Exclusive: South Korea Says Tokenized Stocks Are Securities, Opening Door to Taxation This Year

Finance Ministry says tokenized stocks are securities, not virtual assets

Taxation could begin once the Financial Services Commission issues a formal interpretation

South Korea’s tax authorities said tokenized stocks could be taxed as soon as this year if the country’s financial regulator makes a final determination. The government is moving to treat tokenized stocks as securities rather than virtual assets and to align the tax framework accordingly.

A Ministry of Economy and Finance official told Bloomingbit on June 12 that the government currently views tokenized stocks as securities. If the Financial Services Commission formally classifies them as securities, taxation can begin immediately under the existing Capital Markets Act. While tokenized stocks take the form of virtual assets, they are substantively closer to securities, the official said. Financial authorities have already stated in earlier guidelines that instruments whose substance qualifies as a security should be treated as securities, and have shared that view with the finance ministry several times.

The Financial Services Commission said in its 2023 token securities guidelines that token securities are securities issued in digital-asset form and are therefore subject to the Capital Markets Act. Still, those guidelines focused on nonstandard securities tied to fractional investments in art, real estate and copyrights. That has left the legal status of tokenized versions of standard securities such as stocks unclear. The prevailing market view had been that tokenized stocks were virtual assets, which are currently untaxed, meaning investors would not need to pay taxes until virtual-asset taxation takes effect next year.

The tax authorities, however, are treating tokenized stocks as securities and are closely watching the Financial Services Commission’s legislative work. At the second public-private token securities consultative meeting in May, the commission said it would prepare a detailed step-by-step roadmap for the tokenization of existing standard securities, including stocks. If the commission issues an official interpretation on the security status of tokenized stocks in its planned July release of revised token securities guidelines and related regulations, taxation could begin as early as the second half of this year.

Because securities under the Capital Markets Act are not limited to those issued in South Korea, offshore trading on overseas platforms would also fall within the tax net. Regardless of where an instrument is issued, it could be subject to dividend income tax under current tax law if the substance of its economic value and rights structure qualifies as a security, the finance ministry official said. Depending on whether tokenized stocks carry voting rights, they could later be classified more specifically as common stock, derivative-linked securities or investment contract securities.

The ministry and the National Tax Service are also working to build information-sharing systems with overseas tax authorities, including the US Internal Revenue Service, to track transactions conducted through foreign platforms. Tokenized stocks are a new concept and a new asset class with no domestic taxation precedent, so disputes between taxpayers and tax authorities could arise, the official said. While the final determination on whether they are securities rests with the Financial Services Commission, the tax authorities view tokenized stocks as securities rather than virtual assets.

Tokenized stocks are structured by placing actual shares with a custodian and then issuing and distributing tokens representing the economic rights attached to those shares. Investors can trade the tokens to profit from stock-price moves. The model also uses blockchain-based settlement, enabling round-the-clock trading throughout the year and settlement in about 10 minutes.

Demand has recently grown rapidly among investors in US stocks such as Tesla and Nvidia, particularly because the instruments are not currently taxed. Data from real-world asset tokenization platform RWA.xyz showed the tokenized stock market was worth $1.46644 billion as of June 8. That was up 115% from the start of the year, about 2.8 times the growth rate of the broader RWA market, which expanded 42% over the same period.