Up to 50 Million Won Tax-Free... Will the Stock Market Heat Up?

Expand Deduction Scope and Lower Transaction Tax
Individual Investors 'Smile' at Tax Reform Plan

Transaction Tax Cut Starting in 6 Months
Expect Increased Market Liquidity Inflow

[Asia Economy Reporter Oh Ju-yeon] "It has become a better environment for individual investors to trade stocks."

With the announcement of the '2020 Tax Law Amendment' financial tax reform plan, attention is focused on whether the funds released into the market will flow more rapidly into the stock market. This is in contrast to the government's continuous strong regulations on the real estate market, leading to analyses that it will have a positive impact on the stock market. The securities industry expressed regret over the decision to maintain the transaction tax but evaluated that since the plan was significantly revised to be more market-friendly compared to the original announcement, it will work favorably for stock investors.

According to the financial investment industry on the 23rd, the increase in the basic deduction amount for capital gains on stocks from 20 million KRW to 50 million KRW in this financial tax reform plan is effectively regarded as a 'tax exemption' benefit for stock investors. When deducting 50 million KRW, it is estimated that only about 150,000 investors, or the top 2.5% out of a total of 6 million investors, will be subject to capital gains tax. The remaining 5.85 million investors will not pay capital gains tax.

There were complaints that this was a 'tax increase' because capital gains tax, which was previously imposed only on major shareholders holding stocks worth more than 1 billion KRW per stock, will be applied to individual investors starting in 2023. However, since 97 to 98 out of 100 stock investors will not be subject to capital gains tax under this reform plan, it is a non-issue for small investors.

A securities industry official said, "If a married couple invests simultaneously, it is as if 100 million KRW is tax-exempt," adding, "With the addition of loss deductions, stocks will effectively become the most advantageous tool for asset growth."

The government combined all financial investment income and losses and allowed carryover deductions for deficits, extending the loss deduction carryover period from the existing 3 years to 5 years. The taxation method was also changed from monthly reporting to semi-annual reporting. An industry insider said, "It would have been better if it were on an annual basis, but semi-annual tax payments are a tolerable frequency," adding, "Earning 50 million KRW within half a year is not easy."

The Korea Financial Investment Association also expressed active support. Through its materials, the association stated, "The tax burden on the capital market has been eased," and "It is expected to contribute to revitalizing the capital market and establishing a long-term investment culture."

Although it is regrettable that the securities transaction tax will be gradually reduced instead of abolished, the fact that the reduction schedule has been advanced by one year compared to the original plan is positively evaluated. The government decided to reduce the securities transaction tax by 0.02 percentage points starting next year and further reduce it by 0.08 percentage points in 2023. A securities company official said, "The transaction tax will be reduced starting six months from now, which benefits both individuals and institutions," adding, "Especially government-managed funds, which are exempt from corporate tax obligations, can immediately enjoy the benefits of the transaction tax reduction."

There is also analysis that this reform plan, combined with recent real estate regulations, could attract funds into the stock market. SK Securities researcher Han Dae-hoon assessed, "It reconfirms the government's intention to channel abundant liquidity released into the market into the stock market."

Investor deposits have increased sharply this year. Investor deposits, which were 27 trillion KRW at the end of December last year, rose to 28 trillion KRW at the end of January this year and 31 trillion KRW at the end of February, then surged after the outbreak of the novel coronavirus disease (COVID-19) in March. After increasing by 38.7% to 43 trillion KRW at the end of March compared to the previous month, as of the 21st of this month, the amount waiting to buy stocks has reached 46.15 trillion KRW, maintaining a level above 40 trillion KRW for five consecutive months.

Margin loans for stock trading are also hitting record highs daily. This means that more investors are borrowing money to invest in stocks. According to the Korea Financial Investment Association, as of the 21st, the balance of margin loans (money borrowed from securities firms by investors to buy stocks) in the KOSPI and KOSDAQ markets was 13.669 trillion KRW. Since surpassing 13 trillion KRW for the first time on the 10th, it has been setting new records daily. This means that 'debt investment' is increasing by about 100 billion KRW per day on average.

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