[Asia Economy Reporter Ji Yeon-jin] Starting next year, the securities transaction tax will be reduced, potentially leading to more active stock trading. However, concerns have been raised that short-term trading by individual investors and high-frequency trading by foreigners may become more prevalent.
According to the financial investment industry on the 22nd, the government's tax law amendment plan announced the day before lowered the securities transaction tax (including the special rural development tax) imposed on KOSPI and KOSDAQ stock trades from the current 0.23% to 0.2% starting next year, a reduction of 0.02 percentage points. The securities transaction tax is a tax paid when selling stocks. It was introduced in 1978 based on the logic that capital gains from stock investments should be taxed, but there has been controversy over its abolition because the tax is levied even when selling at a loss. In 2019, the government reduced the securities transaction tax from 0.30% to 0.25% and announced a phased abolition plan, intending to create a financial investment income tax to replace capital gains tax starting next year, but postponed this by two years until 2025. The securities transaction tax will also be gradually lowered to 0.2% next year and 0.15% in 2025.
The market expects that lowering the transaction tax will reduce trading costs and have a positive impact on the market. In fact, examining the changes in turnover rates (monthly basis) of the relevant stocks for four months before and after the exemption of transaction tax for market makers, turnover rates for KOSPI stocks increased from 4.4% to 6.4%, about a 44% increase, and for KOSDAQ stocks, it rose from 14.4% to 17.9%, about a 24% increase. Nam Gil-nam, head of the Capital Market Research Institute’s Capital Market Division, said, "Korea’s transaction tax is higher than in other countries, and reducing the transaction tax is expected to lower trading costs, thereby increasing trading activity."
However, the reduction in transaction tax may lead to the spread of 'high-frequency trading,' which captures and trades small short-term profit opportunities in an automated manner. High-frequency trading is evaluated as having a positive effect on market liquidity and price efficiency, but excessive trading behavior is pointed out to potentially undermine the stability of market systems. Kim Jun-seok, a researcher at the Capital Market Research Institute, said, "As the transaction tax rate decreases, high-frequency trading is gradually increasing in the Korean stock market," and added, "With the reduction in transaction tax lowering trading cost burdens, the number of individual investors participating in day trading for short-term gains may increase, so the possibility of accumulating investment losses should also be carefully considered."
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