Gov't considering capital gains tax break as year-end approaches

The South Korean government is considering easing the capital gains tax in an attempt to rally investors and avoid a year-end selling spree.

Finance Minister Choo Kyung-ho speaks during a plenary session at the National Assembly in western Seoul on Friday. [NEWS1]

The Yoon Suk Yeol government is considering easing the capital gains tax, a major driver behind the annual year-end selling spree that takes place on Korea's stock market.

The discussions are widely perceived as an attempt to further rally investors following the recent short-selling ban — and ahead of the general election slated for next April.

But is it really a safeguard to protect smaller investors, or is it merely a tax break for the rich?

On Dec. 28, 2021, Korean retail investors offloaded a record 3.09 trillion won ($2.33 billion) worth of shares in a single day amid a largely uneventful market.

The massive sell-offs were an attempt to avoid capital gains taxes, as investors holding a single company’s stocks valued at more than 1 billion won were trying to reduce their holdings below the 1-billion-won threshold.

This is a typical occurrence at the end of the year in Korea, and it causes smaller investors to fret over the inevitable price plunges that ensue after major players sell.

Korea’s current taxation policy categorizes those holding stocks worth more than 1 billion won, or exceeding a certain proportion of a company’s total ownership by year-end, as major shareholders subject to capital gains tax. The system taxes large investors' capital gains at a rate of 20 percent.

Easing the capital gains tax has been one of Yoon’s main agenda items during the presidential election, along with illegal short-selling ban.

A source from the presidential office on Friday said that “the government should positively consider investors’ demands for easing capital gains tax.”

The Yoon administration is considering raising the current 1 billion won taxation threshold to a range of 2 to 5 billion won. The adjustment would entail a revision of the decree under the Income Tax Act, and therefore will not be subject to a legislative process through the National Assembly.

Finance Minister Choo Kyung-ho said that “no decision has been made on relaxing the standard for major shareholders,” during a televised news interview on Sunday.

“There was an agreement between the ruling and opposition parties to maintain the 1-billion-won threshold until next year,” Choo continued. “If any change is to be made, there needs to be a negotiation with the opposition upon the previous agreement.”

If the taxation standard were eased, only those holding stocks worth more than multiple billion won would be taxed for capital gains. This would theoretically prevent investors from dumping stocks at the end of the year, which makes the potential adjustment particularly appealing to smaller retail investors.

It will be large investors, however, who directly benefit from the revision.

Only 0.3 percent of all investors were subject to capital gains tax in 2020. If the threshold rises, that figure will inevitably shrink — running counter to previous fiscal policy, which has trended toward extending the scope of corporate taxation.

“Most advanced economies have been imposing capital gains tax, and Korea has also been expanding the taxing scope. So, if the Yoon administration decides on raising the threshold, that will be going against the decadelong trend,” said Kim Yong-won, a researcher at the Fiscal Reform Institute.

“It is a tax cut for the rich,” stressed Kim.

State tax revenue is also declining. Korea posted a deficit of 70.6 trillion won in fiscal balance this year through September.

Meanwhile, some experts have argued that the government should look into the stock exchange tax before making revisions with capital gains taxes.

Stock exchange tax is levied on securities transactions on stock exchanges, regardless of whether investors make a profit or loss. Many countries, including the United States, Germany and Japan are replacing stock exchange taxes with capital gains taxes, under the principle of taxing only profits.

“It is more desirable to shift the focus from extending the taxing scope for capital gains tax to reducing the stock exchange tax,” said Kim Woo-cheol, a taxation professor at the University of Seoul, adding that “if it is not possible to abolish the stock exchange tax immediately due to concerns of tax revenue, it should be done gradually.”

BY KIM KI-HWAN [shin.hanee@joongang.co.kr]