South Korea’s tax man continues to circle crypto – airdrops appear to be the next target

South Korea’s 5 million cryptocurrency investors were up in arms last year when the government considered imposing a 20% tax on crypto profits, until the authorities postponed the plan until 2025. The next target appears to be crypto airdrops.

Airdrops are typically used by cryptocurrency projects as marketing tools to attract users and involve dropping tokens into users’ wallets, often for free. But South Korea has a tax for that – the Inheritance Tax and Gift Tax Act which covers all items that can be converted into cash.

The Ministry of Economy and Finance said on Monday that airdrops fall under the gift tax rule. But how to implement the law on digital transactions involving private wallets? Cha Dong-joon, a professor of tax accounting at Kyungbok University in South Korea, said it will be difficult.

The ministry issues a declaration of intent, Cha said Discard in an interview. “At least for the next two, three years, actual taxation is practically difficult,” he said. First, the tax authorities are not able to calculate the price of cryptocurrencies that are not listed on exchanges, he added.

Second, “under the Adjustment of International Taxes Act, local tax laws cannot affect virtual assets gifted from an entity abroad.” Cha explained that is the case if the country of the sender, an unrelated company of the recipient, does not impose a gift tax.

See related article: South Korea’s upcoming all-encompassing crypto law – what we know

Oh Mun-sung, a professor of tax accounting at Hanyang Women’s University, agreed that taxing airdrops is problematic.

“We need to identify the characteristics of the airdrop first,” Oh said in an interview. “Some airdrops are given to those who are holders of specific tokens, in some other cases they just give out tokens for promotion.”

Oh said Korea lacks a definition of airdrops, unlike stocks where the method of tax calculation is specifically detailed. He agreed that applying the gift tax to crypto-assets moved from one private e-wallet to another would be problematic because they are difficult to track.

Taxes Chaebol

While these experts explained the problems with imposing tax laws on digital assets such as airdrops, it is also true that South Korea’s gift tax law has real teeth.

Some researchers and tax experts have suggested that the law has evolved over the years with a particular community in mind: the ultra-rich families that run the country’s leading conglomerates, such as Samsung Group and Hyundai Motor Group, and are known as Chaebol.

In 1996, South Korea changed its laws to tax indirect gifts after Lee Jae-yong, the current de facto head of Samsung, received 6 billion Korean won (US$4.4 million today) from his father and then-Samsung chairman Lee Kun-hee. He paid the gift tax on the funds and then reinvested the rest in two unlisted subsidiaries under Samsung. The two companies soon went public which earned the younger Lee 58.7 billion won.

The laws were tightened again in 2004, or before Lee Jae-yong took over Samsung when his father fell ill.

“I think it is no coincidence that South Korea strengthened the tax requirements and left room for wider interpretation in time for [Samsung’s] order,” Cha said.

See related article: S. Korea’s 20% crypto tax delayed by two more years

“In the past, rich families used antiques or paintings that were difficult to calculate in value to pass down wealth. Recently, unlisted, or soon-to-be-listed shares were inherited,” explained Cha.

“Governments find it difficult to tax the gains from gifted shares, never mind virtual assets that are not clearly defined by the government.” Cha said, adding that Chaebol may see this as a digital loophole to take advantage of.

Oh of Hanyang Women’s University said crypto-gifting could be used by the ultra-rich, but added that the price volatility of digital assets makes it unlikely that such practices will spread to the middle-to-upper class in Korea.

South Korea’s tax laws need to be changed to include cryptocurrencies, airdrops and other digital assets, Cha said.

“The right thing is to institutionalize these activities and build the tax laws around them which Korea lacks today.”