“I will defer taxation on virtual assets by one year.”
After such remarks by Democratic Party presidential candidate Lee Jae-myung, the debate over whether to suspend taxation on virtual asset income is heating up in the political arena. Candidate Lee attended the ‘Youth Talks About Virtual Assets’ meeting on the 11th and said, “I think it is right to defer the taxation of virtual assets by one year, just like the stock transfer tax system.”
Candidate Lee also made a promise to go one step further and raise the limit on virtual asset income deductions. In a Facebook post, he said, “There is an opinion that it would be more reasonable to comprehensively tax all asset income, including virtual assets, in 2023, when the financial investment income reform plan will be implemented in earnest.” I need this,” he wrote.
Deferring virtual asset taxation is not the only argument for Lee. On the 11th, at the virtual asset-related policy forum co-hosted by Min Hyung-bae, a Democratic Party lawmaker and Cho Myung-hee, the floor leader of the People’s Power, participants voiced their unanimous voice in suspending taxation, saying, “The taxation infrastructure is not in place.” This is an argument that overturns the amendments to the Income Tax Act, which were passed last year by an agreement between the ruling and opposition parties. According to the amendment, from January 1 of next year, income from virtual assets was to be taxed at a 20% rate on income exceeding 2.5 million won per year.
Why did politicians bring out virtual asset tax deferral cards?
loopholes in virtual asset taxation
First of all, the opposition and opposition parties, ahead of next year’s presidential election, are pushing for a tax waiver despite the government’s opposition to target the votes of the 2030 generation. The 2030 generation, who have emerged as the mainstream of virtual asset investment, are raising their voices against the taxation of virtual assets on the grounds of equity among domestic and foreign virtual asset investors and lack of system. In particular, they point out that there are loopholes in the premise of taxation of virtual assets.
The basic principle of taxation is ‘tax where there is income’. According to this principle, the argument that income earned from virtual assets should be taxed has been strengthened. However, in order to be taxed properly, you need to know your income. Here comes the problem. This is because current virtual asset investors are not only trading where the government can determine their income.
A typical example is peer-to-peer (P2P) transactions. When individuals directly exchange virtual assets without going through domestic virtual asset exchanges such as Upbit and Bithumb, it is difficult for the government to know not only the transaction details such as the transaction price and quantity, but also the fact that the transaction was made.
In particular, interpersonal transactions through cold wallets are more problematic. A cold wallet is an ‘electronic wallet’ that allows you to store virtual assets on hardware that is completely blocked from the internet. With this technology, you can store virtual assets on USB or hand them over to others. Cold wallets have the advantage of being strong against hacking because the internet is blocked, but it is a big obstacle for the government to determine whether virtual assets are being traded.
Even if a virtual asset is purchased through an overseas virtual asset exchange such as Coinbase or Binance, it is difficult to determine whether a transaction has been made. It is almost impossible for the government to take over the transaction information of domestic users through overseas exchanges. If this happens, only those who use the domestic exchange, which are relatively easy to control by the government, are taxed, which violates the ‘fair taxation principle’.
Heo Jun-beom, team leader of the Korea Fintech Industry Association, said, “The government expects that taxation will be meaningful because most users trade on the four largest virtual asset exchanges in Korea, but that is a story based on now.” To avoid), no one knows how active the P2P market will be.” He also feared, “Even if you earn the same amount of money (depending on the type of transaction), there will be situations where some people pay taxes and others don’t.”
0 won deduction if the acquisition price is not proven?
Just because the government understands the transaction details of virtual assets does not mean that the problem will go away. This is because the problem of specifying the acquisition price remains when an individual calculates the actual profit earned by trading virtual assets.
Currently, the government is in a position to calculate virtual asset income by subtracting the acquisition price and necessary expenses from the sale price of virtual assets. However, even if the selling price is clear, the buying price may not be. It is difficult to calculate the acquisition price when virtual assets are acquired through so-called ‘mining’, which generates blocks and receives virtual assets, or when companies receive virtual assets as dividends.
Noh Ung-rae, a member of the Democratic Party’s office, said, “The government is in a position to tax the entire transfer value without deducting expenses if the user cannot prove the purchase price directly.” “The government is placing an excessive burden of proof on individuals.”
There is also the issue of equity with other financial investment income. The government defines virtual assets as ‘other income’, but is it correct? In the International Accounting Standards, virtual assets are classified as intangible assets, and in our tax law, intangible assets are classified as other income and taxed. Therefore, the Ministry of Strategy and Finance plans to tax virtual assets as other income.
In this case, the application of the loss deferral system, which is recognized only for capital gains, becomes impossible in virtual asset transactions. This system is a system that allows the loss to be carried forward so that the tax base for the following year can be lowered in case of a loss as much as it is taxed when a profit is made. From 2023, when capital gains tax is levied on financial investment income exceeding 50 million won, stock trading will receive a carryover deduction for five years. On the other hand, virtual assets classified as other income cannot be deducted.
The issue of equity with new investment destinations such as non-fungible tokens (NFTs) cannot be left out. Recently, as the NFT market is newly emerging, domestic and foreign funds are pouring in, but the NFT market is in a taxation blind spot. Deputy Prime Minister Hong Nam-ki, attending a state audit by the Planning and Finance Committee in October, said, “There is still debate as to whether or not NFTs are included in virtual assets,” but “not yet.”
For this reason, experts point out that although the principle of taxation on virtual asset income should be respected, the implementation should be delayed until a proper taxation infrastructure is in place.
Oh Moon-seong, a professor of tax accounting at Hanyang Women’s University (Chairman of the Korea Association for Tax Policy) said, “The government is only interested in securing tax sources when the taxation infrastructure is not in place. will be hit,” he suggested, proposing a tax waiver.
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