Taxation Delayed Amid Regulatory Gaps

In November 2021, Deputy Prime Minister and Minister of Economy and Finance Hong Nam-ki expressed confidence in the taxation system for virtual assets, just two months before its scheduled implementation in January 2022. However, nearly three years later, discussions surrounding virtual asset taxation remain unresolved.

The Ministry of Economy and Finance proposed in July 2024 to delay the implementation of virtual asset taxation by an additional two years to January 2027, citing the underdeveloped tax system. This raises concerns about the government's lack of preparation, with the total postponement period amounting to five years.

Tracking Overseas Exchanges a Challenge

A significant obstacle to the implementation of the system is the lack of adequate means to track and tax virtual asset investors using overseas exchanges. Although the foreign financial account reporting system has been applied to virtual assets since 2023, it lacks enforceability and relies on voluntary reporting.

A ministry official explained that the issue could be resolved once the 'Crypto-Asset Reporting Framework,' which involves the exchange of information on virtual asset transactions between OECD countries, is implemented in 2027. This indicates that the tax postponement was chosen to avoid regulatory gaps.

Market Sentiment and Classification Issues

Some argue that the postponement was inevitable due to the government's plan to abolish the financial investment income tax. This could lead to claims of unfairness if stocks are not taxed while virtual assets are. The frozen investment sentiment may have also influenced the tax postponement, with the daily trading volume of domestic virtual assets plummeting by 90%.

There are also calls to further examine how to define the evolving nature of virtual assets as financial products. Currently, virtual asset income is classified as other income rather than financial income, which differs from the U.S. SEC's recent approval of virtual asset ETFs.