A populist tax delay

Joo Jung-wan
The author is the economic news editor of the JoongAng Ilbo.

Gains from trading digital coins are not subject to taxation in Korea regardless of how much money you make. Prices of some are skyrocketing by hundred and thousand times and then crash in the cryptocurrency market.

The government had planned to collect taxes from capital gains from cryptocurrency trade from next year under an agreement with the ruling and opposition parties. A related bill passed the legislature. But political circles decided to put off the taxation for a year. They agreed not to impose the levy next year with the presidential election in March and local elections in June. The Strategy and Finance Committee in the National Assembly passed the revised income tax act on Tuesday. That is a political collaboration based on populism aimed at not losing votes in both elections.

Deputy Prime Minister for Economic Affairs Hong Nam-ki persistently opposed the suspension of taxation. During a legislative hearing in October, he did not agree to adjusting or postponing the taxation on virtual assets citing the need to protect legal stability and the credibility of government policy. Postponing the taxation ahead of elections cannot be justified in terms of tax justice. But legislators with lawmaking authority ignored the deputy prime minister’s argument.

Politicians linked the taxation on trading digital tokens to the introduction in January 2023 of income tax on financial investments. If the revised act is passed, tax will be newly collected on income from stock investment. They find investments in securities and digital tokes are the same.

But strictly speaking, they are different. According to Deputy Prime Minister Hong, virtual assets are invisible assets with economic value whereas financial investment income is a productive financial fund that can help the economy. Other countries, including G20 economies, have the same definition.

Investments in stocks help raise capital for corporate activities. It is why governments promote capital markets. But cryptocurrency investment is irrelevant to corporate productivity. Active trade in cryptocurrencies only fattens revenue for the exchanges. The cryptocurrency exchanges are privately owned — unlike state-run Korea Exchange on which equities are traded.

There is another critical difference between financial investment tax and cryptocurrency tax. Stock investors pay taxes for every trade. Each stock trade imposes a tax securities companies collect. Investors are just unaware of that because it is automatically deducted.

From 2023, stock investors are subject to two taxes — a securities trade tax for every transaction and a financial investment tax for capital gains. Since the stock capital gains tax will start after a deduction of 50 million won ($42,017) a year, small-sum investors could benefit from the new tax.

Cryptocurrency traders do not pay any tax for each trade. The government plans to impose tax only on capital gains. If digital tokens are regarded as the same asset investment as stocks, they should also be subject to a trade tax. Politicians’ reasoning therefore has a fallacy.

Last month’s seminar on taxation on cryptocurrency held by the Korea Tax Policy Association had been heated with differing arguments. Lee Dong-kun, a professor of accounting at Hanbat National University, pointed out that most countries, except for Japan, impose a tax on the capital gains from cryptocurrencies, and proposed to categorize the coins as being subject to the financial investment tax. Kim Gap-soon, a professor of business management at Dongkuk University, suggested a tax of a lower rate as a special purpose tax until a thorough study is made on the taxation on virtual coins.

Kim, however, disagreed with the call for exemptions for investors in their 20s and 30s who mostly invest in the cryptocurrencies. He argued that suspending the tax on virtual assets in consideration of the relatively large portion of those in their 20s and 30s active on the crypto exchanges could encourage young investors into the heavily volatile market. He stressed that none can cover up for the losses as no one can guarantee the returns.

It is the rule of thumb in taxation that there is tax on all income. If tax is waived to indulge a certain group, the burden on others could increase. If gains are made from cryptocurrency trade, taxes should be collected. The naming of the tax should be a secondary matter. Politicians must stop bringing politics into taxation.