[Initial Insight] Stock Transfer Tax and Donghak Ant Movement

[Asia Economy Reporter Song Hwajeong] The undisputed protagonist of this year's stock market was individual investors. In March, when the stock market plunged sharply due to the novel coronavirus disease (COVID-19) and created a panic market, individuals massively accumulated blue-chip stocks. The judgment that there would be no opportunity to buy blue-chip stocks at that price unless it was a crash market led to bold investments. As foreigners sold off large amounts of stocks and individuals bought them to defend stock prices, it became known as the "Donghak Ant Movement."

Thanks to the active investment enthusiasm of individuals, the stock market successfully rebounded at the end of March, rising about 37% from the low point and recovering from the COVID-19 shock. Since then, the investment fervor of individuals has not cooled. The subscription competition rate for SK Biopharm, considered the largest IPO this year, reached 323.02 to 1 among general investors. The subscription deposit amounted to 30.9889 trillion won, marking the largest scale ever. After listing, SK Biopharm continued to attract individual buying interest, forming an opening price double the public offering price on the first day of listing, closing at the upper limit price to record a "ttasang," and then maintaining the upper limit price for three consecutive days. Up to the day before today this year, individuals have net purchased 42.573 trillion won in the stock market. Meanwhile, foreigners and institutions, who had led the stock market so far, have net sold 2.874 trillion won and 15.3782 trillion won, respectively.

Recently, the Donghak ants, who had been enthusiastic about stock investment, have started to boil over. This is because the government announced its plan to impose capital gains tax on stocks. On the 25th of last month, the government announced the "Financial Tax System Advancement Direction," deciding to expand capital gains taxation on listed stocks from major shareholders to small shareholders starting in 2023. After a basic deduction of 20 million won, a tax rate of 20% is applied to gains up to 300 million won, and 25% to gains exceeding 300 million won. Previously, most investors except major shareholders?those with a certain shareholding ratio or total stock holdings of 1 billion won or more per stock?did not pay capital gains tax on stocks but only paid securities transaction tax through withholding. From 2022, a 20% tax will also be imposed on gains from currently non-taxable bond stock-type funds and over-the-counter derivatives.

For example, if an individual investor buys 50 million won worth of listed stocks in 2023 and earns a profit of 20 million won, no capital gains tax is due due to the basic deduction. However, if the profit is 30 million won, a 20% capital gains tax will be imposed on the 10 million won exceeding the 20 million won deduction. The government expects that when applying the 20 million won basic deduction on listed stocks, about 300,000 people, corresponding to the top 5% of approximately 6 million individual investors, will be subject to taxation. However, individual investors are opposing this taxation policy. On the Blue House's public petition board, opinions demanding the withdrawal of capital gains tax on stocks are continuously posted. One petitioner protested, saying, "Imposing capital gains tax on stocks only shifts the tax revenue gap of foreigners and institutions onto individuals." Another petitioner emphasized, "If taxation is applied uniformly, investors will seek ways to avoid taxes rather than becoming productive as the government intends, and ultimately, investors who invest properly for the long term may suffer greater damage," adding, "Tax benefits for long-term investors should be added."

On the 7th, the government held a "Financial Tax System Advancement Direction Public Hearing" to gather various opinions. At the hearing, issues such as the controversy over reverse discrimination against indirect investments like funds while providing basic deductions only for listed stocks, the abolition of securities transaction tax, and benefits for long-term investors were raised. Considering fairness controversies, the government suggested that the basic deduction could be expanded to indirect investment products such as funds. However, regarding taxation on foreigners' stock trading and control measures on high-frequency trading, the government expressed that maintaining the transaction tax is inevitable, and regarding benefits for long-term stockholding, it noted opinions that conglomerate owners might benefit more. The government plans to reflect these opinions in the tax law amendment bill to be announced at the end of this month after going through the opinion-gathering process including the public hearing.

The reason individual investors massively invested this year is not because the investment environment has improved. The stock market situation changed by COVID-19 attracted individual investors to the market. Now that individual investors have finally started to play a proper role in the stock market, it is time to reconsider whether excessive taxation should worsen the investment environment.