Tax Obligations for Domestic Virtual Asset Trading
Currently, there is no explicit legal basis for taxing income from virtual asset trading under the current tax laws in South Korea. As a result, no taxation is imposed. Courts have also weighed in on this matter with rulings that clarify the legal stance.
Seoul Administrative Court Ruling
The Seoul Administrative Court ruled:
"Under the current tax laws, income from virtual asset trading by individuals (residents and non-residents) and foreign corporations is not listed as taxable income under the Income Tax Act and is therefore not subject to taxation."
The court provided the following rationale for its decision:
-
Virtual Assets as Non-Tangible Domestic Assets
- Virtual assets do not qualify as "domestic assets other than real estate" under the former Income Tax Act (Article 119, Paragraph 12, Subparagraph (m)).
- As virtual assets are stored and maintained across a global network of computers connected through blockchain, they cannot be considered assets located within Korea.
-
Exclusion from Economic Benefits Clause
- Income from virtual asset transactions does not meet the criteria for "economic benefits derived from assets located within Korea or similar income" under the same statute (Subparagraph (k)).
-
Principle of Tax Legality
- Under the principle of legality in tax law, tax regulations must be strictly interpreted as written without expansion or analogy unless special circumstances justify otherwise.
-
Enumerative Tax System
- The Income Tax Act employs an enumerative system, meaning only income explicitly listed in the law can be taxed. Unlisted income remains untaxed.
Planned Taxation of Virtual Asset Trading Income
The South Korean government plans to implement taxation on virtual asset trading income starting January 1, 2025.
Key Provisions of the Revised Tax Laws
- Income Classification:
- Revised Income Tax Act (Article 21, Paragraph 1, Subparagraph 27) categorizes "income from the transfer or lending of virtual assets" as other income.
- Source of Income:
- Revised Income Tax Act (Article 119, Paragraph 12, Subparagraph (n)) designates this income as domestic source income for non-residents.
- Withholding Tax Rates:
- Revised Income Tax Act (Article 156, Paragraph 1, Subparagraph 8, Clause (b)) specifies withholding tax rates for virtual asset trading income, differentiating cases based on whether the acquisition cost is verifiable.
- Corporate Tax Inclusion:
- Revised Corporate Tax Act (Article 93, Paragraph 10, Subparagraph (k)) includes virtual asset income as domestic source income for foreign corporations.
Implementation Timeline
Initially scheduled for January 1, 2022, the enforcement was delayed twice and is now set to commence on January 1, 2025. The taxation will apply to transfers or lending of virtual assets occurring after this date. However, there remains a possibility of further postponement.
Current and Future Taxation Implications
As of now, there is no tax obligation for income generated from virtual asset trading due to the lack of explicit legal grounds. However, once the revised laws come into effect on January 1, 2025, tax obligations will likely arise.
Monitoring and Considerations
Tax regulations and their interpretation may evolve. Therefore, continuous monitoring is essential. Specific issues, such as the determination of acquisition costs, handling of transactions through foreign exchanges, and taxation of various virtual asset transaction forms (e.g., DeFi, NFTs), are expected to be clarified before the tax implementation. Stakeholders should stay informed on these developments.
