per year, and the tax rate is 22% (including 2% local income tax). For financial income such as interest, dividends, and pensions, if the annual income is below 20 million KRW, tax payment is completed through a 15.4% withholding tax. Only when this amount is exceeded does the income become subject to comprehensive financial income taxation, where progressive tax rates (6?45%) apply combined with other comprehensive income. This measure is based on policy considerations aimed at "activating the financial market."

However, there is some consensus in the National Assembly regarding the virtual asset deduction limit. The Democratic Party of Korea, which won a landslide victory in the 22nd general election, proposed raising the deduction limit while proceeding with taxation as planned. The proposal is to increase the deduction limit from the existing 2.5 million KRW to 50 million KRW and apply a 5-year loss offset and loss carryforward deduction. For example, if an investor incurs a loss of 10 million KRW in 2025 and gains 20 million KRW in 2026, they would only pay taxes on the net 10 million KRW. The ruling party also considered postponing the implementation of taxation itself but found it difficult to voice this after the election defeat.

Health insurance premiums, which have a quasi-tax nature, are also cited as an issue. The National Health Insurance Corporation calculates premiums based on income information received from the National Tax Service, including business, interest, dividend, and other income. For regional health insurance subscribers, if separately taxed financial income exceeds 10 million KRW annually, it begins to be reflected in the income used to calculate premiums. The tax industry estimates that capital gains from virtual assets, classified as other income, are likely to be included in the income used for health insurance premium calculations.

Kim Gap-rae, Senior Research Fellow at the Korea Capital Market Institute, said, "In line with the government's national agenda to soundly foster the digital asset market, it is necessary to encourage healthy virtual asset investment and long-term investment, but current policies impose too heavy a tax burden on individuals." He emphasized, "Comprehensive consideration of loss offset and health insurance premiums is needed. We must not follow Japan’s example, where excessive taxation caused the market to shrink."

Kim Ji-ho, a tax accountant at Seum Tax, said, "Since current law only allows loss offset within one year, it does not sufficiently reflect the continuity of investment, so improvement seems necessary." He added, "Given the diverse transaction types in the virtual asset market, there are only broad regulations, and it is unclear how taxes should be applied to specific transactions. Active policy promotion will be needed in the future."

"Tax Collection Will Not Be Easy... Access to Decentralized Wallets Will Also Be Difficult"

Due to the diverse transaction methods and targets in the virtual asset market, tax authorities are expected to face difficulties in collecting taxes. Professor Hwang Seok-jin of Dongguk University’s Graduate School of International Information Security noted, "There are practical issues such as whether taxes can only be collected when exchanged for fiat currency, whether taxation should apply to peer-to-peer transactions, and how to collect taxes on transactions conducted without going through exchanges."

Another limitation is that taxation is difficult for items not enumerated in the Income Tax Act. For example, among products traded on the overseas major exchange Binance, there are derivative products classified as "futures trading," not "spot trading." These are derivatives based on virtual assets. Unlike the "Capital Markets and Financial Investment Business Act (Capital Markets Act)," which contains regulations related to capital gains tax, the Income Tax Act does not include provisions related to profits from derivative transactions. The Capital Markets Act specifically defines the nature and targets of overseas derivatives. However, when the financial investment income tax is introduced, profits from virtual asset derivative transactions could also be comprehensively applied under this tax, and there have been many integrated discussions led by opposition parties.

There is also a call for an increase in private virtual asset tax calculation programs that individual investors can easily use. Currently, domestic business-to-consumer (B2C) virtual asset tax calculation platforms are almost limited to "CryptoTax." While individual tax firms provide virtual asset taxation consultation services, this inevitably increases the cost burden on individual investors. Choi Byung-jun, CEO of Double X Soft, which operates CryptoTax, said, "We are preparing to launch an overseas financial account reporting agency service first this year." He added, "However, due to policy uncertainties until the end of the year, we are closely monitoring legislative trends."

There are cautious predictions that "big players" may move their accounts to overseas virtual asset exchanges to avoid taxes. A source from the domestic virtual asset industry said, "South Korea has a high card payment rate and many transactions are transparent through cash and receipts, so tax authorities seem to have approached it similarly. However, overseas exchanges will have many transactions that are difficult to cooperate with, and decentralized wallets will be hard to even inspect."

The National Tax Service is also aware that it is not easy to compare the appropriateness of overseas financial account reporting. They are hopeful that with the implementation of the "Crypto-Asset Reporting Framework (CARF)" being considered by the Organisation for Economic Co-operation and Development (OECD) in 2027, automatic information exchange related to overseas virtual assets will become possible. However, at least two or more years remain until implementation. Voluntary reporting by individuals holding overseas financial accounts is expected to be important. According to the overseas financial account reporting system, failure to report or underreporting accounts results in fines up to 20% of the amount involved. If the unreported or underreported amount exceeds 5 billion KRW, criminal penalties or imprisonment are also possible.