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South Korea and Japan grapple with how to define, and tax, cryptocurrency gains

South Korea and Japan grapple with how to define, and tax, cryptocurrency gains
Despite the increasing acceptance of cryptocurrency globally, governments are still figuring out how crypto should be defined and taxed. Is it an alternative form of currency, or is it an asset or securities? Are crypto profits capital gains, or income? 



In Japan, crypto tax depends on an individual’s earnings, and the highest earners can be subject to a whopping 55% tax on crypto gains, compared to the 20% tax the same investor would pay on profits from ordinary stocks. 



In contrast, South Korea, which currently has no crypto tax, is slated to levy a 20% tax on crypto gains starting next year — much less than its maximum income tax rate of 45%.



South Korea is now moving to delay the politically unpopular plan to impose a crypto tax during a presidential election year.



At South Korea’s National Assembly tax subcommittee meeting today, the country’s ruling Democratic Party and the opposition conservative party have essentially agreed to push back a 20% levy on virtual asset income by one year, from the start of 2022 to Jan. 1, 2023. 



A meeting regarding the tax delay bill was held earlier this week on Wednesday, but ended without making a decision due to opposition from the Ministry of Economy and Finance . Officials present at the second meeting today agreed tentatively to postpone taxation on cryptocurrency gains. However, local media report the delay is not finalized, but one official from the National Assembly expects a decision to be made during the weekend and the bill to pass next Monday as the two political parties are seeing eye to eye.  



The National Assembly still needs to decide whether to raise the tax-free limit for virtual asset gains to be on the same level as that of stock gains.



When South Korea announced the 20% tax on crypto gains over the amount of 2.5 million Korean won (about US$2,090), investors criticized the plan, pointing out that the tax policy is constructed unfairly when compared to stock gains tax. Stock income will be taxed 20% from 50 million won, which is around US$41,800, and is scheduled to start on Jan. 1, 2023.



The critics of the crypto tax plan, many of whom are in their 20s and 30s, argued that as cryptocurrencies have similar characteristics to financial assets, they should be taxed on the same basis. Keen on winning over the votes of people in their 20s and 30s for the upcoming presidential election on March 9, 2022, political parties started to push the delay of crypto taxation.



However, the South Korean government gave its own reason for putting a difference in virtual asset gains tax, away from the stock gains tax. It explained that under the current income tax law, income generated from virtual asset transactions is categorized as other income. Examples of other income include prize money, reward money, and lottery winning. And cryptocurrencies were categorized as intangible assets rather than financial.



The government also explained that there are special tax benefits to income from certain financial investments, and virtual assets aren’t categorized as financial assets in South Korea — hence the lower threshold for tax deduction.



“I believe the reason why the Ministry of Economy and Finance classified virtual assets as intangible assets is the negative perception, or this social stigma that Korea used to have on cryptocurrencies,” said Cha Dong-joon, professor at Kyungbok University’s tax accounting department, in an interview with Forkast.News. “But in reality, [cryptocurrencies]  are a lot like financial assets, and transaction methods are very similar to stock trading. So I believe that crypto gains should be categorized under financial income.”



In Japan, crypto investors face even more rigorous tax responsibilities — and it’s not up for debate. 



Japan’s stock investors pay a 20% tax on profits from stocks — a 15% income tax and 5% inhabitant’s tax. The tax rate remains the same regardless of the amount of stock income.



However, it is a totally different story with cryptocurrencies. From 2018, the Japanese government started to tax virtual asset gains from 5% to as much as 45% . With the 10% inhabitant’s tax, investors who earn a profit of more than 40 million Japanese yen (around US$351,000) from virtual assets are subject to a whopping 55% tax responsibility. 



Moreover, the tax loss carry-forward system applied to stocks is not applicable to virtual assets. A tax loss carry-forward allows investors to move a tax loss to future years to counterbalance with a profit. Stock investors can carry over the loss for three years. In essence, Japanese crypto investors are left with few benefits and a lot of taxation. 



The tax collector’s reasons are similar to those of South Korea — the Japanese National Tax Service taxes virtual currency gains by classifying them as miscellaneous income. Virtual asset investors in Japan are not given special benefits, whereas the Japanese government made exceptions for stocks and foreign exchange futures and imposed low tax rates.



This has led many investors in Japan to drop virtual assets from their portfolios, while some others hid their crypto earnings. In October, the Japanese tax authorities found out and started investigating US$6 million worth of virtual currency income that has been unreported in the Kanto region.

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