[Dividend Investment in an Era of Uncertainty④] Chasing 'Dividends' May Tear You Apart... Check Transaction Costs and Taxes

Editor's NoteAs the global financial market environment deteriorates and uncertainty over capital gains increases, demand from investors seeking stable income has risen, bringing dividend investing into the spotlight. With the increase in dividend Exchange Traded Products (ETPs), investment opportunities are expanding, and the market size is expected to grow steadily. Growing interest from general investors in shareholder returns is also driving the expansion of dividend payouts by companies, further fueling market growth.

[Asia Economy Reporter Kwon Jaehee] As uncertainty in the domestic stock market grows, U.S. dividend stocks are gaining attention as a stable investment destination. In Korea, most companies pay dividends once a year, but in the U.S., quarterly dividends are common, so if you diversify investments to match dividend dates, you can receive dividends regularly every month like a paycheck. However, if you buy without knowing the details, you might earn from dividends but lose money to taxes. Let's take a look at what kinds of taxes apply to stock trading, including dividend stocks.

◆ Capital Gains Tax, Dividend Income Tax, Securities Transaction Tax... What Are These?

If you earn income from stock trading, you must pay capital gains tax and dividend income tax. For dividend stock investors, the most important tax to watch is the dividend income tax. Dividend income tax is imposed at 14% of the dividend amount plus 1.4% local income tax, totaling 15.4%. The securities company paying the dividend withholds this tax at source, so there is no need to file separately.

For U.S. stocks, foreign dividend income tax is withheld in advance and paid to the investor. The U.S. does not have a securities transaction tax, but a Securities and Exchange Commission fee (SEC Fee) is charged as a tax on the transfer of general assets. However, this rate is extremely low at about 0.00051%. Securities transaction tax is imposed when selling stocks, with rates of 0.23% in Korea, 0.1% in Hong Kong, and approximately 0.01% when buying and 0.11% when selling in China. This is automatically deducted during transactions separately from brokerage fees.

The important tax is the dividend income tax, which is imposed when holding foreign stocks. The applicable dividend tax rate is based not on the listing country but on the country where the company is headquartered, so the company's location must be considered. For example, Coupang is listed on the U.S. Nasdaq market but is headquartered in Korea, so Korean tax rates apply. Another key point about dividend income tax is that it is divided into taxes paid overseas and taxes paid domestically. The former is paid locally in foreign currency, with a 15% rate based on the U.S. standard. When receiving dividends from foreign stocks, domestic tax must also be paid. If the tax rate of the stock's listing country is lower than the domestic dividend income tax rate of 15.4%, the difference is withheld domestically.

◆ Earned More Than 20 Million KRW in Dividends? You Are Subject to 'Comprehensive Financial Income Tax.'

If you made money from dividend stocks, is paying only dividend income tax enough? The answer is 'No.' If the amount received as dividends, including other financial income (interest income, dividend income, etc.), exceeds 20 million KRW annually, you must combine it with other comprehensive income such as salary and pay additional comprehensive income tax.

If the amount is below 20 million KRW, separate taxation applies, but if it exceeds 20 million KRW, it converts to comprehensive income tax with progressive rates. All dividends are summed regardless of whether they come from domestic or foreign stocks. The comprehensive income tax rate ranges from 6.6% to 49.5% (including local income tax) depending on the amount. If other income such as earned income is high, you may pay up to 49.5% (including local income tax).

Comprehensive income tax must be reported and paid to the National Tax Service the following year. Foreign dividend income tax paid overseas is credited to prevent double taxation, and to claim this credit, you must obtain a foreign tax payment receipt.

◆ It's Not Over Until It's Over... Capital Gains Tax and Additional Costs

Capital gains tax is imposed on profits earned from stock investments. In Korea, capital gains tax does not apply unless you meet the major shareholder criteria with a large stockholding. However, starting next year, a financial investment income tax will be introduced, and capital gains tax will be imposed if capital gains exceed 50 million KRW. In the U.S., the taxable base is the net profit or loss from January 1 to December 31, excluding brokerage fees, and capital gains tax of 22% is applied to the remaining amount. Like comprehensive income tax, capital gains tax must be voluntarily reported and paid by May of the following year. It is imposed only if profits from transactions exceed 2.5 million KRW.

For example, if Mr. Han Mo (36), a Korean investor in U.S. stocks, earned 10 million KRW profit from investing in NVIDIA from January 1 to December 31 this year, and paid 1 million KRW in brokerage fees, capital gains tax at 22% applies to 6.5 million KRW (9 million KRW minus 2.5 million KRW). That means he must pay 1.43 million KRW in taxes. If he traded other stocks, profits and losses must be combined. If he lost 2 million KRW on Tesla but earned 5 million KRW on Apple, he pays tax only on 500,000 KRW (3 million KRW minus 2.5 million KRW).

If you fail to report or underreport despite profits exceeding 2.5 million KRW, you must pay an additional 20% penalty on the tax amount. If payment is delayed beyond the deadline, a late payment surcharge of 0.025% per day applies.

Other costs to consider include overseas stock trading fees (0.2~0.5%), exchange rates, and securities company currency exchange fees.

For reference, starting in 2023, income from stocks, funds, derivatives, etc., will be combined and subject to financial investment income tax. Since tax saving is the 'flower' of investment, it is important to keep paying attention to the new tax reform plans.