Cryptocurrency & Virtual Currency Taxation Plan Explained: How Much Tax Will You Actually Pay, and Is There a Way to Avoid It After the Specific Financial Information Act
6 min read · · Korean original
Hello, this is Bitpunk. Today I'm going to break down the new cryptocurrency & virtual currency taxation plan that starts on January 1, 2022. I haven't even "graduated" from this land of opportunity yet, and they're already about to hit us with taxes. It really breaks my heart. So how much tax will we have to pay, and how? And is there any way to pay a little less?
Cryptocurrency Taxation Plan Explained
First, I'm sharing a Twitter thread from CoinKorea, who did a great job summarizing the crypto taxation plan. Focusing on this should help you get a feel for how the taxation will work.
To roughly summarize the content below, a 20% tax (+ an additional 2% local tax) is imposed on all gains exceeding KRW 2.5 million per year. For example, if your income for one year is KRW 4 million, you exclude KRW 2.5 million, and on the remaining KRW 1.5 million you pay 20% tax + 2% local tax, a total of 22%, which comes to KRW 330,000 in tax.
Summary of South Korea's 2020 cryptocurrency tax law
— CoinKorea (@CoinKor) December 2, 2020
1)
- From January 1, 2022, gains (from trading, exchange, lending) are taxed as "other income" at 20% + 2% (local tax), no withholding
- Filing and payment once a year (May 1–31)
- Tax applies to annual income above KRW 2.5 million (KRW 50 million for stocks)
- Holdings on overseas exchanges must also be reported; personal wallets are not subject to reporting
2)
— CoinKorea (@CoinKor) December 2, 2020
- If you make a profit of KRW 10 million (excluding incidental costs such as fees), you subtract the minimum deduction of KRW 2.5 million and pay 20% of the KRW 7.5 million, i.e. KRW 1.5 million + local tax
- For non-residents (working abroad, staying abroad for 2+ years) and foreign corporations, tax is withheld: if the acquisition price cannot be proven, transfer price x 10%; if it can be proven, (transfer price - acquisition price) x 20%
3)
— CoinKorea (@CoinKor) December 2, 2020
- Residents of countries with a tax treaty may be exempt under that treaty (a tax exemption application must be submitted)
- For mining, if you can prove incidental costs such as labor and electricity, they are recognized as deductions in the acquisition price
- Personal wallets (P2P, OTC trades) are not subject to reporting, so routes for hiding funds, tax evasion and tax avoidance remain open
4)
— CoinKorea (@CoinKor) December 2, 2020
- Taxation applies from January 1, 2022, and how to value the market price on the day before taxation begins is still under discussion (7-day average, 30-day average, price before close, etc.)
- If you can't prove the acquisition price, for example if you found a USB containing crypto on the street, 20% of the sale price is collected
5)
— CoinKorea (@CoinKor) December 2, 2020
- Overseas exchange users must report their overseas exchange accounts to the tax authorities separately from paying tax (if caught, penalty tax of 20% for non-reporting, 40% for fraud, 60% for offshore transactions)
- Penalties for late payment are calculated daily, and if caught a year later, an extra 10% penalty tax is added
6)
— CoinKorea (@CoinKor) December 2, 2020
- Interest income from DeFi, staking, stablecoins, P2P, etc. is also taxed based on KRW withdrawals
- You can save on taxes by submitting transaction history and account information (withdrawal fees, transfer gas fees, the Korea premium between overseas and domestic exchange prices, aka the kimchi premium, etc.) in an Excel file or similar as necessary expenses
This Is Too Much. Can't We Avoid Some of This Tax?
With stocks you only pay tax on gains of KRW 50 million or more, but with crypto it starts at KRW 2.5 million. That kind of discrimination feels like too much. Is there any way to pay a little less of this tax? To cut to the chase, it's not easy. The following is a summary based on an article from CoinDesk Korea.
1. If I keep my crypto in a personal wallet and sell it right when taxation begins, won't there be no capital gain?
Unfortunately, no. Investors must prove the acquisition price of crypto they obtained before taxation begins. If they can't prove it, the acquisition price is set at the market price on September 30, 2021, and if that can't be established either, they must pay 20% of the sale amount as tax.
2. Can't I just use a personal wallet and trade over the counter?
This is the one method where there's at least some possibility of not paying tax, because it's nearly impossible for the authorities to track every personal wallet. However, OTC companies are classified as virtual asset service providers and must register with the financial authorities. Since trust is essential in OTC trading, you'd naturally feel uneasy trading with an unregistered company. In the end, even if you trade through a legitimate OTC brokerage, you still have to pay tax.
3. What if I pay directly with crypto?
The government has this in mind too. Amounts paid with Bitcoin, Ethereum, etc. will also be treated as transfers and taxed. This is because crypto is treated as an asset rather than a currency. So rather than a payment, it's closer to bartering, and that triggers capital gains tax. However, some see this as excessive taxation, so it's expected to be controversial.
4. What about using a card like Crypto.com?
The Crypto.com card links your crypto to Visa/Mastercard so you can spend it. Some argue that capital gains tax can't apply, because when you pay with Crypto.com, your crypto is converted to Singapore dollars before the payment is made. In other words, it's a foreign currency payment using Singapore dollars. Nothing has been finalized on this yet, but for now, tax will reportedly be imposed if a capital gain arises when the crypto is converted to Singapore dollars.
5. What if I trade on an overseas exchange and hold my funds in Tether or similar?
As we saw earlier, all income arising from crypto exchanges is taxed. Exchanging into Tether is considered a transfer and exchange of crypto, meaning the gain has been realized. If you don't report this properly, an additional tax of 20% or more is imposed.
That wraps up our look at the newly introduced, heartbreaking cryptocurrency taxation plan. If this post was helpful, please give the heart below a tap, with all the bitterness you feel.
