"If You Make Money from Stocks, You Pay Taxes"... How Many Individuals Will Actually Pay?

[Asia Economy Reporter Koh Hyung-kwang] Starting in 2023, even small investors who make more than 20 million KRW in annual capital gains from stock investments will have to pay capital gains tax. In return, the securities transaction tax rate, which was previously paid every time stocks were bought and sold, will be reduced from 0.25% to 0.15% over 2022 and 2023. This is the gist of the government's recently announced "Financial Tax System Advancement Plan." The government intends to tax those who earn significant profits from stock investments while lowering transaction taxes to promote stock trading activity.

According to the financial investment industry on the 27th, until now, capital gains tax on stock profits was imposed at a rate of 20% only on "major shareholders" under tax law. Major shareholders were limited to those holding at least 1% of KOSPI shares, 2% of KOSDAQ shares, or stocks worth 1 billion KRW or more per item. Next year, the threshold will be lowered to 300 million KRW, but even then, the taxable group will be only about 100,000 out of 6 million individual investors.

According to the reform plan, from 2023, whether a major shareholder or a retail investor, anyone earning more than 20 million KRW from domestic stock investments will have to pay taxes. A deduction of 20 million KRW will be applied to capital gains from domestic listed stocks, and tax will be imposed on the remainder. A 20% tax rate applies to gains up to 300 million KRW, and 25% applies to the amount exceeding 300 million KRW. Meanwhile, the government plans to reduce the securities transaction tax rate from the current 0.25% to 0.23% in 2022 and 0.15% in 2023.

For example, if an individual investor invests 100 million KRW in domestic listed stocks and earns a capital gain of 40 million KRW, currently they only pay securities transaction tax of 350,000 KRW (0.25%). From 2023, after deducting 20 million KRW from the 40 million KRW gain, they will have to pay 4 million KRW in capital gains tax at a 20% rate. Adding the reduced securities transaction tax of 210,000 KRW (0.15%), the total tax burden jumps to 4.21 million KRW.

However, capital gains tax will be imposed by aggregating profits and losses across all financial investment products, including stocks, funds, and derivatives. This means that even if an investor incurs a 60 million KRW loss from stocks but earns 30 million KRW from derivatives, they will not be taxed. Investment losses can be carried forward and deducted for up to three years. Even if net profits arise in the taxable year, if losses occurred in the previous three years, taxation will be waived.

In any case, this tax reform expands the taxable group, which was previously limited to major shareholders holding more than 1% per stock or stocks worth over 1 billion KRW. The government estimates that about 300,000 investors, or 5% of the total 6 million stock investors, will newly become subject to taxation under this reform.

Hwang Se-woon, a research fellow at the Korea Capital Market Institute, pointed out, "The removal of the tax exemption benefit, which was an advantage of domestic stocks compared to other investment assets, may reduce the attractiveness for new investors to enter the market. Considering the steady downward trend in stock market trading volume, it is necessary to gradually abolish the securities transaction tax to improve market liquidity."

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