Korea's crypto tax regime has a long way to go: income classification, double taxation need fixing [Crypto360]

As the government moves to defer digital asset taxation by two years and refine the regime, a National Assembly analysis has found that South Korea needs to address far more than transfers and lending — including how taxes already paid abroad are credited. The assessment calls for clarifying the nature of income arising from new transaction types and building in double-taxation safeguards, much as Japan has done by establishing detailed rules for each transaction category. Stablecoins were also flagged as a pending task, with their legal character and tax treatment needing to be settled in tandem with the enactment of a sector-specific law.

A legislative research response on Japan's virtual asset tax regime, prepared by the National Assembly Research Service in January and obtained by The Herald Business, contains these recommendations for improving South Korea's framework. Such responses are compiled by Research Service analysts at the request of individual lawmakers and provided to their offices on a confidential basis.

Japan spelled out its income tax rules for cryptocurrency transactions in 2017 and enacted related tax law revisions in April 2019. Crypto trading income is classified in principle as miscellaneous income and subject to comprehensive taxation at progressive rates of 5 to 45 percent; including local inhabitant taxes, the top effective rate reaches 55 percent.

Japan, too, faced practical difficulties at the time — incomplete data submitted by exchanges, the limits of tracking peer-to-peer transactions, and the complexity of calculating the tax base. Rather than delay implementation, however, Japan chose to launch the regime first and address problems as they emerged.

Japan sets out the timing of taxation and the method of calculating income for each transaction type, covering coin-to-coin swaps, mining and hard forks. Coins received through mining are valued at market price at the time of acquisition, with necessary expenses deducted to arrive at taxable income; the same approach applies to lending. Coins received through a hard fork — where a blockchain splits — are not taxed at the point of receipt; instead, the acquisition cost is treated as zero when the coins are later sold.

South Korea's income tax law, by contrast, classifies income from the transfer and lending of virtual assets as other income for tax purposes. "Japan has made its tax standards comparatively clear through income tax and corporate tax provisions covering a wide range of transactions, as well as National Tax Service guidelines," the Research Service said. "South Korea has only legislated for income from the transfer and lending of virtual assets and has not specifically addressed other types of transactions."

In response, analysts say one option worth exploring in future discussions is classifying income from all virtual asset transactions — not just transfers and lending — as other income under a single umbrella rule. Staking rewards alone could be interpreted differently depending on whether they are seen as consideration for lending a virtual asset or as payment for blockchain validation services, which would affect how they are taxed. The idea is to bring new transaction types under the other-income category rather than determining taxability case by case under general tax principles each time a new type emerges.

However, there are objections to bundling all virtual asset income under other income, on the grounds that it does not fit the existing tax framework. Transfer income represents a capital gain from the sale of an asset, while lending income is a recurring return earned by lending an asset — the two are fundamentally different in character. "Taxing transfers and lending together under one category would simplify filing, but it does not sit well with the tax classification system," said Ahn Seong-hee, a professor at Catholic University of Korea.

A second issue is how to handle taxes already paid abroad. When a South Korean resident earns virtual asset transfer or lending income on an overseas exchange and pays tax locally, the risk of double taxation needs to be resolved.

The Research Service noted that under a separate-taxation structure for virtual asset income classified as other income, claiming a foreign tax credit could be difficult. Under Article 57 of the Income Tax Act, foreign-source income must be included in aggregate income or retirement income — not classified as other income — to qualify for the adjustment.

One remedy proposed is allowing taxpayers to opt for comprehensive taxation. If virtual asset income could be combined with other aggregate income for filing purposes, the foreign tax credit would become available, letting taxpayers deduct taxes already paid abroad from their domestic tax liability up to a set ceiling and reducing the double-taxation burden.

Another option discussed is recognizing overseas taxes paid as a deductible expense while keeping the separate-taxation structure. Under this approach, taxes paid abroad would be subtracted as a cost when calculating virtual asset income, lowering the domestic tax base. Because this differs from a direct tax credit in the degree of relief it provides, the specific scope and application method would require further design work.

Of late, the market has also been discussing ways to ease the burden on investors through a higher basic deduction or a reduced tax rate. The rationale is that the deduction and rate structure should be designed with investor distribution, holdings and income levels in mind. "Rather than focusing on the basic deduction, we should boldly discuss applying a low tax rate or tax exemption to capital gains earned by lower-income investors who invest for asset-building purposes," said Kim Woo-cheol, a professor at the University of Seoul. "The approach should not be limited to virtual assets but should be framed within the broader context of capital gains taxation as a whole."

Analysts also say South Korea needs to accelerate its regulatory overhaul, particularly when compared with Japan's track record on stablecoins. Japan amended its Payment Services Act in 2023 to define stablecoins as electronic payment instruments and brought them within the regulatory perimeter by restricting issuance to banks, trust companies and fund transfer service providers. South Korea, by contrast, has yet to enact a basic digital asset law covering the issuance and retail distribution of stablecoins, leaving the legal character of related transactions and their tax treatment unclear.

This has led analysts to argue that the legal character and tax treatment of stablecoins and other new digital assets should be addressed as part of the sector-specific legislation now being drafted. Whether a stablecoin is treated as a means of payment, an investment asset or a financial product combined with deposit and lending features will determine how the resulting income is classified and taxed. Just as Japan first established in law the issuers and distribution structure for stablecoins, South Korea needs to revise its income tax law and corporate tax law in parallel with the sector legislation, analysts say.