Exclusive: South Korea Finance Ministry Says Tokenized Stocks Are Securities, Taxation Could Start in Second Half

Finance Ministry Says Tokenized Stocks Are Securities, Not Virtual Assets

Taxation Could Begin Once FSC Issues Authoritative Interpretation

South Korea’s tax authorities said tokenized stocks could be taxed as early as this year if financial regulators make a final determination. The Ministry of Economy and Finance is moving to overhaul the tax framework on the view that tokenized stocks should be treated as securities rather than virtual assets.

A ministry official told Bloomingbit on June 12 that the government currently views tokenized stocks as securities. If the Financial Services Commission determines that tokenized stocks are securities, they can be taxed immediately under the current Capital Markets Act. While tokenized stocks formally take the form of virtual assets, they are closer in substance to securities. Financial regulators have already made clear in guidance that instruments with the substance of securities should be treated as securities, and they have shared that view with the finance ministry several times.

The FSC said in its 2023 token securities guidelines that token securities are securities issued in the form of digital assets and are therefore subject to the Capital Markets Act. Those guidelines, however, focused on non-standard securities tied to fractional investments in art, real estate and copyrights, leaving the legal status of tokenized conventional securities such as stocks unclear. The prevailing market view had been that tokenized stocks would be treated as virtual assets, which are currently untaxed, so investors would not owe taxes until South Korea’s virtual-asset tax regime takes effect next year.

The tax authorities, however, are treating tokenized stocks as securities and are closely watching the FSC’s legislative work. At the second public-private token securities consultative meeting in May, the FSC said it would draw up a detailed step-by-step roadmap for the tokenization of conventional securities such as stocks. If the regulator issues an authoritative interpretation on the securities status of tokenized stocks 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 securities under the Capital Markets Act are not limited to domestic issuance, offshore trading on overseas platforms would also fall within the tax net. Regardless of where an instrument is issued, if its economic value and rights structure amount to a security, it could be subject to dividend income tax under current law, the ministry official said. Depending on whether tokenized stocks carry voting rights, they could later be classified in more detail as common stock, equity-linked securities or investment contract securities.

The finance ministry and the National Tax Service are also working to build information-sharing systems with overseas tax authorities, including the US Internal Revenue Service, to track transactions conducted through foreign platforms. Tokenized stocks are a new concept and a new asset class with no domestic taxation precedent, so disputes could arise between taxpayers and tax authorities. The final determination on whether they are securities falls under the FSC’s authority, but tax authorities view tokenized stocks as securities rather than virtual assets.

Tokenized stocks are structured by placing actual shares with a custodian and then issuing and distributing tokens representing the economic rights to those shares. Investors can trade the tokens to capture gains from share-price movements. Their appeal lies in blockchain-based settlement systems that allow round-the-clock trading throughout the year and relatively fast settlement in about 10 minutes.

Demand has been rising quickly, especially among investors in US stocks such as Tesla and Nvidia, partly because the instruments are not currently taxed. According to RWA.xyz, a data platform for real-world assets, the tokenized stock market stood at $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.