[2020 Tax Law] "We Will Not Discourage Donghak Ants' Investment Spirit"... Financial Investment Capital Gains Tax Basic Deduction of 50 Million Won, Including Funds

2020 Tax Law Amendment Proposal

Carryforward Deduction for Financial Investment Losses Extended from 3 to 5 Years
Withholding Tax on Financial Investment Income Changed from Monthly to Quarterly
Securities Transaction Tax Reduced by 0.02%p in 2021 Instead of 2022
ISA Tax Benefits Deadline Removed and Listed Stocks Added to Asset Management Scope

[Sejong=Asia Economy Reporter Joo Sang-don] Starting in 2023, capital gains from all financial investment income including stocks, bonds, and funds will be subject to taxation. However, capital gains from domestic listed stocks and public stock-type funds will be tax-exempt up to KRW 50 million. Previously, the 'Financial Tax System Advancement Plan' announced a month ago set the basic deduction limit at KRW 20 million and excluded funds from the deduction, but due to concerns about investment contraction, the basic deduction amount has been expanded and funds will now be included.

On the 22nd, the Ministry of Economy and Finance held the Tax System Development Committee at the Bankers' Hall in Myeong-dong, Seoul, and finalized and announced the '2020 Tax Law Amendment' containing these details.

According to this tax law amendment, a taxation system for 'financial investment income' will be introduced from 2023. Capital gains from securities and derivatives with no principal loss risk, such as deposits and installment savings, during the tax period (January 1 to December 31) will be subject to taxation.

At this time, loss offsetting and carryforward deductions among financial investment income will apply. Taxation will occur only if there is a net gain after combining all financial investment income and losses. A basic deduction of KRW 50 million will be applied by combining domestic listed stocks and public stock-type funds, and KRW 2.5 million for other financial investment income such as overseas stocks. For example, if an investor earns KRW 70 million from domestic stock investments and incurs a KRW 10 million loss from funds, the capital gains tax will be imposed on KRW 10 million, which is the total gain of KRW 60 million minus the KRW 50 million deduction. The capital gains tax rate is 20% for amounts up to KRW 300 million and 25% for amounts exceeding KRW 300 million.

If there is a loss in a given year, it can be carried forward for up to 5 years. For instance, if an investor incurs a KRW 50 million loss in 2023 and earns KRW 100 million in investment income in 2028, the taxable amount will be KRW 50 million after deducting the 2023 loss. Applying the basic deduction of KRW 50 million results in zero tax.

Initially, the Ministry of Economy and Finance excluded funds from the basic deduction target, reasoning that indirect investment products like funds, which are similar to deposits and installment savings, do not require basic deductions. However, following claims of 'fund discrimination' from the investment industry and individual investors, the ministry accepted the argument and decided to apply the basic deduction to funds as well. Additionally, considering the split taxation on capital gains, the basic deduction amount was significantly increased from KRW 20 million to KRW 50 million. A ministry official explained, "This measure is to prevent contraction of the stock market and to maintain the motivation of individual investors," adding, "With a KRW 50 million deduction on financial investment income, only about 150,000 people, or the top 2.5%, will be taxed."

The securities transaction tax will be reduced by 0.02 percentage points in 2021 and by 0.08 percentage points in 2023. Accordingly, stock investors will receive tax benefits totaling KRW 3.4 trillion by 2023. However, the current tax law amendment does not include the abolition of transaction tax or tax support for long-term investment.

Tax support conditions for Individual Savings Accounts (ISA) will be relaxed. To foster ISA as a representative financial product for national wealth accumulation, the eligibility for subscription has been expanded to residents aged 19 and older, and the tax support application deadline has been removed. The contract period has been shortened from 5 years to 3 years, and carryforward payments for unpaid amounts from the previous year are allowed within an annual limit of KRW 20 million (up to KRW 100 million). Notably, listed stocks have been added to the asset management scope, which was previously limited to deposits, installment savings, and collective investment securities.

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