South Korea Tightens Crypto Regulations and Delays Tax Plan
1. Reassessing Cryptocurrency Listings
South Korean financial authorities plan to reassess the listing of approximately 600 cryptocurrencies traded on domestic exchanges to ensure compliance with the Virtual Asset User Protection Act, effective July 19.
Local media reported that the South Korean government has finalized a best practice plan to support virtual asset trading, outlining strict new requirements for listing cryptocurrencies on domestic exchanges. Currently, exchanges conduct internal reviews, but the authorities will implement more stringent review procedures.
2. Establishing Self-Regulation Standards
All virtual asset exchanges in South Korea are collaborating to develop a model case for “self-regulation standards for virtual asset trading support (listing).” Previously, the five major won market exchanges (Upbit, Bithumb, Coinone, Korbit, Gopax) had established self-regulation standards, but this is the first time all crypto-to-crypto exchanges are participating.
The Digital Asset eXchange Alliance (DAXA) is working with domestically operated exchanges to revise the self-regulation standards for virtual asset trading support.
3. Formulating New Self-Regulation Standards
The new self-regulation standards include the five major won market exchanges and more than 20 crypto-to-crypto exchanges. This is the first time all virtual asset exchanges are collaboratively creating unified self-regulation standards.
The new standards will be based on the existing DAXA trading support guidelines and will incorporate feedback from the exchanges.
Additionally, the Financial Supervisory Service of Korea is involved in formulating these new self-regulation standards, providing expertise and knowledge from the traditional financial sector.
Recommendations from the Financial Supervisory Service include quarterly listing maintenance reviews by exchanges, designating problematic assets as “cautionary assets,” and considering delisting them.
The new self-regulation standards are expected to be released by DAXA around the time the Virtual Asset User Protection Act takes effect on July 19.
Industry insiders indicate that while the content of the new self-regulation standards is not yet finalized, they aim to enhance the existing DAXA guidelines and strengthen monitoring measures.
4. Challenges in the Virtual Asset Taxation Plan
On June 21, 2024, South Korea’s Ministry of Economy and Finance began reviewing the postponement of the virtual asset taxation plan, originally set to take effect in January next year.
Experts point out that there is currently no effective solution to address the anonymity of virtual assets, posing significant challenges for taxation.
Background
The South Korean government initially planned to start taxing virtual assets in January 2022, but due to insufficient preparation of the tax system and exchanges, this plan has been postponed twice. It is now scheduled for implementation in January 2024.
Under the current plan, income from the transfer and lending of virtual assets will be taxed as other income, with amounts exceeding 2.5 million won subject to a 22% tax (including local tax).
Points of Contention
Despite government efforts to advance the taxation plan, existing laws struggle to address the issues of anonymity and decentralization in virtual assets.
Experts note that current laws require obtaining transaction records from exchanges for verification, but this design has significant flaws and cannot fully capture the complexity and anonymity of virtual asset transactions.
Expert Opinions
Tax professionals believe that effective taxation requires centralized identification and transaction information of traders and finding realistic solutions. They suggest treating virtual asset income as financial investment income, provided there is a system to verify off-exchange transaction records.
Experts also highlight that the current legislation is too hasty and has not fully considered the unique characteristics and technical challenges of the virtual asset market, even failing to accurately estimate tax revenue.
Conclusion
Due to the lack of a solid taxation foundation, experts believe that the current legislation has many shortcomings. If these issues are not effectively resolved, the 2025 taxation plan may also face delays.
The South Korean government faces significant challenges in implementing effective taxation while addressing the anonymity and decentralization of virtual assets. Resolving these issues will require not only improvements to existing laws but also the development of more advanced technological solutions to ensure fair and effective taxation.