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10 Jan 2018

Korea Announces Plan to Tax Cryptocurrency

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Korea Announces Plan to Tax Cryptocurrency

Following formation of a joint task force on cryptocurrency (e.g., bitcoin) on December 4, 2017 and banning of minors and foreigners from dealing in cryptocurrency, the Korean government announced its plan to tax cryptocurrency in its "2018 economic policy direction" on December 27, 2017. The government seems to have recognized that the cryptocurrency market, which has recently become overheated, has become the place of speculation, and therefore, have decided to impose tax on cryptocurrency transactions as a means of suppressing speculation.

Until now, the government has not announced any detailed taxation measures regarding cryptocurrency. However, corporate tax, business income tax, capital gains tax, transaction tax, value added tax, inheritance tax and gift tax, etc. are mentioned among tax experts as possible measures. Provided below is a summary of tax experts" discussion on the current status of taxation and probable measures to be taken with regard to cryptocurrency transactions.

I. Corporate Income Tax

If income earned by a company is greater than expenses paid by such company for business purposes, the net assets of the company increase as much as the difference between income and expenses, and such increase in the net assets becomes taxable profits of the company. As taxable profits of a company is comprehensively defined under the Corporate Income Tax Law, income earned by a Korean company from cryptocurrency-related business will likely be included in taxable profits, and also, income earned by a Korean company from the sale of cryptocurrency for investment purposes will also be subject to corporate income tax.

II. Business Income Tax of Individual Businessmen

Types of business income subject to individual income tax are listed under Article 19(1)(1) to (20) of the Individual Income Tax Law: Article 19(1)(1) to (19) lists business income generated from specific businesses (such as income generated from agriculture), and Article 19(1)(20) prescribes "income obtained from the continuous and repeated activity under an individual"s own calculation and responsibility for profit making purposes, as income similar to those specified in subparagraphs 1 through 19" as business income. The Individual Income Tax Law prescribes that businesses listed under Article 19(1)(1) to (19) mean businesses classified in accordance with the Korean Standard Industrial Classification published by the Commissioner of the Korea National Statistical Office. In case an individual engages in cryptocurrency brokerage business, such business will be considered a business similar to "other specific commodity brokerage business" under the Korean Standard Industrial Classification (Article 19(1)(20)), and thus, in case the individual "continuously and repeatedly" conducts cryptocurrency brokerage activities, income arising from such activities will be subject to individual income tax

III. Capital Gains Tax

Currently, capital gains arising from the sale of "real estate, shares (excluding certain listed shares), certain derivative products, goodwill transferred with fixed assets for business, and the right to use facilities" by an individual are subject to capital gains tax. Capital gains which do not arise from the sale of the above listed objects are not taxable. Under the current law relating to capital gains tax, capital gains arising from an individual"s simple investment in cryptocurrency will not be subject to capital gains tax. Accordingly, in order to impose capital gains tax on capital gains derived from the sale of cryptocurrency, the government needs to amend relevant law. In the case of the United States, the United Kingdom, Australia, Japan, and Germany, it seems possible to impose capital gains tax on capital gains arising from the sale of cryptocurrency under their current taxation system.

IV. Transaction Tax

There is also a discussion on whether to impose transaction tax, such as securities transaction tax, of which payment is made by the transferor at the time of cryptocurrency transfer. In general, due to the nature of cryptocurrency, it is not easy to find out numerous transactions conducted between individuals. Further, the introduction of transaction tax will not be easy, because the cryptocurrency market does not have an institutional foundation such as a stock exchange where shares are traded.


Domestic supply of goods or services and importation of goods are taxable under the VAT Act. Thus, whether cryptocurrency falls under goods under the VAT Act will be an issue. "Goods" under the VAT Act means "any things or rights that have property value". As a cryptocurrency has its own price and is traded at such price, it may be reasonable to consider that cryptocurrency has property value and therefore it will fall under the category of goods under the VAT Act. However, if cryptocurrency is considered "currency" based on its nature, it will not fall under goods under the VAT Act, because it is not a thing or right but means of payment itself. Accordingly, whether the government will recognize cryptocurrency as a type of currency will likely determine the direction of VAT imposition. On the other hand, considering that it is practically difficult for the government to monitor all cryptocurrency transactions, or for industrial policy reasons, there is also a possibility that cryptocurrency transactions may be treated as VAT-exempt transactions.

VI. Inheritance Tax and Gift Tax

"All properties having economic value that can be converted into money" and "all legal or de facto rights having property value" are taxable objects of inheritance tax, and besides the above, "all economic profits that can be converted into money" are also included in taxable objects of gift tax. As taxable objects are broadly prescribed under the Inheritance Tax and Gift Tax Act, cryptocurrency will likely be subject to inheritance tax and gift tax. However, valuation of cryptocurrency subject to inheritance tax and gift tax will be an issue. Although the price of cryptocurrency is being formed in the cryptocurrency exchange, price fluctuations are very sharp, and also, the price changes every 24 hours. Therefore, tax burden may differ greatly according to timing. Also, difference in prices per cryptocurrency exchange makes valuation of cryptocurrency difficult. The more serious issue is that there is a limit in imposing inheritance tax and gift tax on cryptocurrency. In case cryptocurrency is acquired through the cryptocurrency exchange, such transaction can be traced based on the record left in the cryptocurrency exchange. However, in case some cryptocurrencies are acquired through a P2P (peer-to-peer) transaction, it will be difficult to trace such transaction. In addition, in case cryptocurrencies are acquired in the overseas cryptocurrency exchange, it will also be difficult to trace such transaction, because the overseas cryptocurrency exchange will not likely cooperate with the Korean tax authority"s request for information.

VII. Conclusion

Considering that major countries are imposing tax on capital gains arising from the sale of cryptocurrency (i.e., U.S. recent tax reform which has explicitly prescribed cryptocurrency transactions as taxable object of income tax), capital gains tax will likely be applied to cryptocurrency transactions in Korea in near future. On the other hand, with respect to VAT treatment of cryptocurrency transactions and imposition of transaction tax on such transactions, the Korean government is expected to cautiously determine such issues by comprehensively reviewing the position of financial supervisory authorities, industrial policy aspects, and tax administration issues.

Yulchon has established a task force team for block chain markets and accumulated extensive experiences with respect to cryptocurrency-related issues and various issues of relevant industries. We will continue to make efforts to provide useful advice to clients who are interested in block chain-related issues including taxation of cryptocurrency.

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Kim, Dong Soo Lee, Kyung Geun
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Soh, Jin Soo Lee, Sun Young
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