Original authors: Ryan Yoon, Yoon Lee, Tiger Research
Original translation by: Luffy, Foresight News
Summary
Tax policies take various forms, including exemptions, progressive taxes, unified taxes, transitional taxation, and transaction-based taxes, with different forms reflecting the economic strategies and policy priorities of each country.
Governments seek to ensure tax revenues, while investors worry about excessive taxation, leading to capital flowing to overseas exchanges.
To ensure the success of cryptocurrency tax policies, policymakers need to consider both tax revenue and support for the healthy development of the crypto market.
1. Cryptocurrency Trading and Taxation
Since the emergence of the cryptocurrency trading market, taxation on cryptocurrency transactions has been a hot topic of discussion. The core conflict lies in the differing priorities of governments and investors. Governments emphasize the necessity of ensuring tax revenues, while investors worry that high taxes may lead to decreased profitability.
However, taxation is an inevitable component of modern societal systems and a key driver of market development. In particular, cryptocurrency taxation is expected to lay the foundation for market growth through three key effects.
First, it can establish a formal market. The example of the stock market shows that taxing profits or transactions represents official recognition of the relevant assets, which helps establish a stable foundation for cryptocurrency market activities.
Second, investor protection can be strengthened. The United States (Consumer Financial Protection Act) and the Consumer Financial Protection Bureau (CFPB) established in 2010 are examples of regulatory protection for investors. In the Web3 market, restricting indiscriminate product launches and misleading advertising helps prevent fraud and protect investor rights.
Ultimately, taxation can accelerate the integration of cryptocurrency into the existing financial system by clarifying its legal status. This integration can enhance market stability and trust.
However, given the uniqueness of the cryptocurrency market, relying solely on stock market experience may make it difficult to expect taxation to produce positive effects. Due to the rapid growth of cryptocurrencies, many existing tax systems have been criticized as mere means of extracting value. This has led to an increasing conflict between governments and investors.
In this context, this report will examine the cryptocurrency tax regimes of major Asian countries, analyzing the three effects mentioned earlier: market establishment, investor protection, and the realization of system integration, with the aim of providing a balanced perspective for investors and governments.
2. Comparative Analysis of Cryptocurrency Taxation in Major Asian Countries
Analyzing the cryptocurrency tax regimes of major Asian countries reveals five different policy types. These differences reflect the economic structures and policy priorities of each country.
For example, Singapore exempts capital gains tax and only imposes a 17% income tax when cryptocurrencies are recognized as business income. This flexible approach has consolidated Singapore's position as a global cryptocurrency hub. Similarly, Hong Kong is considering tax exemption policies for hedge funds and family offices' investment returns to further enhance its attractiveness to institutional investors.
In contrast, Japan's high tax rate of up to 55% focuses on curbing speculative activities. However, Japan is also considering a proposal to lower the tax rate to 20%, which may indicate a potential change in Japan's current cryptocurrency taxation approach.
2.1 Tax-Exempt Countries: Singapore, Hong Kong, Malaysia
Major Asian financial centers such as Singapore, Hong Kong, and Malaysia have adopted capital gains tax exemptions for cryptocurrencies, aligning with each country's long-standing economic strategies.
The tax exemption policies of these countries are consistent with their traditional financial frameworks. Historically, they have attracted global capital through low tax rates. Maintaining this position on cryptocurrencies indicates a commitment to policy consistency and clear adherence to their economic principles.
This strategy has yielded significant results. For instance, Singapore became Asia's largest cryptocurrency trading center in 2021. With no tax burden on investment profits, investors actively participated in the market, accelerating its growth.
However, tax exemption policies are not without limitations. Major challenges include the risk of speculative overheating and a reduction in direct tax revenues for governments. These countries are taking alternative measures to address these issues. They ensure indirect tax revenues through the development of the financial services industry and maintain market stability through strict regulations on exchanges and financial institutions.
2.2 Progressive Tax Regime Countries: Japan and Thailand
Japan and Thailand impose high progressive tax rates on profits from cryptocurrency trading. This policy reflects broader social goals of 'wealth redistribution' by taxing high-income groups. In Japan, the highest tax rate is 55%, consistent with policies for traditional financial assets.
However, such high tax rates have significant drawbacks. The most notable issue is 'capital flight,' where investors transfer their assets to tax-exempt regions like Singapore, Hong Kong, or Dubai. There are also concerns that heavy tax burdens may suppress market growth.
2.3 Unified Tax Rate Countries: India
Source: ISH News Youtube
India imposes a unified tax rate of 30% on profits from cryptocurrency trading. This approach differs from the progressive tax systems used in traditional financial markets, reflecting its strategic choice aimed at achieving two key goals: administrative efficiency and market transparency.
India's unified tax rate policy has produced several significant effects. First, the tax system is simple and clear, reducing the administrative burden on taxpayers and tax authorities. Additionally, applying the same tax rate to all transactions minimizes tax avoidance strategies.
However, unified tax systems also have clear limitations. The biggest concern is that they may discourage small-scale investors from entering the market. Even minimal profits are subject to a high tax rate of 30%, placing a heavy burden on small-scale investors. Additionally, imposing the same tax rate on both high-income and low-income groups raises questions about the fairness of the tax system.
The Indian government has recognized these issues and is currently exploring solutions. Proposed measures include lowering tax rates on small transactions and providing incentives for long-term holders. These efforts aim to retain the benefits of a unified tax system while promoting stable market growth.
2.4 Transitional Approach: South Korea
Source: Jingxiang News
South Korea has taken a cautious approach to cryptocurrency taxation, reflecting the high uncertainty in the cryptocurrency market. A notable example is the financial investment income tax originally scheduled for implementation in 2021, which has been postponed to 2025. The implementation of cryptocurrency taxation has also been further postponed to 2027 following the same reasoning.
This transitional approach has clear advantages. It allows the market to grow organically while providing time to observe the policy outcomes of other countries and global regulatory trends. By studying the cases of Japan and Singapore, South Korea aims to establish an optimized tax framework in retrospect.
However, this approach also faces challenges. A lack of a clear tax regime may lead to market confusion and increase the risk of speculative overheating. Moreover, the absence of regulatory infrastructure could affect investor protection, hindering long-term market development.
2.5 Transaction-Based Taxation: Indonesia
Unlike other Asian countries, Indonesia has implemented a unique transaction-based tax system. This system imposes a 0.1% income tax and a 0.11% value-added tax (VAT) on transactions. This policy was introduced in May 2022 as part of Indonesia's broader financial market modernization reforms.
Transaction taxes can simplify procedures and encourage investors to use licensed exchanges to increase market transparency by applying low and unified tax rates to all transactions. Since implementation, trading volumes on licensed exchanges have significantly increased.
However, this policy also has limitations. Similar to India, a unified tax rate places a heavy burden on small-scale investors. For investors who trade frequently, the cumulative tax costs can be very high, raising concerns about decreased market liquidity.
The Indonesian government recognizes these challenges and plans to refine its policies based on market feedback. Proposed measures include tax reductions on small transactions and incentives for long-term investments. These adjustments aim to retain the advantages of a transaction-based tax system while addressing its shortcomings.
3. Conflicts Between Investors and Governments
Despite the differences in tax systems across countries, conflicts between governments and investors over cryptocurrency taxation remain a common issue. These conflicts arise not only from the act of taxation but also from fundamental differences in the perception of crypto assets. The nature of these conflicts varies according to each country's tax policy.
Governments view profits from cryptocurrency trading as a new source of tax revenue. In particular, due to the COVID-19 pandemic exacerbating fiscal deficits, the rapid growth of the cryptocurrency market has become an attractive source of stable income. For example, Japan's progressive tax system imposes rates as high as 55%, while India's unified rate is 30%, both highlighting governments' strong demand for tax revenues.
Source: GMB Labs
From the investors' perspective, excessive taxation is an obstacle to market growth. Compared to traditional financial products, higher tax rates, combined with the cumulative tax burden from frequent trading, hinder investment activities. As a result, capital flight has become a major issue. Many investors are transferring their assets to overseas platforms or tax-exempt jurisdictions like Singapore and Hong Kong. This indicates that government efforts to ensure tax revenues may backfire.
In some cases, governments focus solely on taxation without implementing policies to support market development, further exacerbating tensions.
Finding a new balance between governments and investors is becoming increasingly important. Solutions require more than simple tax adjustments; they demand that governments formulate innovative policies to support healthy market growth while ensuring adequate tax revenues. Achieving this balance will be a key policy challenge for governments in the coming years.
4. National-Level Market Revitalization Policies
Cryptocurrency taxation has a dual impact on market development. While some countries leverage it as an opportunity for institutionalization and market growth, others face issues of market stagnation and talent drain due to strict tax policies.
Singapore is a model for successfully activating markets. Singapore encourages innovation by exempting capital gains tax and providing systematic support and regulatory sandboxes for blockchain companies. This comprehensive approach has reinforced its position as a cryptocurrency hub in Asia.
Hong Kong is also implementing an active market development strategy. While maintaining a tax exemption policy for individual investors, Hong Kong is expanding the licensing framework for cryptocurrency asset management companies. Notably, starting in 2024, Hong Kong will allow qualified institutional investors to trade cryptocurrency ETFs, further expanding market participation.
On the other hand, strict tax policies in some countries have also become obstacles to market growth. High tax rates and complex regulations have forced investors to transfer their assets overseas, leading to the outflow of innovative companies and skilled talent.
Ultimately, the success of cryptocurrency tax policies depends on balancing with market development. In addition to simply ensuring short-term tax revenues, governments must also consider how to nurture a healthy, sustainable market ecosystem. Looking ahead, countries need to continuously adjust policies to achieve this crucial balance.
5. Conclusion
Taxing cryptocurrencies is an inevitable step in developing the cryptocurrency asset market. However, the stabilizing effects of taxation need careful reconsideration. Some argue that transaction taxes can suppress speculative trading and reduce market volatility, but historical cases indicate that this effect is often not realized.
A typical example is Sweden in 1986. When the financial transaction tax was significantly increased by 100 basis points, a large portion of stock trading shifted to the UK market. Specifically, 60% of trading volume in 11 major Swedish stocks moved to the London market, highlighting the consequences of ineffective tax policy.
Both governments and investors must seriously assess the actual impact of taxation. Governments should not only focus on simple tax revenues but also on fostering a sustainable and healthy market environment. Investors should view taxation as an opportunity to institutionalize the market, promoting a more stable and mature investment environment.
Ultimately, the success of cryptocurrency taxation depends on whether governments and market participants can find ways to achieve some balance between each other. It is not merely a matter of adjusting tax rates; it is a critical challenge that will determine the long-term direction and development of the cryptocurrency market.