No-expiry contract structure poses legal hurdles

Classification under Capital Markets Act unclear; tracking overseas trades another challenge

[Yonhap]
[Yonhap]

The government said taxing overseas perpetual futures contracts will require prior consultation with financial regulators, as it must first determine whether such instruments can be classified as derivatives under the current Capital Markets Act.

A Ministry of Economy and Finance official said Wednesday that taxing perpetual futures linked to overseas equities "is a matter that requires legal review," adding that the products appear to fall outside the scope of the Capital Markets Act. "We need to first discuss how to handle this under the relevant laws before we can determine whether taxation is possible," the official said. "This is something the Financial Services Commission and the Ministry of Economy and Finance need to work out together."

The official said discussions on taxing perpetual futures linked to US stocks are separate from digital asset taxation, as they concern products based on foreign equities. The official left open the possibility of extending the review to bitcoin-linked perpetual futures, but stressed that "it is fundamentally important that they qualify as derivatives" and that "the underlying asset must be defined under the Capital Markets Act for taxation to apply."

The first hurdle for taxing perpetual futures is defining the product itself. Under the current Income Tax Act, capital gains from overseas equities are taxed at 22 percent, including local income tax. Domestic and foreign derivatives subject to taxation carry a flexible rate of 11 percent. However, it remains unclear whether perpetual futures traded on overseas digital asset exchanges qualify as derivatives under existing law, leaving the legal basis for taxation insufficient.

The definition of derivatives under the Capital Markets Act also sits uneasily with perpetual futures. Article 5 of the act defines derivatives as contractual rights covering futures, options and swaps. Futures, in that framework, are contracts obligating delivery of cash or assets calculated on the price of an underlying asset at "a specific future point in time." Perpetual futures, by contrast, allow traders to bet on price movements through long (buy) or short (sell) positions with no expiration date — a structural feature that sets them apart.

Legal experts also view immediate inclusion of perpetual futures in the tax base as difficult. Kim Dan, an attorney at law firm Robaex, said "a review is needed on whether perpetual futures should be regulated as derivatives or as another type of financial product," adding that "under our current legal framework, it is difficult to treat them as derivatives."

Kim said that under the Capital Markets Act's definition of derivatives, futures contracts presuppose an expiration date, whereas perpetual futures are structured to trade continuously without one. "The legal character of the product must be established first," Kim said.

Kim also warned that securing transaction data would be difficult if domestic trading of perpetual futures were to begin before the Crypto-Asset Reporting Framework takes effect. "It will not be easy to tax transactions conducted overseas through Binance or decentralized finance platforms," Kim said.

Kim also argued that the standard for determining the legal character of perpetual futures should be consistent regardless of the underlying asset. "The legal nature of the product itself matters more than the type of underlying asset — whether it is equities, gold or raw materials," Kim said.

Calls for regulatory groundwork before any tax rollout are growing louder as the legal status of perpetual futures remains unsettled and concerns mount over unequal treatment between domestic and overseas transactions.

Kim Jae-jin, standing vice chairman of the Digital Asset Exchange Alliance, said at a forum on digital asset market competitiveness held Monday in Yeouido, Seoul, that digital asset derivatives "often settle only the price difference without actually transferring the underlying asset, making it difficult to view them as a transfer or loan — the taxable events under the current Income Tax Act."

Kim added that it is also unclear whether capital gains tax rules for overseas derivatives can be applied, warning that "a situation could arise where gains from domestic spot trading are taxed while gains from overseas digital asset derivatives trading are not — creating an imbalance."

Kim warned that this taxation blind spot could push domestic investors toward overseas platforms. "It is not simply a matter of tax equity — it creates a growing incentive for domestic users to choose overseas derivatives trading over domestic spot trading," Kim said.

Data suggest the scale of domestic investors' overseas digital asset derivatives activity is already substantial. An analysis by Tiger Research of approximately 120,000 wallets estimated to belong to domestic investors found that about 1,200 wallets that traded on the decentralized derivatives platform Hyperliquid in July recorded a notional trading volume of 7.4 trillion won ($5.52 billion).

Particularly striking, products linked to SK hynix — including American depositary receipts — accounted for 5.3 times the trading volume of bitcoin-linked products among the estimated domestic investor wallets from January through July this year, ranking first. The figures suggest that overseas digital asset derivatives markets are seeing active trading not only in bitcoin but also in products tied to domestic company shares.

Ahead of the digital asset tax set to take effect next year, some investors have been circulating tax-avoidance strategies using overseas perpetual futures — specifically, taking a long position at one times leverage on an overseas exchange instead of buying bitcoin spot on a domestic exchange as a way to sidestep the tax.


kyoung@heraldcorp.com