[Full Text] DAXA: "Digital Asset Taxation Should Be Linked to Basic Law Classification and Enforcement Infrastructure"

Kim Jae-jin, Vice Chairman of the Digital Asset Exchange Joint Council (DAXA), spoke at the Korean Tax Law Society's autumn academic conference held at Samil Accounting Corporation in Yongsan, Seoul on the 14th. Source: Park Beom-soo / Digital Asset

Ahead of the implementation of virtual asset (digital asset) taxation in 2027, there are calls to simultaneously organize the asset classification under the Digital Asset Basic Law, the taxation system by transaction type, and the enforcement infrastructure including overseas transactions.

In particular, there are concerns that if the current taxation system is implemented before the legal status of stablecoins is confirmed, taxpayers and businesses may face a series of new tax standards and changes in a short period.

Kim Jae-jin, Vice Chairman of DAXA, stated at the conference, "The current income tax law is scheduled to take effect on January 1, 2027, but if stablecoins are classified separately from general digital assets in the Digital Asset Basic Law, transitional measures regarding the application timing of classification changes and the acquisition costs and profit-loss calculations of existing holdings will be necessary."

He emphasized that if the timing of tax implementation is adjusted, it should not be a simple postponement but should be linked to the confirmation of classification under the Basic Law, the organization of the taxation system by transaction type, and the establishment of enforcement infrastructure.

The possibility that tax enforcement may be concentrated on domestic virtual asset users was also pointed out as a problem. Kim noted that assets entering the country through overseas exchanges, personal wallets, and over-the-counter (P2P) transactions make it difficult to verify the acquisition timing and acquisition costs.

He further pointed out, "Taxation may practically concentrate on taxpayers who only use domestic businesses among those who have obtained the same economic benefits." He also mentioned the need to clarify the timing of income generation and taxation methods for transaction types that have emerged since the design of the taxation system in 2020, such as staking, airdrops, hard forks, and crypto cards.

Hello, I am Kim Jae-jin, a lawyer working at the Digital Asset Exchange Joint Council DAXA.

First of all, I would like to express my deep gratitude to Dr. Park Soo-jin for shedding light on the taxation issues of virtual assets (digital assets) from a new perspective of stablecoins and foreign currencies.

Now, with the implementation of taxation in 2027 approaching, discussions on the Digital Asset Basic Law and major countries' reforms of stablecoin taxation are also progressing globally at the same time. I believe that this announcement, which proactively examines the tax status of stablecoins at this time, is very timely.

In particular, this announcement is significant in that it broadly compares the taxation systems of major countries such as the United States, the United Kingdom, Germany, France, Japan, and Australia, which are also of interest to our industry, starting from the specific scope of the legal nature of foreign currencies, digital assets, and stablecoins.

It compares fiat-linked stablecoins with foreign currencies and derives an analytical framework based on this. It is also examining whether it is appropriate to treat stablecoins the same as general digital assets in the digital asset taxation system scheduled to be implemented in January 2027.

The framework of distinguishing profit and loss into exchange rate fluctuations and intrinsic price fluctuations, and analyzing payment transactions and investment transactions separately, as well as the perspective that the classification under regulatory law does not immediately determine treatment under income tax law, could serve as a useful standard in future legislative discussions.

In this regard, I would like to ask the presenter two questions and then add supplementary opinions to expand the discussion of the announcement to the overall taxation system of digital assets.

The first question concerns the relationship between the issue of taxation being implemented before the classification under the Digital Asset Basic Law is confirmed and the improvement measures.

The presenter has divided the improvement measures into cases where the current virtual asset regulations are applied as they are to fiat-linked stablecoins and cases where they are included in separate legislation.

Which case will apply will be determined according to the content of the Digital Asset Basic Law currently being discussed in the National Assembly.

As already detailed in the presentation, the currently pending bills refer to stablecoins by different names such as asset-linked, value-stabilizing, and value-preserving, and there are some differences in requirements. Some bills include regulations on stablecoins within the overall Basic Law, while others have been proposed as independent bills. This is also not yet confirmed.

Meanwhile, the current income tax law is scheduled to take effect on January 1, 2027. Under the current interpretation of the regulations, small payments using stablecoins are likely to be subject to taxation as transfers or exchanges of virtual assets.

However, if the Basic Law later classifies the stablecoin separately from general digital assets, as pointed out in the presentation, transitional measures regarding the application timing of classification changes and the acquisition costs and profit-loss calculations of existing holdings will be necessary.

In this case, taxpayers and businesses may experience a series of new tax standards and changes in a relatively short period.

In this regard, the legislative order of major countries is worth referencing. Japan introduced separate taxation for specific cryptocurrencies during the tax reform process, linking its application timing to the implementation timing of the relevant financial product trading law. It can be understood that the timing was set for the tax to apply after the classification under the regulatory system was confirmed.

The UK also seems to be considering the scope of qualified stablecoins, the establishment of a regulatory system, and tax reform together.

The special provisions for small payment transactions and the classification based on value stabilization requirements presented by the presenter appear to be matters that require amendments to the income tax law before implementation.

In that case, I would like to ask for your opinion on which approach would be more suitable for realizing your improvement measures: implementing the current regulations before the classification under the Basic Law is confirmed or implementing the tax law after the Basic Law is enacted and then organizing the tax law according to that classification system.

The second question concerns the differences in enforceability based on transaction paths and the issue of equity.

The presenter presents enforceability as one of the criteria for judging the legitimacy of differences in taxation.

If foreign exchange transactions through financial institutions and stablecoin transactions through virtual asset businesses leave similar levels of transaction records, it is difficult to justify the difference of taxing only one side based on taxpayer cooperation costs.

At the same time, it is noted that transactions conducted outside intermediaries or transactions passing through multiple wallets and exchanges may make it difficult to verify acquisition costs, and it cannot be assumed that enforceability is secured in all transactions.

If the acquisition and transfer of stablecoins are conducted entirely through domestic virtual asset exchanges, it will be relatively easy to verify acquisition costs and transfer amounts through the submission of transaction history by the relevant business.

On the other hand, assets entering the country through overseas exchanges, decentralized exchanges, over-the-counter transactions, P2P, and personal wallets have significantly limited means to verify acquisition timing and acquisition costs.

In particular, digital asset users often use various domestic and foreign exchanges and personal wallets together. Deposits and withdrawals are also not difficult.

Considering this, if there are any transactions in the entire transaction process where acquisition costs cannot be verified, it may become quite difficult to calculate capital gains and verify the tax base.

Although information exchange under CARF will begin in 2027, there are delays in implementation by country, and there are still questions about how much the exchanged information can actually be used as tax data.

As a result, there is a possibility that taxation may practically concentrate on taxpayers who only use domestic businesses among those who have obtained the same economic benefits.

This is not only an issue that needs to be examined from the perspective of horizontal equity but may also create an incentive for transactions to move offshore, leading to the outflow of users and assets overseas. In the long term, it could also impact the domestic tax base itself.

In this regard, I would like to ask for your opinion on the possibility that the same economic benefits may be taxed differently simply because the transaction paths are different.

I would also like to ask whether there is a need to establish a system to verify the acquisition costs of assets brought in from abroad or to organize the enforcement infrastructure that links foreign information to actual taxation before implementation.

Following these two questions, I would like to discuss the need for organizing the taxation system by transaction type.

I believe that the analysis in this announcement, which suggests that we need to view taxation differently based on the causes of profit and loss and transaction types rather than the classification under regulatory law itself, is not limited to stablecoins.

Since the digital asset taxation was first designed in 2020, various products and services have emerged in the market over the past six years. I believe that the analytical framework of this announcement can also be applied to these products and services.

The current income tax law defines taxable income as income generated from the transfer or lending of virtual assets. This regulation was designed based on the market at the time in 2020, so some of the transaction types that have emerged since then may not clearly fall under either transfer or lending.

For example, there are staking, airdrops, and hard forks. In particular, airdrops or hard forks may be difficult to classify as transfers or lending since they can be acquired without compensation, and the timing of income generation may vary depending on when the asset is received and when it is disposed of, which can also affect taxation.

The same analysis can be applied to stablecoin payments or the increasingly used crypto cards.

It may be an issue whether to consider the point in time when the digital asset was transferred to the foreign business, the point in time when the card was used, or the point in time when the actual asset was deducted as the transfer point. It is also a part that taxpayers may find difficult to easily judge whether to view the transaction as a disposal of the asset or as the use of a payment method.

So far, the implementation of taxation has been postponed three times. However, it has mainly remained at the adjustment of the implementation timing, and there has not yet been significant changes to the content of the system itself.

There are considerable reasons for the critical perspective on the repeated postponement of the same method.

However, this situation also suggests that if the timing of implementation is discussed again, it should be meaningful only if the confirmation of classification under the Basic Law, the organization of the taxation system by transaction type, and the establishment of enforcement infrastructure are carried out together during the adjusted period.

I believe that the analytical framework of this announcement can provide useful standards in future discussions.

The content presented today raises various questions about the digital asset taxation system ahead of its implementation in 2027.

I would like to thank Dr. Park Soo-jin once again for sharing in-depth research results, and I will conclude the discussion. Thank you.

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