Tax Tribunal: Virtual assets received for project participation are employment income; taxation justified

Virtual assets (cryptocurrencies) received for participating in a blockchain project constitute employment income and are therefore subject to taxation, the Tax Tribunal has ruled.

According to the industry on the 26th, the tribunal recently decided that the National Tax Service’s (NTS) action—treating digital assets paid to executives of a blockchain company as employment income and taxing them—was justified, as the payments were made in return for their contributions to the project.

The executives, as founding members, participated in the business as chief executive, CEO, chair and other roles. During an integrated corporate tax audit in 2021, the Seoul Regional Tax Office found that the company had paid digital assets to executives without fulfilling its obligations to withhold tax at source and submit payment statements. It then imposed employment income tax and penalties based on the market price at the time of payment, and reassessed and notified comprehensive income tax.

The executives argued that they had merely “originally acquired” the tokens in accordance with allocation ratios set out in the white paper, and that they had not been paid company assets. They said the portion earmarked for the team and partners among the issuance amount was structured to vest based on network consensus.

The NTS, however, viewed the tokens as company assets. It cited the fact that development was funded with investors’ money, and that the company had specified ownership and managed the supply through a controlled wallet. It also judged that the tokens were difficult to regard as a simple original acquisition, noting that they were paid after internal committee resolutions, contract execution and confirmation of services provided.

The Tax Tribunal sided with the NTS. Taken together—such as the company having spent costs to build the token ecosystem and maintain its value and having booked those costs as expenses, and the payments having been made through internal decision-making procedures—it found it difficult to view the executives as having originally acquired the virtual assets.

It also ruled that there was no illegality in taxing digital assets received as compensation for work based on their market price at the time of delivery.