Bitcoin taxation: Won't do it? Can't do it? [Ko In-seon's Tax Insight]

Virtual asset taxation…postponed again by two years

Originally 2022 → implementation in 2027

6 million investors…taxation is 'idling'

Taxes even if there are losses? Controversy over fairness

Taxation of overseas exchanges is effectively a 'loophole'

The 'Law Street' column of Hankyung Law&Biz provides practical legal knowledge for companies and individuals. Expert attorneys cover a range of legal issues including taxation, inheritance, labor, fair trade, M&A, and finance, and also provide analysis of major rulings.

The size of South Korea's virtual asset market ranks third in the world, and the number of investors is estimated to exceed 6 million. However, since the 2020 amendment to the Income Tax Act that decided on taxation of virtual asset income, the taxation timetable has repeatedly stalled. Taxation originally scheduled for 2022 was deferred in 2023 and 2025, and has now been postponed again until January 1, 2027.

Despite the basic tax principle that "where there is income, there is tax," why has the government hesitated to implement taxation for as long as five years? Is this simply a political choice to avoid taxation — i.e., 'not doing' it? Or is it a practical limitation due to an insufficient tax base — i.e., 'unable to do' it?

Reasons for 'not doing' it: tax fairness issues

Behind the postponement of virtual asset taxation is the issue of 'tax fairness' with other financial investment products. The Income Tax Act amendment classifies income from the transfer or lending of virtual assets as 'other income' and plans to tax separately at a 20% rate on income exceeding 2.5 million won per year. However, this structure is significantly disadvantageous to investors when compared to taxation methods for other investment assets.

For example, the abolished financial investment income tax (financial investment tax) applied a basic deduction of 50 million won to financial investment products such as stocks, and allowed a 'carryforward of net operating losses' for five years to offset losses against next year's gains if losses occurred.

By contrast, virtual asset income would only be subject to a low deduction limit of 2.5 million won, and neither loss offsetting across asset types nor carryforward of net operating losses would be possible. For instance, if an investor had a loss of 10 million won last year and an equal gain of 10 million won this year, the actual income is zero, yet under the current taxation plan the investor would have to pay tax on this year's 10 million won gain. Considering that major countries such as the United States, the United Kingdom, and Germany treat virtual asset income as capital gains and permit loss offsetting and carryforward of net operating losses with other assets, the rigidity of the domestic taxation plan is even more striking.

This controversy over tax fairness can trigger investor backlash against taxation, which likely acted as a political burden that made the government reluctant to push forward with taxation — a factor of 'not doing' it. Moreover, given that most capital gains from domestically listed stocks, which currently have a far larger number of investors and trading volume, are not subject to tax following the abolition of the financial investment tax, taxing virtual assets may be seen as a 'gray' area.

Reasons for 'unable to do' it: insufficient tax infrastructure

On the other hand, among the explanations the government gives for postponing taxation is the lack of tax infrastructure. One of the biggest obstacles is the lack of a proper method to identify income generated through overseas exchanges or person-to-person (P2P) transactions.

Under the current legal system, transaction records through virtual asset service providers reported under the Act on Reporting and Using Certain Financial Transaction Information can be traced, but if investors use overseas exchanges such as Binance or trade virtual assets through personal electronic wallets, it is not easy for tax authorities to recognize whether income has been generated. This not only creates a tax fairness issue with domestic exchange users but also raises concerns that it could encourage tax avoidance by using overseas exchanges.

The government postponed the taxation date to 2027 expecting the 'Crypto-Asset Reporting Framework (CARF)' promoted by the OECD to be implemented. CARF aims to automatically exchange virtual asset transaction information among member countries, so if implemented it could enhance the effectiveness of identifying overseas income. However, actual information exchange requires each country to revise laws and systems and reach individual agreements, so there are also views that smooth implementation within 2027 is not guaranteed. In this way, the lack of technical and institutional infrastructure is a core reason for being 'unable to do' taxation.

From 'unable to do' to 'doing well'

The postponement of virtual asset taxation appears to be the result of a combination of political considerations of 'not doing' it and practical limitations of 'unable to do' it. However, repeated deferrals undermine trust in government policy and can deepen unfairness between honest taxpayers and tax avoiders.

Tax authorities should not waste the secured two years simply waiting for CARF to take effect. They need to reassess the nature of virtual asset income and design a rational and fair taxation system, such as introducing loss offsetting and carryforward of net operating losses. In addition, taxation standards for new forms of virtual asset income such as staking and airdrops should be established. It is hoped that a virtual asset taxation system that investors can trust and accept will be implemented.

<Hankyung Law&Biz contributor> Ko In-seon, attorney at Won Law Firm