With South Korea set to begin taxing cryptocurrency gains next year, crypto payment cards are emerging as a potential blind spot in tax enforcement. Because payments run through overseas exchanges, private wallets and foreign card issuers, tax authorities cannot track the transactions in real time.
Stablecoin payments made with overseas crypto cards, whose use has been growing in South Korea, will also be subject to taxation starting next year, according to financial industry officials on Sept. 13. If a stablecoin is spent when its price is higher than at the time of acquisition, the gain is counted as cryptocurrency income. Tax authorities say fairness must be considered because a payment, like converting holdings into won or swapping them for another cryptocurrency, involves disposing of the asset and realizing a gain.
Crypto cards work by loading cryptocurrency into a wallet on an overseas platform, with the holdings converted into fiat currency at the point of payment. Their use is spreading quickly in South Korea on the appeal of convenience, allowing stablecoins acquired through crypto investing to be spent directly in daily life without first being cashed out into won on a domestic exchange.
An analysis commissioned by The Seoul Economic Daily from Web3 research firm Tiger Research and global blockchain analytics company Chainalysis found that cumulative domestic downloads of major crypto card apps reached about 38,000 from January last year through the end of July this year. Hong Kong-based crypto payment company RedotPay accounted for about 25,000 of those.
The problem is that when cryptocurrency held on overseas exchanges or in private wallets is spent through a foreign crypto card, domestic tax authorities cannot immediately identify the transaction. Selling cryptocurrency or swapping it for another token on a domestic exchange leaves a record with a local operator, but when investing and spending both take place within an overseas platform, a transaction can be completed without passing through any domestic financial institution or exchange.
"Even if taxes are assessed after the fact through tax audits, there are practical limits to identifying each of the countless small payments made on overseas platforms," an official in the cryptocurrency industry said.
