While the government has announced it will impose a 22% other income tax (including local tax) on virtual currency investment gains starting next January as planned, concerns persist that the taxation infrastructure remains inadequately established. The government maintains that taxation can no longer be delayed, but the industry argues it is premature. Here are the four shortcomings of cryptocurrency taxation raised by the market.
◇ Difficulty Tracking U.S. Transaction Records = The United States plans to join the Crypto-Asset Reporting Framework (CARF) agreement in 2029. Countries participating in the agreement share virtual currency transaction and transfer records with one another. Korea is set to begin receiving information through CARF starting next year.
The problem is that a partial taxation gap may arise during the next two years while the U.S. remains outside the agreement. Concerns are particularly heightened for global virtual currency exchanges such as Binance, whose actual headquarters location is unclear. Binance has a large domestic user base, with the Wall Street Journal reporting that Koreans traded $58.3 billion (approximately 86 trillion won) on Binance during a single month in May 2023.
Tax authorities plan to track down amounts from 2027-2028 at a later date, given that the statute of limitations for tax assessment is 10 years. However, there are interpretations that taxation will be difficult without U.S. cooperation in cases of deliberate non-reporting. Oh Moon-sung, a professor of tax accounting at Hanyang Women's University, explained, "If someone intentionally fails to report overseas holdings and hides them in a specific wallet, there is no effective way to find them."
◇ Other Countries Consider Gains and Losses Together = Another source of dissatisfaction among investors is the inability to use loss carryover deductions, which allow current-year losses to be applied to future tax reductions. The United States permits virtual currency loss carryover deductions up to $3,000 (approximately 4.4 million won) annually.
In the United States, if an investor loses $3,000 on virtual currency investments in 2027 and then earns the same $3,000 the following year, the loss carryover applies and no tax is owed. In Korea, however, if an investor loses 4.4 million won on bitcoin investments in 2027 and earns the same amount in 2028, they must pay 418,000 won in other income tax. The Ministry of Economy and Finance stated, "Domestic stocks do not allow loss carryover either," adding, "It is unreasonable to make simple comparisons with overseas cases."
◇ Controversy Over Taxing Only Virtual Currency = Domestic stocks are not taxed unless held by major shareholders with 5 billion won or more in holdings. If an ordinary person earns 10 million won from domestic stocks, the tax is zero.
By contrast, generating the same gain through virtual currency requires a payment of 1.65 million won. The Ministry of Economy and Finance emphasized, "We must consider fairness with earned income and business income." The industry argues that comparison with stocks, which share a similar character as investment products, is more appropriate.
◇ What About Taxes on Coin Payment Events? = Some point out that the tax standards for staking and airdrops are unclear. Staking refers to rewards earned from deposited virtual currency, while airdrops refer to the free distribution of coins. The industry argues, however, that it is unclear when the reward point should be set and by what standards freely distributed coins should be valued. Kim Kyung-ho, head of the Digital Asset Center at Deloitte Anjin, explained, "When you include DeFi and peer-to-peer (P2P) transactions, the sheer number of transactions is enormous and the structures are complex, making it difficult for individuals to directly calculate and report all transaction records themselves."
