Korea Capital Market Institute "Temporary Tax Exemption Needed for Token Securities Until 2025"

2025 Enforcement of Financial Investment Tax Amendment, Token Securities Transfer Difference Considered as Capital Gains
"Changing to Dividend Income May Undermine Taxation Principle Consistency"

As 'Security Tokens (ST)', emerging as a new growth area in the capital market, approach institutionalization, there are calls to clearly organize the related taxation system. The security token market is expected to be fully activated as early as next year, but discussions on how to define and tax profits from security token transactions have yet to be properly conducted. Industry experts argue that capital gains tax on security token transactions should be incorporated into the revised Financial Investment Income Tax (FIIT) system scheduled for implementation in 2025, and that a 'temporary tax exemption' similar to that for virtual assets should be applied until the revised law takes effect.

Security tokens are a new type of financial product that uses distributed ledger technology to fractionalize shares in assets such as artworks, real estate, and copyrights, enabling so-called 'fractional investment.' Under the Yoon Seok-yeol administration’s national agenda item of 'building digital asset infrastructure and regulatory frameworks,' the Financial Services Commission is pushing forward with related institutionalization efforts. In July, Yoon Chang-hyun, a member of the People Power Party, introduced a bill to legislate security tokens by amending the Capital Markets Act and the Electronic Securities Act. The goal is to pass the bill in the National Assembly plenary session within the year and implement it one year later.

As the legislation for security tokens gains momentum, the need for subsequent institutional adjustments is also being raised. Among these, taxation issues are a key point. Whether capital gains from security token transactions are classified as 'dividend income' or 'capital gains income' can affect whether they are taxed.

According to the industry, the tax authorities currently classify capital gains from non-monetary trust beneficiary certificates circulated in token form as 'dividend income' and tax them accordingly. Under the domestic income tax law system, capital gains income follows an 'enumeration principle,' and since security tokens are a recently introduced concept, they are not listed as subjects of capital gains tax, thus lacking grounds for taxation. In 2020, the Ministry of Economy and Finance interpreted in response to inquiries that "profits from trading beneficiary rights on exchanges like stocks correspond to dividend income." Unlike capital gains income, dividend income adopts a 'comprehensive principle by type,' allowing it to be broadly applied to similar types of income even if not explicitly stated in the law.

However, concerns have been raised that this approach could cause several problems. Kim Gap-rae, Senior Research Fellow at the Korea Capital Market Institute, explained, "According to the FIIT amendment effective January 1, 2025, capital gains from investment contract securities such as security tokens will be treated as financial investment income, effectively as capital gains income rather than dividend income." He added, "If capital gains from security tokens are initially taxed as dividend income by broadly interpreting the dividend income provisions of the Income Tax Act, and then taxed as financial investment income from 2025, it could undermine the consistency of tax principles and cause confusion among taxpayers."

Furthermore, he pointed out, "If security token profits are regarded as 'dividend income,' offsetting gains and losses with other financial products under the capital gains income system would be fundamentally blocked, potentially reducing incentives for existing investors to diversify their portfolios." This could lead to reverse discrimination against innovative financial investment products and, ultimately, cause tax resistance and side effects that hinder the launch and circulation of related products in the early security token market.

The financial authorities basically classify security tokens as 'securities,' considering that they differ from existing stocks (electronic securities) only in issuance form but are essentially the same concept. Therefore, the industry argues that related tax provisions should follow the FIIT system, just like stocks. The problem is that the relevant amendment is scheduled to take effect in January 2025, and if the taxation system for security tokens is not organized before then, a regulatory gap will occur. The government's income tax law amendment bill submitted to the National Assembly in September did not include taxation measures for capital gains on non-monetary trust beneficiary certificates, the main type of security tokens.

Senior Research Fellow Kim expressed concerns, saying, "There appears to be a lack of clear stance and related institutional efforts from the tax authorities regarding taxation of capital gains on tokenized atypical securities." He warned, "If tax preparations are insufficient, calls for postponing financial investment income taxation could resurface, making it difficult for financial companies to build related tax IT systems, increasing taxpayer resistance and raising uncertainty about tax implementation." He added, "It is desirable to exempt capital gains on tokenized investment contract securities and non-monetary trust beneficiary certificates from taxation until the financial investment income tax system is implemented in 2025." Considering the policy intent that security token products are recognized as 'financial innovation' and accepted under the financial regulatory sandbox, a temporary capital gains tax exemption on security tokens until 2025 can be justified as a measure to promote financial innovation."

This content was produced with the assistance of AI translation services.