South Korean regulator confirms that NFTs are not virtual assets

South Korean regulator confirms that NFTs are not virtual assets
The country will follow global crypto guidelines in excluding non-fungible tokens (NFTs) from its categorization of virtual assets — meaning income from NFTs may remain untaxed in Korea.

The K-pop mega group BTS and its agency recently announced fan collectibles in the form of non-fungible tokens (NFTs). Since then, BTS NFTs have been cited by many as testament to the growing following behind NFT technology in South Korea, but also to underline the lack of regulatory framework on NFTs despite the growing popularity.

Last week, one unnamed official from the Financial Intelligence Unit (FIU) told South Korean media that NFTs will not be categorized as virtual assets and hence will not be regulated, in accordance with the Financial Action Task Force’s (FATF) global guidelines for virtual assets.

The term “virtual assets” was called to attention more recently as assets classified under the term are to be taxed 20% from January next year. This prompted several experts and lawmakers to raise the question whether NFTs will count as virtual assets. Last month, at the National Assembly’s annual review, Korea’s finance minister Hong Nam-ki had said the classification of NFTs is still under discussion, when he was asked if NFTs will be taxed.

FATF’s guideline says that NFTs that are used “as collectibles rather than as payment or investment instruments” are not generally considered to be virtual assets. However, the guideline adds that if NFTs are used in payments or investments, they could fall under the virtual assets category. FATF suggests that countries apply its standards on NFTs on a case-by-case basis.

Australia treats NFT taxes depending on the kind of use and reasons behind trading the NFTs. Depending on the variables, NFT taxes may be paid under the capital gains tax, on a revenue account as trading stock, or as part of a profit-making scheme.

“In order for [NFTs] to be used as a payment method, a very large amount needs to be issued. And there is essentially no reason to make [the payment method] with NFTs, where the core value is scarcity,” said the FIU official, implying that the Korean authorities are determined to not regulate NFTs. But the official added that taxing NFTs in the form of “stock tokens” that prove one’s ownership of financial investments need to be discussed further.

“Any kind of asset can be turned into NFTs. If a painting is made into an NFT, it should be taxed on capital gains,” said Oh Moon-sung, professor of tax accounting at Hanyang Women’s University. “But the same cannot be said about books or antique artifacts. It is absurd to think that the same kind of tax can be applied to all NFTs.”

“And Bitcoin and NFTs can never be put on the same line. The only commonness they share is that they’re based on blockchain technology. They cannot be taxed under the same circumstances,” Oh added.

Nonetheless, there still exist several other controversies surrounding the virtual assets tax. One is that many experts say that taxation starts too early, especially when the government has yet to prepare sufficient tax infrastructure. The government cannot track peer-to-peer transactions and has not found a way to tax cryptocurrencies that are not listed on any exchange.

Another issue is that crypto investors are taxed on uneven grounds when compared to stock capital gains. Income from virtual assets is taxed over 2.5 million won (about US$2,112), while stock capital gains taxes start at 50 million won (about US$42,247). Moreover, stock capital gains are to be taxed from 2023, a year later than crypto taxation. The government said it gives special tax benefits to income from certain financial investments, and virtual assets aren’t categorized as financial assets in South Korea — so given a lower threshold for tax deduction.

Currently, lawmakers from both the ruling Democratic Party and the conservative People Power Party have proposed laws to push back the tax on crypto assets. Lee Jae-myung, the Democratic Party’s candidate for the upcoming presidential election, announced today that he will push postponing the tax law by one year.