With digital asset income taxation set to take effect in January next year, calls are growing for incentives to encourage use of domestic exchanges and for an automatic calculation and filing system linked to exchanges. With areas such as overseas exchanges, private wallets and over-the-counter trading still difficult for tax authorities to track, the tax base and taxpaying infrastructure need to be reinforced before implementation.

In a report published on Wednesday, the National Assembly Budget Office listed key tasks including stronger tax base management, building reporting and payment infrastructure, and clarifying taxation standards by transaction type.

Digital asset income taxation was introduced through an amendment to the Income Tax Act in December 2020, but after three postponements it is due to take effect for transfers and loans made on or after Jan. 1, 2027.

Under the current system, income generated from transfers and loans of digital assets is subject to separate taxation as other income. An annual income deduction of 2.5 million won applies, and amounts above that are taxed at 20 percent, or 22 percent including local income tax.

Profit and loss can be netted within the same tax period, but loss carryforwards that allow net losses to be carried into the following year for deduction are not permitted.

The office cited identifying the tax base as one of the biggest challenges ahead of implementation. Domestic digital asset service providers must submit transaction records to tax authorities, but decentralised transactions or over-the-counter trades using private wallets could make it difficult to identify the party responsible for submitting records or the actual owner.

Overseas exchanges also have no obligation to directly submit transaction records to South Korean tax authorities, raising the possibility of blind spots.

From 2027, countries will begin automatically exchanging transaction information through the OECD's Crypto-Asset Reporting Framework, but implementation timing differs by country.

South Korea, along with 46 countries and jurisdictions, is set to begin the first information exchange in 2027, while Canada, Switzerland, Singapore and Hong Kong are to begin in 2028, and the United States in 2029.

The office proposed strengthening the National Tax Service's digital asset transaction tracking and verification technology, while also preparing measures to encourage voluntary reporting by users of over-the-counter trading and overseas exchanges located in countries that do not implement CARF.

It also presented, as an item for review, ways to provide benefits for using domestic exchanges. Japan is pursuing the introduction of a system that applies separate taxation of 20 percent to digital asset income through registered exchanges and allows loss carryforwards for 3 years.

By contrast, Japan is preparing a plan to apply progressive taxation of up to 55 percent to transactions through overseas exchanges and the like, and not allow loss carryforwards. The office said such an approach could encourage use of domestic exchanges and make it easier to identify transaction records.

It also called for building systems to reduce taxpayers' reporting burden. Digital assets can be repeatedly acquired and transferred through multiple exchanges and wallets, making it difficult for individuals to confirm acquisition costs and transaction histories and calculate gains and losses on their own.

The office proposed preparing infrastructure that links domestic exchanges with the taxation system to automatically calculate acquisition costs and gains and losses, and to support filing.

The National Tax Service created a Digital Asset General Division in July and plans to complete the buildout of a "virtual asset integrated analysis system" by the end of this year to analyse transaction data and other information.

Calls also emerged to clarify taxation standards for various transaction methods including staking, lending, hard forks and airdrops. The current Income Tax Act defines income from transfers and loans of digital assets as taxable, but interpretation remains unclear on issues such as the timing of taxation and the nature of income for profits generated from these transactions.

The office said, "Until taxation takes effect, the tax authorities need to use administrative interpretations such as public notices and precedents, as well as frequently asked questions (FAQ), to establish concrete interpretation standards and provide guidance to taxpayers."