Do You Have to Pay Taxes When You Make Money from Stock Investments? [Seungseop Song's Financial Light]

A Centuries-Long Tax Debate Over Capital Gains
No Stock Investment Taxes in Korea... The State Has Begun Collecting
Ministry of Economy and Finance Raises Major Shareholder Capital Gains Tax Threshold from 1 Billion to 5 Billion Won

There is heated debate over the criteria for the ‘major shareholder capital gains tax.’ But did you know that the controversy over how to tax capital, such as stocks, is a historical debate that has lasted for hundreds of years? You might think, ‘If you make money, you should obviously pay taxes,’ but it’s not that simple. People had very different ideas about ‘what exactly counts as income.’

Should You Pay Taxes on Stock Investments? ... A Debate Spanning Hundreds of Years

The painting "The Tax Payment" by Pieter Bruegel the Elder, a painter from the Duchy of Brabant active during the Northern Renaissance. For a very long time, the amount of tax on money has been one of the headaches for both the state and its people.

The long-standing debate surrounding income and taxes can be broadly divided into two camps. One side believes ‘If assets increase, income has obviously increased as well.’ This view applies to stocks too. People buy and sell stocks to make money. If they earn profits but don’t pay taxes, it violates the principle of fair taxation. People who work at jobs pay taxes to make a living, so isn’t it unfair if those who make money by selling stocks don’t pay taxes? Moreover, capital gains mostly come from high-income earners. Taxes should be levied according to ability to pay, so not taxing income from stocks is unfair. This idea is called the ‘Net Asset Increase Theory.’

On the other hand, there is the view that ‘It is unfair to tax temporary and incidental money.’ It is unjust to consider all money gained as income. True income should arise periodically from specific sources such as work, business, or property. Think about it: if you suffered a big loss in stocks a year ago but made a small gain this year and then had to pay taxes, wouldn’t that feel unfair? Your assets and income actually decreased. Furthermore, taxing capital gains makes reinvestment difficult and complicates asset transfers, hindering the efficient use of resources. This argument is called the ‘Income Source Theory.’

Of course, these are academic theories, but in reality, most developed countries do tax capital gains. However, instead of blanket taxation, they collect taxes through appropriate tax systems. They may tax only part of capital gains, exempt gains up to a certain limit, or apply separate taxation methods. They may also consider inflation and tax only real gains. In other words, countries combine the Net Asset Increase Theory and Income Source Theory to create tax systems suited to their realities.

No Taxes on Stock Investments in Korea... The State Began Collecting

A high-rise building in Yeouido's financial district at the end of the year, symbolizing the Korean capital market. Photo by Dongju Yoon doso7@

Before 1991, Korea did not tax profits made from stocks. This was because massive funds were needed for rapid growth during the early stages of industrialization. For a developing country to grow, fostering the financial industry and capital markets is essential. To do so, it was more important to provide tax exemptions to investors and encourage more capital investment in Korea. Thanks to this, companies could raise funds more smoothly.

Korea only began taxing capital gains from stocks and similar assets in 1991. Taxes had to be paid when capital gains occurred from transferring assets such as stocks. However, even then, taxes were levied very restrictively. Capital gains tax was applied only when there were price gains on unlisted stocks. For listed stocks and registered stocks traded on the KOSDAQ market, no capital gains tax was imposed. Even now, the vast majority of small shareholders pay only securities transaction tax when selling listed stocks, not taxes on their profits.

But in 1999, tax laws were revised. Only major shareholders were required to pay capital gains tax on stock transfers. Major shareholders were defined as those owning 5% or more of corporate stocks or related parties. If they sold more than 1% of their holdings within a year, they had to report capital gains tax. From 2000, the major shareholder criteria were tightened to ‘owning 3% or more of corporate stocks’ or ‘shareholders or related parties holding stocks with a market capitalization of 10 billion KRW or more at year-end.’ Most of these were chaebol family members, who had to report capital gains tax even if they sold just one share. The tax rate was 20% of the taxable base, with 20% for unlisted stocks of general corporations and 10% for small and medium corporations.

Over time, the criteria for major shareholders required to pay capital gains tax gradually expanded. In 2013, the major shareholder shareholding threshold was lowered from 3% to 2%, and the market capitalization threshold from 10 billion KRW to 5 billion KRW. For KOSDAQ-listed companies, the shareholding threshold was tightened from 5% to 4%, and market capitalization from 5 billion KRW to 4 billion KRW. In 2016, the criteria changed to 1% or 2.5 billion KRW, in 2018 to 1% or 1.5 billion KRW, and in 2020 to 1% or 1 billion KRW. The Moon Jae-in administration planned to expand the major shareholder threshold to 300 million KRW but faced strong opposition from investors and abandoned the plan.

Ministry of Economy and Finance Raises Major Shareholder Capital Gains Tax Threshold from 1 Billion to 5 Billion KRW

Choe Sang-mok, the nominee for Deputy Prime Minister and Minister of Economy and Finance, is answering questions from reporters at a press briefing held on the 5th at the Seoul Jung-gu Community Financial Services Agency. Photo by Kang Jin-hyung aymsdream@

The government announced plans to significantly raise the major shareholder capital gains tax threshold, which had only been lowered over time. The Ministry of Economy and Finance recently announced it will propose an amendment to the Income Tax Act Enforcement Decree to raise the classification standard for major shareholder holdings from 1 billion KRW to 5 billion KRW. This measure aims to prevent large investors from flooding the market with shares at year-end to avoid the major shareholder criteria.

According to data submitted by the Korea Securities Depository to Rep. Yang Kyung-sook of the Democratic Party, as of the end of last year, there were 13,368 people holding more than 1 billion KRW in a single stock on the KOSPI and KOSDAQ markets. Those holding more than 5 billion KRW numbered 4,161. If this new standard is uniformly applied, the number of major shareholders required to pay capital gains tax would drop significantly from 13,368 to 4,161, a reduction of 9,207 people (68.9%).

Separately, a major change in capital gains tax will occur in 2025 with the implementation of the Financial Investment Income Tax. From then on, regardless of major shareholder status, anyone earning more than 50 million KRW from financial investments must pay a 22% capital gains tax. If earnings exceed 300 million KRW, the tax rate rises to 27.5%. [Reference article: Why the Financial Investment Income Tax Was Delayed by 2 Years]

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