Finance Ministry Says Tokenized Stocks Are Securities, Not Crypto, Opening Door to Tax in Second Half

Finance Ministry Says Tokenized Stocks Are Securities, Not Virtual Assets

Taxation Could Begin Once FSC Issues Formal Interpretation

South Korea’s tax authorities said tokenized stocks could be taxed as early as this year if financial regulators issue a final ruling. The government is preparing to treat tokenized stocks as securities rather than virtual assets and align the tax framework accordingly.

A Ministry of Economy and Finance official told Bloomingbit on June 12 that the government currently views tokenized stocks as securities. If the Financial Services Commission formally classifies them as securities, they can be taxed immediately under the existing Capital Markets Act. While tokenized stocks are structured in the form of virtual assets, they are closer in substance to securities, the official added. Financial regulators have already said through prior guidelines that instruments deemed securities in substance should be treated as securities, and they have shared that view with the ministry several times.

The FSC said in its 2023 token securities guidelines that token securities are securities issued in digital-asset form and therefore fall under the Capital Markets Act. Those guidelines, however, focused on nonstandard securities tied to fractional investments in assets such as art, real estate and copyrights. The legal status of tokenized conventional securities such as stocks remains unclear. The prevailing market view has been that tokenized stocks are virtual assets, which are not taxed, and that investors would not owe taxes until virtual-asset taxation takes effect next year.

Tax authorities, however, are monitoring the FSC’s legislative work on tokenized stocks while treating them as securities. At the second public-private token securities consultative meeting in May, the FSC said it would prepare a detailed phased roadmap for the tokenization of conventional securities such as stocks. If the commission formally recognizes tokenized stocks as securities in its planned July release of revised token securities guidelines and subordinate regulations, taxation could begin as early as the second half of this year.

Because the Capital Markets Act does not limit securities to domestic issuance, offshore trading on overseas platforms would also fall within the tax net. Regardless of where an instrument is issued, it could be subject to dividend income tax under current law if the substance of its economic value and rights structure qualifies as a security, the ministry official said. Depending on whether tokenized stocks grant voting rights, they could later be classified more specifically as common shares, derivative-linked securities or investment contract securities.

The Ministry of Economy and Finance and the National Tax Service are also building information-sharing systems with foreign tax authorities, including the US Internal Revenue Service, to track transactions conducted through overseas platforms. The ministry official said tokenized stocks are a new concept and a new asset class with no domestic tax precedent, raising the possibility of disputes between taxpayers and authorities. Still, the official said, although the final determination of whether they qualify as securities rests with the Financial Services Commission, tax authorities view tokenized stocks as securities rather than virtual assets.

Tokenized stocks are structured so actual shares are held by a custodian and the economic rights to those shares are issued and distributed as tokens. Investors can trade the tokens to capture capital gains linked to moves in the underlying stock price. Their appeal lies in blockchain-based settlement systems that allow 24/7 trading year-round and settlement in about 10 minutes.

Demand has recently grown rapidly, especially among investors in US stocks such as Tesla and Nvidia, partly because the instruments are not being taxed. According to RWA.xyz, a real-world asset tokenization data platform, the tokenized stock market totaled $1.46644 billion as of June 8. That was up 115% from the start of the year, about 2.8 times the 42% growth rate of the broader RWA market over the same period.