Improving Rationality of Financial Investment Profit and Loss Offsetting and Carryforward Deduction... Government Says "Absolutely Not a Tax Increase"

Announcement of Financial Tax System Advancement Direction for Activating Financial Investment and Rationalizing Taxation on the 25th

[Sejong=Asia Economy Reporter Kim Hyunjung] According to the government's announcement on the 25th regarding the 'Direction for Advancing Financial Taxation to Revitalize Financial Investment and Rationalize Taxation,' from 2023, individual investors who earn more than 20 million KRW from domestic listed stocks will have to pay a tax of 20% (25% for amounts exceeding 300 million KRW) on the capital gains exceeding 20 million KRW. Currently, capital gains tax on listed stocks is limited to major shareholders, but this will be expanded to include small shareholders as well.

The government repeatedly emphasizes that the purpose of this financial tax reform, which requires retail investors to pay capital gains tax on stocks, is not to increase taxes. However, since this tax reform was attempted amid a situation where tax revenues have decreased due to the spread of the novel coronavirus disease (COVID-19) and fiscal spending demands have surged, there is a perspective that it is an attempt to have stock investors bear some of the costs.

◆Offsetting Gains and Losses and Carryforward Deduction Allowed for 3 Years=Under this tax reform, a basic deduction of 20 million KRW will be applied to financial investment income, and the remaining gains will be taxed at 20% for amounts up to 300 million KRW and 25% for amounts exceeding 300 million KRW. Previously, most investors except major shareholders?defined as those holding a certain share ratio (1% for KOSPI, 2% for KOSDAQ) or total stock holdings of 1 billion KRW or more (reduced to 300 million KRW from next year)?did not pay capital gains tax on stocks but only paid securities transaction tax via withholding. The plan is to expand the scope of capital gains tax on stocks from major shareholders to individual investors in general.

The basic deduction of '20 million KRW' was set based on the judgment that taxing the top 5% of stock investors (about 3 million investors), approximately 300,000 people, who account for about 85% of total stock capital gains, would be appropriate considering market impact. The Ministry of Economy and Finance expects that most small investors (5.7 million people, 95%) who are currently exempt from capital gains tax will see a reduction in their tax burden due to a reduction in securities transaction tax.

From 2022, capital gains on bonds, which are currently non-taxable, and 'stocks within funds' will also be taxed. Additionally, 'offsetting gains and losses' will be introduced, allowing individuals to combine annual income and losses from all financial investment products and pay tax only on net profits, and loss carryforward deductions will be allowed for three years. 'Offsetting gains and losses between funds,' which is currently impossible, will also become possible.

The plan is to establish a new category called 'financial investment income,' which consolidates income generated from all financial investment products, including bonds previously in a 'tax blind spot,' and to tax it separately from comprehensive income, capital gains, and retirement income. Partial application will begin in 2022, with full implementation in 2023. Financial investment income will be taxed at a basic rate of 20% (25% for amounts exceeding 300 million KRW) with the 'same tax rate.' Financial investment products refer to securities and derivatives under the Capital Markets Act. Securities include bonds, stocks (stock certificates, subscription rights, etc.), beneficiary certificates, derivative-linked securities (such as equity-linked securities), and investment contract securities.

The tax payment process may become cumbersome or complicated. In the case of stock trading, capital gains tax will be withheld by financial companies as with the current securities transaction tax, so there is no need for separate reporting or payment. However, for financial investment income from over-the-counter transactions or those not processed through financial companies, preliminary reports must be filed at the end of August and February. If financial investment income exceeds 300 million KRW and falls into the higher tax bracket (25%), additional tax payments may be required, or if refunds are needed due to loss carryforward and offsetting, taxpayers must directly provide income and withholding tax data to the National Tax Service for electronic reporting and payment.

◆Government Cautious About Tax Increase, "95% Will See Reduced Tax Burden"=The government has firmly stated that the tax revenue effect of this plan is 'neutral,' meaning that tax revenue will not increase overall. Since bonds currently exempt from tax and capital gains on listed stocks of small shareholders will be taxed, securities transaction tax will be reduced, resulting in no significant change when combined. Based on current market conditions, it is expected that about 95% of individual investors will actually see a reduction in their tax burden. The government has also left open the possibility of completely abolishing securities transaction tax as a future reform direction.

According to government estimates, if the reform is fully applied, capital gains tax revenue will be about 2.1 trillion KRW, and the taxable population will be limited to about 300,000 people, the top 5% of all stock investors. Since 20 million KRW of capital gains is exempted, about 95% of investors (approximately 5.7 million people) will not pay capital gains tax but will benefit from reduced transaction tax, resulting in a lower tax burden for the majority.

However, the government sees the initial deduction amount of 20 million KRW as subject to future reduction. Lim Jae-hyun, Director of the Tax Policy Division at the Ministry of Economy and Finance, said, "This amount was proposed considering the early stage of implementation and can be adjusted after gathering opinions," adding, "It will be gradually lowered to increase the number of taxpayers and improve the fairness of financial income taxation."

In the mid to long term, the government is focusing on 'capital gains tax imposition and abolition of transaction tax,' explaining that "depending on the situation, the scope of capital gains tax may be expanded." Kim Moon-geon, Director of the Financial Taxation Division, said, "There are not as many people making large profits through stock trading as expected," and added, "Even if the entire 20 million KRW deduction is removed and transaction tax is completely abolished, there will not be a significant increase in tax revenue to be considered a tax hike."

This content was produced with the assistance of AI translation services.