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South Korea to Implement 20% Capital Gains Tax
Most countries in the world have yet to deal with the fact that cryptocurrencies exist in any real manner. Many of them have acknowledged their existence in a classic governmental fashion; An outright ban. This option is often deeply unsatisfying. We like to think that governments would dedicate a committee to determining the best course of action to deal with a new disruptive technology. Instead we too often get a quick knee jerk reaction such as a ban after a high profile hack. South Korea has just instantiated a 20% capital gains tax on all cryptocurrency trading income. This move to tax cryptocurrencies is significant for a couple of reasons.
Korea Recognizes Cryptocurrencies as Distinct Asset Class
The first reason why the move to tax cryptocurrencies is significant is because Korea decided to recognize cryptocurrencies as their own distinct financial instrument. Korea is a major technology player in the world. Therefore, Korea recognizing cryptocurrencies as a distinct financial asset class brought forth by technology brings legitimacy to cryptocurrency. Many countries have opted to classify cryptocurrencies under existing laws. This is a very shortsighted, and lazy approach to dealing with a new disruptive technology. This is like trying to fit automobile laws under the existing horse and buggy legislation. New paradigms, call for new regulation. If new things are being forced into old boxes, people are going to find ways to game the system.
A Capital Gains Tax of 20% is Reasonable
Typically, Korean capital gains tax works like this. Citizens pay between 11% and 22% of the gains realized on traditional assets such as stock or real estate. The new cryptocurrency capital gains is set at 20% of the realized gains. Furthermore, if the gains realized is less than 2.5 million won (appx. 2000 USD), then no capital gains need to be paid at all. Compared to other countries such as Canada, a 20% capital gains tax is extremely reasonable. Canadians will pay tax on 50% of their capital gains, at their current income tax bracket. This can result in a significant portion of realized gains being handed over to the government.
Incentivize the Development of Cryptocurrencies
Instead of taxing cryptocurrency, some countries have opted to encourage its development by waving capital gains taxes altogether. In Switzerland, profits from trading cryptocurrency are tax exempt. If you hold cryptocurrency for more than one year in Germany, you don’t have to pay capital gains at all. There is no official tax whatsoever on cryptocurrencies in Malaysia. In Portugal, personal investment gains are non taxable, whereas businesses pay income tax on cryptocurrency gains. All of these examples indicate a fundamentally different approach than the tactics taken by the United States or Canada. In order to incentivize a high growth, high potential industry, there needs to be incentive to do so. A tax break, or even a reasonable tax guideline for cryptocurrency is appreciated by companies. Instead of having to get legal opinions on business activity, companies can simply adhere to the rules set forth by governments who have decided to manifest actual legislation.
Legislation is the Way to Go
Korea has higher capital gains taxes than the other countries that were mentioned in this article. This is not so much of a problem though, as companies will still work towards capturing the Korean cryptocurrency market. For example, Korea is responsible or 30% of the worldwide trading volume. Beyond the ability to collect taxes, legislation shows the willingness of a country to accept cryptocurrency as a legitimate form of money. The Korean government has officially joined the ranks of countries that have established a meaningful long term relationship with cryptocurrency.
