[Why the Government] Why Is the Government Greatly Raising Capital Gains Tax on Stocks... But Saying It's Not a Tax Increase?

After Announcement of Financial Tax System Reform, Market Is Boiling Over

[Sejong=Asia Economy Reporter Kim Hyunjung] As the government recently announced a significant increase in capital gains tax rates on stock transactions to enhance tax fairness and rationality, the market is heated with debates over tax hikes. From the perspective of small shareholders, while the existing securities transaction tax (with a lowered rate) remains, the previously '0%' capital gains tax has suddenly appeared, requiring them to pay 20% of their investment income. Nevertheless, the government insists this is not a 'tax increase.' Why is that?

On the 25th, the government announced the 'Financial Tax System Advancement for the Activation of Financial Investment and Tax Rationalization,' stating that from 2023, investors earning more than 20 million KRW annually from stock investment income will be subject to a 20% capital gains tax rate. If investment income exceeds 300 million KRW, a 25% tax rate will apply to the excess amount. This reflects the fundamental taxation principle of taxing higher incomes more. At the same time, the securities transaction tax, which has been withheld at 0.25% for listed stocks through securities firms (0.45% for over-the-counter listed and unlisted stocks), will be reduced to 0.23% next year, and further reduced by 0.08 percentage points in 2023 to 0.15%.

The two points that individual investors focused on in the announcement were these: why impose a sudden 20% 'bomb tax rate' on capital gains that were previously untaxed, while only slightly lowering the transaction tax? Some argue that since this constitutes double taxation, the transaction tax should be abolished immediately.

However, the government's stance differs. In this announcement, the government emphasized 'advancement.' According to the Ministry of Economy and Finance, the main government agency, looking at major advanced financial countries, reducing or abolishing transaction taxes while imposing capital gains taxes is the most rational approach in the mid to long term. They pointed out that the current tax system has broad non-taxable ranges for small shareholders, bonds, and over-the-counter derivatives, causing horizontal inequality, and that tax avoidance is possible for those with higher investment income, resulting in vertical inequality.

On the 26th, when the KOSPI index started rising after a sharp drop of over 2% the previous day, dealers were working in the dealing room of Hana Bank in Euljiro, Seoul. Photo by Moon Honam munonam@

Furthermore, the government found the reason for deciding on a 'reduction' rather than an 'abolition' of the transaction tax in the fact that it cannot tax foreigners' domestic stock trading at all. The transaction tax is also seen as a tool to counter market distortions caused by so-called 'short-term trading,' such as high-frequency trading. The Korea Institute of Public Finance, which conducted research related to this tax reform, also suggested that abolishing the transaction tax could lead to an expansion of high-frequency trading and short-term investments, so both transaction and capital gains taxes should be operated concurrently. Some short-term traders have raised concerns about cash flow issues due to the government's plan to lock funds so that only the amount excluding the provisional withholding tax can be withdrawn during the capital gains tax withholding process, but the government views 'short-term trading' itself as a target to be addressed or suppressed anyway.

The government's logic that this is not a tax increase is also supported by predictions that the decrease in revenue from lowering the transaction tax and the increase in revenue from imposing capital gains tax will effectively balance out to 'zero.' According to estimates based on data and statistics available to the government, about 300,000 investors, or 5% of the total individual investors (approximately 6 million), will actually pay this tax when capital gains tax is imposed on those earning over 20 million KRW. Conversely, 95% (5.7 million) will not pay capital gains tax and will pay less transaction tax than before, so the net effect is not significant enough to be called a 'tax increase.' A Ministry of Economy and Finance official said, "There are not that many investors earning more than 20 million KRW from stock investments domestically," adding, "Even if the transaction tax is completely abolished and the 20 million KRW exemption is removed, it would not result in a tax increase."

However, it is true that investors earning more than 20 million KRW through financial investments will face a significantly increased burden due to this tax reform. For example, assuming investor A earned 40 million KRW from stocks, before the law change, they only paid 350,000 KRW in transaction tax, but now they must pay 4 million KRW in capital gains tax plus 210,000 KRW in transaction tax, totaling 4.21 million KRW. This is an increase of 1102.8%. From A's perspective, this is clearly a tax hike and understandably frustrating.

A similar pattern is emerging in the real estate market recently. The Ministry of Economy and Finance plans to raise the comprehensive real estate tax rate, currently between 0.5% and 3.2% depending on the tax base bracket, to between 0.6% and 4.0% through government legislation soon. For single-homeowners, the increase is modest at 0.1 to 0.3 percentage points, but for owners of three or more homes and those with two homes in regulated areas, the rate will rise by up to 0.8 percentage points.

The government's position is that since those who have earned a lot have not paid proper taxes, normalization is necessary now. Meanwhile, investors who bear the risk of losses themselves and seek opportunities through their own efforts may question what support the government has provided to justify such taxation. For the time being, these two sides seem destined to remain at odds.