April 25, 2024

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Digital artist Beeple’s “Everydays: The first 5000 days,” sold for $69 million in March 2021. (Beeple)

It’s not just cryptocurrencies -- South Korea has been witnessing rapid growth of other forms of digital assets such as nonfungible tokens and decentralized finance.

Korean movie star Ha Jung-woo is one of the latest artists riding on the growing interest in the market as he sold his first digital artwork for 55.46 million won ($47,060) in August. Hybe, the management company behind K-pop sensation BTS, and Dunamu, the blockchain company that operates Upbit, the largest cryptocurrency exchange here, are also reportedly planning to issue BTS goods in the form of nonfungible tokens as well.

Along with the quickly emerging market here, the administrative move to tax profits from digital assets has also been gaining speed. But experts say the government still needs time and effort to make the taxation plan on digital assets ”fair“ and ”transparent.“

Concerns over the government’s rather ”hasty“ move came after a comment from the Finance Ministry last week that it is mulling the possibility of imposing taxing DeFi products. Under the plan, the government will apply a withholding tax rate of 25 percent and basic tax rate of 6 to 45 percent for income above 20 million won, according to officials.

NFTs, which are digital counterparts of real-world assets such as art pieces and music, are also to be subject to taxation. The country is already poised to levy income profit taxes on cryptocurrencies from Jan. 1, 2022.

“We are weighing whether NFTs fall into the virtual-asset category because there is a demand to include (NFTs among virtual assets),“ said Finance Minister Hong Nam-ki.

The government’s move to tax NFTs and DeFi products is supported by the updated guidelines on virtual-asset service providers by the Financial Action Task Force, an intergovernmental anti-money laundering watchdog. The FATF’s guidelines serve as the industry standard for anti-money laundering and counterterrorism financing obligations as a binding measure on member countries of the FATF, including South Korea. In the latest update on the guideline that was published on Oct. 28, the FATF recommended DeFis and NFTs to be included in the FATF definition of virtual assets, making them subject to its rules. 

Korean actor Ha Jung-woo’s first NFT piece, “The Story of Marti Palace Hotel,” sold for 47,000 klay, a cryptocurrency developed by Kakao’s blockchain arm Ground X. It was said to be worth 55.46 million won when the auction was held by digital art gallery Klip Drops on Aug. 1. (Ground X)

Park Kyung-hee, a lawyer at law firm Lin, said along with the FATF’s interpretation, NFTs and DeFi are likely to fall under the supervision of the Act on Reporting and Using Specified Financial Transaction Information, the country’s anti-money laundering law.

Experts, however, have voiced concerns that the taxation scheme may lack fairness. NFTs, for instance, should be taxed just like any other artworks, according to experts.

“If an NFT is regarded as a virtual asset, income from the transfer of NFTs will be taxed from next year, but it would not be fair considering taxes that incur when transferring game items and artworks,” Park said.

In South Korea, transfer gains on paintings, writings and antiques that exceed 60 million won in transfer price per piece is subject to taxation. In contrast, the government is expected to levy a 20 percent tax on capital gains for cryptocurrency above 2.5 million won, a tax rate higher than other financial products will face in accordance with the Financial Investment Income Tax from 2023. The new financial investment income tax seeks a 20 percent tax rate for profits between 50-300 million won and 25 percent for profits above 300 million won

Experts in the blockchain industry contend that the taxation system for cryptocurrency income profit is still under development, and it is unlikely that it will be in full swing by the January deadline.

“To tax properly, the buying costs have to be identified to measure the profits. For this, establishing the travel rule system, which is required to be set up by March next year, has to precede the taxation plan implementation,” an industry expert said on condition of anonymity.

The travel rule, which is a global standard imposed by the FATF, requires virtual-asset service providers to identify virtual-asset holders and share their information with other virtual-asset service providers.

However, the National Tax Service recently delivered guidance to local cryptocurrency exchanges to report it at zero won when the exchange has no knowledge of the acquisition price. In other words, starting next year, if coins transferred from overseas exchanges or personal wallets to domestic exchanges do not reveal the buying price, the entirety of the digital assets will be subject to taxation.

“It’s not that we shouldn’t tax (cryptocurrencies), but that we should implement it after having a proper system through a one-year grace period, but the government is making a hasty decision,” said Noh Woong-rae, lawmaker of the ruling Democratic Party of Korea.

By Park Ga-young (gypark@heraldcorp.com)