[Practical Finance] U.S. Stock Investors Facing Year-End Must Consider Multiple Factors Including Interest Rates and Taxes

AI-Driven Stock Market Rally This Year, Prepare for Volatility Next Year
Maximize Returns by Considering Capital Gains Tax and Comprehensive Financial Income Tax

As the year-end approaches, investment strategies for U.S. stock investors are becoming increasingly complex. The end and beginning of the year is a period when changes in market conditions and tax issues overlap. It is necessary to go beyond simply checking returns and to respond strategically, taking into account the stock market trends and tax structures expected at the beginning of next year.

In particular, U.S. stocks require consideration of more variables than domestic stocks, such as exchange rates, dividend taxation, and foreign tax systems. Since the year-end is when these factors are actually reflected in investment performance, it is essential to review your portfolio from the perspective of "organizing and preparing."

New York Stock Exchange: Optimism vs. Caution

This year, the New York Stock Exchange maintained a solid performance. The S&P 500 and Nasdaq indices hit record highs multiple times, driven by stocks related to AI semiconductors, data centers, and cloud infrastructure. As the rally led by large-cap technology stocks continued, expectations have formed among investors that the bull market could persist.

However, as the year-end approaches, warning signals are also emerging within the market. The number of stocks driving index gains is limited, and valuation pressure is mounting on certain stocks. If specific stocks undergo corrections due to earnings announcements or changes in guidance, there is a possibility that index volatility could increase significantly in a short period.

The Federal Reserve's monetary policy is also a key variable for the year-end stock market. Although the Fed is maintaining its policy of keeping the benchmark interest rate on hold for the time being, the market is reflecting expectations that it could shift to an accommodative monetary policy next year if the trend of price stability continues. While expectations of a rate cut create a favorable environment for the stock market, uncertainty remains regarding the actual timing and pace of the rate reduction.

There are both optimistic and cautious views on the stock market at the beginning of next year. Some forecast further upside potential if corporate earnings continue to grow and interest rate pressures ease, while others analyze that a correction phase could occur if concerns about an economic slowdown and overvaluation issues coincide.

Dubravko Lakos-Bujas, Global Head of Market Strategy at JP Morgan, analyzed, "The AI-driven supercycle is fueling record capital expenditures and rapid earnings growth, but it is also a factor deepening uneven polarization," adding, "Even if fundamentals remain solid in such an environment, the market is vulnerable to volatility."

Tax Strategies: Missing Out at Year-End Means Losses

Portfolio review is also important as the year-end approaches. If the proportion of a particular sector or stock has grown excessively, it is necessary to consider not only short-term market outlooks but also tax burdens when deciding whether to adjust allocations. Rather than holding onto highly profitable stocks without question, realizing some gains to manage risk is considered a valid strategy at year-end. If you are planning trades before the end of the year, it is essential to first understand the domestic tax structure applied to overseas stocks.

For individuals residing in Korea, capital gains from overseas stocks, including U.S. stocks, are taxed regardless of the holding period. The net profit, calculated by offsetting capital gains and losses from overseas stock trades during the year, is subject to a 22% tax rate (including local income tax) after deducting a basic exemption of 2.5 million won. There is no difference in tax rates between long-term holdings and short-term trades; the tax year, not the holding period, determines the timing of taxation. Therefore, the choice of when to sell-at year-end or at the beginning of the next year-can affect the amount of tax owed, so careful attention is required.

A representative year-end tax-saving strategy is the so-called "tax loss harvesting." This involves selling stocks with losses before year-end to offset capital gains from profitable stocks, thereby reducing the overall overseas stock capital gains tax burden. Under Korean tax law, there are no restrictions like the U.S. "wash sale rule" for overseas stocks, so it is possible to repurchase the same stock after realizing a loss. However, since gains and losses are finalized based on the tax year, it is crucial to confirm that actual sales occurred before the year-end.

Dividend income also requires review. Dividends from U.S. stocks are subject to a 15% withholding tax in the U.S. at the time of payment, which can be adjusted through a foreign tax credit in Korea. For Korean resident investors, the key issue is not the nature of the dividend or the holding period, but whether annual financial income is aggregated and subject to comprehensive taxation. In particular, if the combined financial income from dividends and interest exceeds 20 million won per year, it may become subject to comprehensive income tax, so it is important to check the year-end dividend amounts.

In addition, overseas stock investors should consider whether the foreign tax credit applies and how exchange rate fluctuations affect actual returns. At year-end, it is advisable to meticulously review overseas stock transaction records and profit and loss statements provided by securities firms, and to check for any errors in dividend and withholding tax details. For those with large investment amounts or frequent trades, consulting with a tax professional to review both year-end settlement and next year's reporting strategies can be a prudent choice.