Remember how we said to expect some hiccups as Korea moves to bring cryptocurrency into the regulatory fold?

Well, keep your paper bag or glass of water handy.

Turns out cryptocurrency exchange Bithumb has paid in full the KRW 80.3 billion bill it received from the National Tax Service (amounting to over $68.8 million USD at the time of this writing). Or so reports Korean-language blockchain news outlet Blockchain Today, quoting a Bithumb official. The official said, however, that they plan to appeal the tax, something that’s likely to intensify debate over the legitimacy of the tax.

The National Tax Service believes its in the right, pointing to articles in Korea’s Income Tax Act (English version here). 

In particular, they point to the following subparagraphs in Article 119, Paragraph 12 as grounds to tax Bithumb:

  • “Income generated from the transfer of a license, permit, or other rights established by similar administrative dispositions under the Korean laws and regulations, or income generated from the transfer of domestic assets other than real estate.”
  • “Other than the provisions under items (a) through (i), income (where the amount received by redemption of foreign currency bonds issued by the State or financial institutions established under special Acts exceeds the issuance value of such foreign currency bonds, such difference shall not be included) from economic benefits, received in connection with business conducted in the Republic of Korea, personal services provided in the Republic of Korea, or assets located in the Republic of Korea, or as income similar thereto, income prescribed by Presidential Decree.”

The Korean language blockchain news outlet TheBchain notes, however, that those articles are subject to interpretation as cryptocurrency has yet to be defined as an asset.

In June, the International Accounting Standards Board defined cryptocurrency as an intangible asset, but in Korea, cryptocurrency’s asset category has not yet been resolved.

Critics also point to other problems, such as the National Tax Service’s standard for determining economic benefits and the difficulty in determining who is and isn’t a Korean resident.

If any of this seems confusing, fret not. The government may be just as confused as you are.

According to a report submitted to lawmakers, the Ministry of Economy and Finance believes profits made from personal cryptocurrency transactions are NOT subject to taxation under the Income Tax Act.

Though the ministry wants to tax those transactions — and is currently preparing plans to do so, taking into consideration other examples from around the world — it thinks we need to change the tax laws before handing people a bill.

The ministry’s position would seemingly lend support to Bithumb’s appeal. Then again, maybe not. A National Tax Service official told TheBchain that the ministry’s report applied only to Korean residents under the Income Tax Act, while the National Tax Service’s decision applied to non-residents.

Well, we’ll see.

Blockchain and cryptocurrency are potentially transformative technologies that open up new worlds of possibility. Some degree of friction with existing legal and regulatory structures should be expected as lawmakers and officials scramble to catch up. We need to give bureaucrats — including tax officials — time to get their collective mind around virtual assets. 

After sitting on the fence for a while, Korean lawmakers and regulators are moving in the right direction. The National Tax Service’s decision — which could very well be overturned on appeal — changes none of that.