By Lee Min-hyung
The government should not make any rash decisions in levying a "cryptocurrency tax," as the new taxation scheme may end up blocking industrial growth in the emerging digital currency market, economists said Sunday.
The nation's financial authorities ― headed by the Ministry of Economy and Finance ― have discussed for years whether to impose taxes on virtual currencies in line with the global rise of bitcoin.
The cryptocurrency market has been considered a tax-exempt safe haven here despite its rapid growth, as regulators and experts remained poles apart over whether to accept virtual currencies as universal assets subject to regulations.
Wrapping up the years-long discussion, the finance ministry decided recently to impose taxes on cryptocurrency transactions. Minister Hong Nam-ki said Thursday it will announce a reformed tax system in July with details over the encrypted currency taxation.
"It is premature for the government to impose cryptocurrency taxes at a time when the market has not developed enough in a stable manner," Yonsei University economist Sung Tae-yoon said. From an economic viewpoint, he said, cryptocurrencies cannot be considered a universal asset like traditional paper currencies.
He also raised worries that any tough regulations or taxation schemes may block growth in the overall digital currency market.
"The financial authorities should think twice before imposing taxes on the market, as the digital currency industry is still in its infancy," he said. "Any rash taxation or introduction of regulations can be a stumbling block for sustainable growth of the industry."
The finance ministry is in internal discussion over how to levy taxes on cryptocurrency transactions. For now, the authority is likely to impose a capital gains tax over revenues generated by encrypted currency transactions.
Chances are the financial authority will follow in the footsteps of its counterparts from the world's leading financial powerhouses ― such as the United States and Japan ― all of which impose taxes on transactions involving bitcoin and other encrypted currencies.
The U.S. identifies cryptocurrencies as financial assets, and is imposing income taxes on revenues from their transactions. Japanese financial authorities are also applying a tax rate of up to 55 percent on revenues from digital currency transactions.
Korea's upcoming introduction of the new taxation system comes amid growing concerns over the nation's fiscal soundness after the government executed its third round of expansionary budgets due to an economic downturn induced by the coronavirus pandemic.
Against that backdrop, some critics argued the government aims to offset the budget expenditures by collecting more taxes from the new market.
"By reforming the taxation system this year, we are going to consider introducing new types of taxation, such as digital tax," Hong said in a recent National Assembly session. The digital tax refers to an additional tax imposed on overseas IT companies ― such as Google and Amazon ― for their online business activities.
Even if cryptocurrency taxation and regulations may get in the way of industry growth, such steps should be taken in no time, according to Korea University economist Kim Jin-ill.
"It is true regulations can block the market's near-term growth, but the steps are essential," Kim said. This is because regulations are the most effective measure to minimize the aftermath of a potential financial crisis, according to him.
"A fiasco involving commercial banks' mis-selling of derivative-linked funds last year clearly showed how important regulations are in the financial industry," he said. "To prevent the recurrence of such financial accidents, the government needs to introduce more careful regulations on the emerging digital currency market."