[why&next] Tug of War Over the Introduction and Postponement of the Geumtu Tax... Where Is It Heading?

Concerns Over Panic Selling by Large Retail Investors if Financial Investment Tax Introduced
Some Say "Asset Liquidation to Avoid Tax Is Unreasonable"
Industry Leans Toward Postponement

How will the tug-of-war over the introduction and postponement of the financial investment tax (Geumtu Tax) come to an end? Regardless of where the prolonged discussion leads, the market is expected to experience confusion for the time being. So-called "Wanggaemi" investors who earn more than 50 million won this year will be directly impacted and find it difficult to enter the stock market hastily, which undermines the broader goal of "capital market development." Conversely, if the tax is postponed, the principle of "tax fairness," which imposes taxes where transactions occur, cannot be maintained. [Related Article] 'At the Crossroads of Geumtu Tax Introduction'

Will Wanggaemi Leave if Introduced?

Photo by Pixabay

According to the Korea Financial Investment Association on the 23rd, the group most affected by the introduction of the Geumtu Tax is individual investors, estimated at 0.9% (201,843 out of 23,094,832). This figure comes from data compiled at the request of Yoo Dong-su, a member of the National Assembly's Planning and Finance Committee from the Democratic Party, which aggregated investors who earned more than 50 million won over the past three years from five major securities firms. Although there is controversy over the aggregation method due to the small number of taxpayers, even with additional aggregation, most individual investors are expected to be minimally affected.

On the other hand, the burden on so-called "Wanggaemi," who can earn about 50 million won annually from investment income, increases. If income from financial investments such as stocks, bonds, funds, and derivatives exceeds a certain amount (50 million won for stocks, 2.5 million won for others), a tax of 20% (25% for amounts exceeding 300 million won) must be paid.

However, what worries the market is the butterfly effect caused by the increased tax burden on Wanggaemi. There is anxiety about a so-called "Geumtu Tax-triggered panic sell." Jeong Eui-jung, head of the Korea Stock Investors Association (Hantuyun), emphasized, "If the tax is introduced in January next year, a 'panic sell' will occur as the top 1% of big players exit the market beforehand," adding, "They will compete to board the escape train." Hantuyun plans to continue protests in front of the Democratic Party headquarters until the end of this month.

However, some argue that the idea of clearing stock positions in December to avoid taxes is groundless. When the bill was introduced in 2020, there was controversy about "selling everything off," but no significant issues arose. Moreover, it is pointed out that "it is even more incomprehensible to worry about selling domestic stocks with a 50 million won exemption and moving into overseas stocks with only a 2.5 million won exemption."

Industry’s Desire for Postponement

Yeouido Panorama / Photo by Jinhyung Kang aymsdream@

Although the financial investment industry claims to be watching the situation and has passed the ball to the National Assembly, it seems they are leaning more toward postponing the Geumtu Tax. If the government had pushed for introduction, it is unlikely that they would be passively observing without a task force (TF) with just about a month left before implementation. Some securities firms have also been found to be responding without strategies for high-net-worth individuals regarding the Geumtu Tax introduction.

If the Geumtu Tax is postponed, not only securities firms but also investors can continue trading as before. The 99% of investors, as well as the remaining 1%, can trade according to the existing tax system.

However, if the Democratic Party’s concession for postponement includes an "additional reduction in securities transaction tax (from 0.23% to 0.15%)," transaction costs will decrease further, allowing investors to save even a small amount. This policy is opposed by groups like Hantuyun, who argue, "Korea has a very strong short-term trading tendency, and lowering the transaction tax will damage the culture of long-term investment and create a short-term trading paradise." However, it is uncertain whether the transaction tax actually encourages short-term trading. An investor known as a Wanggaemi stated, "I doubt how many investors consider transaction tax when trading," adding, "I have never felt the transaction tax as a hurdle to trading."

Moreover, if the proposal to withdraw the raising of the major shareholder threshold for stock capital gains tax is accepted, the situation will change slightly. The government’s plan is to significantly raise the threshold for stock capital gains tax payment from 1 billion won per stock to 10 billion won, but the proposal is to keep it at 1 billion won. This aims to prevent "tax cuts for the wealthy," but concerns about the "butterfly effect" of Wanggaemi mentioned earlier may resurface.

If postponement occurs without meeting the Democratic Party’s demands, it will fail to uphold the taxation principle of "taxing where income exists" and will not contribute to building a sound capital market. Neither the Democratic Party nor the government will gain anything.

As discussions on the Geumtu Tax drag on, various proposals have emerged. Ryu Sang-chul, a director at the Bank of Korea, suggested on social media, "Since the stock market situation is unfavorable, postponement is necessary and it can be an opportunity for improvement," adding, "It would be more precise and desirable to have a progressive tax structure by income brackets like income tax." Kang Jong-gu, another director at the Bank of Korea, hinted, "If measures are devised to lower the Geumtu Tax for long-term investments, short-term trading can be curbed," noting, "The U.S. applies relatively lower tax rates on capital gains from long-term investments."