[Q&A] How to Report and Pay Capital Gains Tax on Stocks? From Next Year, 'Financial Investment Income Tax'

National Tax Service Announces Stock Capital Gains Tax Filing and Payment Deadline by the 28th

[Asia Economy Sejong=Reporter Kim Hyewon] Major shareholder Mr. A of a listed company applied a 20% tax rate on a capital gain of 200 million KRW when filing a preliminary capital gains tax return in the first half of last year and paid the tax accordingly. In the second half of last year, he also earned a capital gain of 200 million KRW but only applied the 20% tax rate to the gain realized in the second half, filing and paying accordingly without submitting a final return. This was due to unawareness that if the annual taxable base exceeds 300 million KRW, the preliminary return for the second half must include the first half’s details or be reported during the final return period.

Major shareholders of listed companies who transferred stocks in the second half of last year (July to December) and small shareholders of listed companies who transferred stocks through over-the-counter (OTC) transactions must file and pay capital gains tax by the 28th of this month. The National Tax Service announced that from the 7th, it will send guidance letters to major shareholders of listed companies and shareholders of unlisted companies who traded through K-OTC. Those obligated to file preliminary returns must report and pay capital gains tax by the 28th.

Since there are still many common mistakes during filing, frequently asked questions are addressed below.

Q. Who are subject to the preliminary capital gains tax filing and what is the payment deadline?

A. Those who transferred stocks held as major shareholders of listed companies (regardless of on-market or OTC transactions), small shareholders of listed companies (only OTC transactions), and shareholders of unlisted companies (excluding small shareholders of small and medium-sized enterprises who transferred via K-OTC) are subject to filing. Anyone who transferred such stocks in the second half of last year must file. Foreign stocks and derivatives must be reported during the final return period in May next year.

Q. What are the criteria for small shareholders of small and medium-sized enterprises excluded from taxation in K-OTC transactions?

A. If the shareholder does not meet the K-OTC major shareholder criteria (4% or more shareholding or market capitalization of 1 billion KRW or more), they are considered small shareholders.

Q. If the combined capital gains from domestic and foreign stocks transferred in the second half of 2021 amount to zero, can the taxpayer omit the combined or preliminary filing?

A. Since January 1, 2020, the netting of capital gains and losses between taxable domestic and foreign stocks is allowed. However, if you want to net gains and losses, you must file during the final return period (May of the following year). Foreign stocks are not subject to preliminary filing and can only be reported in the final return. If you file and pay by netting domestic and foreign stock gains during the preliminary filing period, you may underpay or fail to pay capital gains tax on domestic stocks, resulting in penalties.

Q. Can the preliminary filing for the second half include the first half (January to June 2021) capital gains that were preliminarily reported in August last year?

A. If stocks subject to progressive tax rates were transferred more than twice semi-annually, you can combine the first half’s preliminary filing details with the second half’s for the preliminary filing. However, if only the second half’s transactions are reported in this preliminary filing, you must check whether the applicable tax rate or calculated tax amount changes when combined with the first half’s gains and file a final return in May accordingly.

Q. Is it possible to pay capital gains tax in installments?

A. If the payable capital gains tax exceeds 10 million KRW, installment payment is allowed up to two months after the payment deadline. For tax amounts up to 20 million KRW, you can pay at least 10 million KRW by the preliminary filing deadline and pay the remainder in installments. If the tax amount exceeds 20 million KRW, you must pay at least 50% of the tax by the preliminary filing deadline and pay the rest in installments.

Q. How should taxes be reported for stocks transferred after January 1, 2023?

A. From next year, financial investment income tax must be reported and paid instead of capital gains tax on stocks. Regardless of major shareholder status, financial investment income tax applies to all income realized from financial investment products under the Capital Markets Act. Securities with principal loss risk (debt, equity, income, derivative-linked, securities deposit, investment contract securities) and derivatives’ transfer, redemption, repurchase, or cancellation are all taxed at rates between 20% and 25%. For example, if you earned more than 50 million KRW (basic deduction) with a taxable base of 300 million KRW or less, 20% tax is applied to the remaining amount. Assuming you earned 350 million KRW from stocks, you would pay financial investment income tax of 60 million KRW, which is 20% of 300 million KRW after deducting the 50 million KRW basic deduction.