Court Rules Crypto Received in Severance Deal Is Taxable as a Reward Payment

[Financial News] The court has ruled that taxing virtual assets received by former employees of a blockchain affiliate of Kakao Group under a severance agreement was justified.
According to the legal community on the 27th, the Second Administrative Division of the Seoul Administrative Court, presided over by Judge Gong Hyun-jin, ruled on May 21 that the plaintiffs had lost their case in a lawsuit seeking to overturn the tax authorities' refusal to correct their comprehensive income tax assessment. The suit was filed by former employees of Ground One, now Ground X, a blockchain affiliate of Kakao Group, against the heads of the Dongjak, Seongdong, and Banpo tax offices.
The employees were recommended for dismissal by the company in September 2020 and received virtual assets along with severance pay and settlement money. The virtual assets were paid in installments from March 2021 to September 2023.
They classified the cash and virtual assets they received as 'reward payments,' a category of other income under the Income Tax Act, and reported and paid comprehensive income tax for 2021 through 2023. A reward payment is money or goods given as a token of appreciation for providing services.
They later filed a request to amend their tax returns, arguing that the virtual assets were not taxable because they were settlement money or damages paid by the company in connection with unfair labor practices, and sought a refund of more than 11.1 billion won in total. Under case law and tax practice, damages arising from illegal acts are generally not taxed. After the local tax office rejected the request, A and the others filed suit.
The court sided with the tax office, saying the virtual assets they received were indeed reward payments.
The court noted that the employees had been in dispute with management over organizational restructuring and job reassignment, and that they signed a resignation agreement in September 2020 to end their employment relationship through a recommended dismissal and settle the dispute.
The agreement stated that A and the others would not damage the reputation of Kakao Group through media interviews or other means, while management would withdraw or suspend personnel actions such as dismissal and provide virtual assets and other compensation.
The court said, "At the time, Kakao Group was pushing ahead with listings of its major affiliates one after another, and Ground One likely had an incentive to end the dispute early, regardless of the merits, and stop media interviews and other actions that could harm the group's reputation and the affiliates' listings." It added, "In the end, A and the others should be seen as having received virtual assets in addition to the usual severance-related payments in exchange for refraining from actions that could damage the company's reputation."
It concluded that "this should be regarded as money or goods paid as a token of appreciation for providing services such as early resolution of the dispute and maintaining confidentiality, in other words, as reward payments."

[email protected] Jung Kyung-soo Reporter