Big tax shock for investors in foreign stocks

With capital gains tax reporting season nearing, in May, there are expected to be many more punters facing tax shocks as Koreans trading foreign stocks increased rapidly last year as liquidity flooded the market and stocks soared.

A 37-year-old office worker was shocked recently after receiving a text message from a brokerage telling him he has to pay capital gains tax on investments in foreign shares. His U.S. stock holdings were up 42 million won ($37,600) in 2020, and he is looking at a tax bill of about 8 million won.

To add insult to injury, his portfolio is down in 2021.

"I've already seen great losses as my stocks plunged entering this year," he said. "But on top of that, I need to pay taxes worth my two months of salary."

The office worker said that he's concerned as he doesn't even know how to report capital gains.

With capital gains tax reporting season nearing, in May, there is expected to be many more punters facing tax shocks as Koreans trading foreign stocks increased rapidly last year as liquidity flooded the market and stocks soared.

According to data from the Korea Securities Depository on Sunday, local investors traded $198.32 billion worth of overseas stocks last year, up almost 5-fold on year.

No capital gains tax is currently charged on the trading of local stocks, for now, unless an investor is considered major shareholder of a company. However, local investors must pay capital gains tax for trading foreign stocks.

If an investor gains in the foreign stock markets, he or she must report that voluntarily in May.

From total gains from foreign stock trading, 2.5 million won is subtracted as a basic deduction. Necessary expenses in stock trading, such as brokerage commissions, are also deducted from the taxed gain.

The tax rate is 22 percent.

If an investor traded multiple foreign stocks, gains and losses need to be totaled.

For example, if an investor gained 10 million won by trading Tesla shares and lost 3 million won on trading Apple shares, the investor's final capital gain from stock trading last year would be 7 million won. After the basic deduction of 2.5 million won, the total becomes 4.5 million won. If commissions were 50,000 won, that may be deductible.

The final capital gains to be taxed would be 4.45 million won. In the end, the investor will need to pay 979,000 won, 22 percent of 4.45 million won.

If an investor gained less than 2.5 million won from annual foreign stock trading, reporting of taxes would not be necessary as he or she won't be subject to any taxes anyway, but it is required in principle.

Whether or not one needs to report capital gains taxes can be checked through mobile stock trading applications operated by brokerages. As each brokerage only tracks trades they handle, if investors traded foreign stocks through multiple brokerages, they need to check all apps offered by different brokerages.

Reporting can be done by visiting tax offices or via "Hometax" webpage operated by the National Tax Service.

If investors ignore the notice and do not report their taxes from stock trading gains, they will have to pay a penalty.

Major brokerages, including Samsung Securities, NH Investment & Securities, KB Securities and Shinhan Investment, offer services to report taxes on behalf of investors, to cater to the needs of growing number of retail investors jumping into foreign stock trading.

In coming years, investors may also be charged capital gains tax on local investments.

Under a proposed government plan, small investors will have to pay 20 to 25 percent tax on gains above 50 million won from local stock trading from 2023. The rate will defer depending on the amount of the gains.

BY HWANG EUI-YOUNG, KIM JEE-HEE [kim.jeehee@joongang.co.kr]