[Korea Times_김상준 회계사]Why no taxation on cryptocurrency trading in Korea?

By Kim Sang-jun

The American polymath Benjamin Franklin famously wrote: “In this world, nothing can be said to be certain, except death and taxes.” This famously paraphrased quotation refers to the fact that people cannot live without paying taxes to the state, and there is no way to evade taxes if they earn income.

However, contrary to the quotation, the number of people in Korea who have been earning huge incomes without paying taxes is increasing. This phenomenon is typically shown in cryptocurrency trading, through which individuals can make enormous profits by selling at a higher price than when purchased due to rising prices. Why is this taking place?

In modern civil society, law is the basis of a well-run state. Specifically, there are two legal principles: i) the principle of legality; and ii) the principle of no taxation without law. The former means that criminal liability and punishment should be based only upon prior enactment (authorities cannot simply make up what is illegal on a whim), while the latter means that no tax should be imposed without legal grounds.

In brief, unless there is a legal ground for the imposition of taxes on income, that income shall not be subject to taxation, no matter how large its value. With no legislation for taxation on the proceeds from personal sales of cryptocurrencies, these are still non-taxable in Korea, regardless of the amount earned and the number of transactions.

In theory, if cryptocurrency trading is made for investment purposes, profits generated may be subject to any of the following taxes: capital gains tax on profits from sale and purchase, value-added tax or certain transaction taxes on the transactions concerned, and other similar taxes. However, some factors prevent this from happening.

Firstly, the Korean Income Tax Act operates on the positive system, stipulating that capital gains tax shall be levied only on earnings actually set out in the laws. Accordingly, gains from transactions of cryptocurrencies are not subject to the imposition of income tax, because they are not listed as items for taxation in the Income Tax Act.

Secondly, there is no legal clarification on whether cryptocurrency is subject to value-added tax. There is not yet a specific legal definition of cryptocurrencies, whether a commodity or a currency.

Thirdly, there has been no legislation as to the taxes that shall be levied on transactions themselves, such as the securities transaction tax. Accordingly, both the value-added tax and the transaction tax cannot yet be levied on cryptocurrencies.

Under these circumstances, the Korean government is reviewing legal measures to impose relevant taxes on any profits or proceeds from cryptocurrency transactions. As stated earlier, taxes should be paid on earned income in conformity with social justice. Therefore, it is reasonable to expect that tax laws will be revised to impose appropriate taxes on cryptocurrencies as soon as possible, similar to the level of taxes applicable to other income items.

Kim Sang-jun is a certified public accountant and a member of the HMP Law Tech & Comms team, for which he reviews and researches tax and accounting issues.


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