In South Korea, Treating Crypto Gains As Income

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To get a better handle on crypto – and to boost government coffers, perhaps – change the tax designation (and rules, of course).

To that end, reports came this week that in South Korea, the Ministry of Economy and Finance is considering a 20 percent tax on income generated from cryptocurrencies – a policy that would codify tax policy where no real foundation yet exists.

As initially reported by The Korea Times, and as attributed to anonymous government officials, the ministry has directed its income office to examine the taxation of cryptos.

As reported, one consideration centers on categorizing gains tied to crypto transactions as “other income.” In South Korea, “other income” includes funds received, for example, from lectures and lottery winnings.

At first glance, if that 20 percent rate and other income designations come to pass, holders might be left with more in their pockets. Under rules governing “other income,” a 20 percent rate is levied on 40 percent of total other income; the remaining 60 percent can be tax-deductible. By way of contrast, capital gains can be taxed at more than 40 percent.

In an interview with Pulse News, one of the government officials said that “the finance ministry is yet to finalize its direction, but it surely has become more likely for the income from virtual asset trading to be labeled as other income, not as gains from transfer of capitals like real estate properties.”

Classifying the fund flows from crypto trading as income rather than capital gains allows taxes to be levied, and ostensibly collected, immediately. Under a capital gains designation, tax authorities must rely on information from crypto exchanges and reports that take into account purchase price, sales price, fair market pricing and other factors.

Tax Policy Still Fluid

As is the case with other countries grappling with crypto’s place in not just finance, but also traditional commerce, South Korea’s tax policy is still fluid. That’s especially true against the backdrop where late last year, the country’s tax authorities determined that crypto exchange Bithumb Korea owed the equivalent of $69 million USD because the exchange allegedly failed to withhold taxes on income paid to foreign customers, who had in turn sold crypto assets in Korea.

Beyond the confines of that particular case, late last year the Ministry of Economy and Finance said it would look to impose taxes on businesses that facilitate crypto trading, payments processing and mining.

This implies a widening net beyond crypto exchanges, and toward at least some normalization of crypto beyond trading on those exchanges. Treating the funds derived from crypto-related activities as income may also open the door to more concrete tax policy on work-related income, paid for in cryptos. Defining the actual confines of crypto assets and how they might be taxed would do much to move those digital holdings beyond the realm of speculation.

In addition, South Korea’s actions may inform similar regulatory policies in other countries. In the United States, for example, tax policy is still evolving. Earlier this year, in Congress, legislation debuted that would exempt transactions from taxes if gains are under $200, which would seem to cover transactions that are more currency- or commerce-related, and would exclude such activity from gross income.

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