🚨 Capital Gains Tax

Today Korean Social News for Beginners | 2025.12.24

0️⃣ Tax System Reform Discussion to Address Financial Asset Inequality

📌 Asset Inequality Issue Emerges... Discussion on Taxing Capital Gains from Stocks and Bonds

💬 The National Assembly Budget Office stated that a capital gains tax system for financial assets is needed to reduce income and asset inequality. As high-income earners shift their assets from real estate to financial assets like stocks and bonds, the current tax system does not adequately address this, leading to growing inequality. The Budget Office emphasized the need to strengthen tax fairness and redistribution by expanding capital income taxation and reducing the proportion of tax-exempt individuals, rather than simply raising income tax rates. They proposed gradually reviewing a system similar to the previously scrapped Financial Investment Income Tax while setting high basic deductions initially and phasing out securities transaction taxes. This is a careful approach aimed at minimizing capital market shocks while ensuring social acceptance of the system.

💡 Summary

• Capital gains tax is a system that taxes profits from selling financial assets like stocks and bonds.
• As high-income earners shift assets to financial investments, tax gaps are increasing inequality.
• The Budget Office proposed reviewing the Financial Investment Income Tax and gradually eliminating securities transaction taxes as medium to long-term tasks.

1️⃣ Definition

Capital gains tax refers to a system that taxes profits (capital gains) earned from selling assets such as stocks, bonds, and real estate. Unlike labor income, it targets income generated from asset transactions, aiming to improve tax fairness and strengthen income redistribution functions.

Capital gains are generally taxed when profits are realized (at the point of sale). For example, if you buy stocks for 10 million won and sell them for 15 million won, the 5 million won profit becomes capital gains and is taxed. Korea's current tax system applies relatively high rates to real estate capital gains, but taxation on financial assets like stocks and bonds is limited or nonexistent in many cases, raising fairness concerns.

💡 Why is this important?

• As high-income earners concentrate assets in financial investments, tax gaps are worsening inequality.
• A tax structure focused on labor income favors high-income earners with significant asset income.
• Strengthening capital gains taxation is a key tool to improve tax fairness and redistribution.
• Careful system design is needed considering market shocks and investor sentiment.

2️⃣ Current Status and Issues

📕 Growing Tax Gap in Financial Assets

• High-income earners are shifting assets to financial investments. Key trends include:

  • As real estate regulations and property holding taxes increase, high-income earners are moving assets to stocks and bonds.
  • Financial asset holdings of top 10% households are rising significantly, widening the wealth gap.
  • Real estate capital gains are taxed through transfer income tax, but most financial assets are not taxed.
  • Listed stocks have no tax on capital gains unless you meet large shareholder requirements, creating wide tax blind spots.

• Limitations of labor income-centered tax structure have emerged. Key issues include:

  • Current income tax focuses on labor income, with inadequate capital income taxation.
  • Higher-income earners have higher proportions of capital income, resulting in relatively lower effective tax rates.
  • Labor income earners are transparently taxed through withholding, but capital income easily goes unreported.
  • This weakens income redistribution functions and perpetuates inequality.

📕 Tasks After Financial Investment Income Tax Abolition

• Financial Investment Income Tax introduction was scrapped. Key developments include:

  • The Financial Investment Income Tax was a system designed to comprehensively tax income from stocks, bonds, and derivatives.
  • It included basic deductions of 50 million won (100 million won for KOSDAQ) to protect small investors while taxing high profits.
  • Implementation was postponed then finally abolished in 2024 due to investor opposition and market shock concerns.
  • After abolition, how to supplement financial asset capital gains taxation remains a policy gap.

• Issues with securities transaction tax are noted. Key limitations include:

  • Securities transaction tax is imposed on stock trades themselves, creating tax burden regardless of profit or loss.
  • Investors must pay taxes even on losses, making it unfavorable and unfair.
  • If capital gains tax is introduced, eliminating transaction tax is necessary to avoid double taxation.
  • However, tax revenue loss is a concern if transaction tax is eliminated, requiring a gradual approach.

📕 Tax-Exempt Population and Tax Structure

• High proportion of tax-exempt individuals concentrates tax burden. Key issues include:

  • About 40% of wage earners pay no income tax.
  • Excessive deductions and exemptions in middle and low-income brackets result in low effective tax rates.
  • Tax burden concentrates on some high-income earners, potentially increasing tax resistance.
  • Reducing the tax-exempt proportion and broadening the tax base is raised as a long-term task.

• Structural improvements are more effective than raising income tax rates. Key directions include:

  • Simply raising maximum tax rates may only increase tax resistance with low effectiveness.
  • Expanding capital income taxation and adjusting deductions/exemptions is more favorable for redistribution effects.
  • Balance must be found between improving tax fairness while maintaining economic vitality.
  • Medium to long-term discussion is needed to redesign the overall tax structure.

💡 Key Issues in Financial Asset Taxation

1. Tax gaps: Most financial asset capital gains are untaxed, worsening inequality
2. Financial Investment Income Tax abolition: Finding alternatives after failed introduction remains a policy task
3. Securities transaction tax: Fairness issues with taxation regardless of profit/loss, revenue loss concerns if abolished
4. Tax-exempt proportion: Excessive deductions/exemptions lead to concentrated tax burden and weak tax base
5. Market shocks: Rapid system changes negatively impact investor sentiment and capital markets

3️⃣ Improvement Measures and Medium-to-Long-Term Tasks

✅ Gradual Introduction of Capital Gains Tax System

• High basic deductions should protect small investors. Key directions include:

  • Initially set high basic deductions like 100 million won so regular investors are unaffected.
  • Tax only high capital gains to increase social acceptance of the system.
  • Gradually adjust basic deductions while expanding taxation scope.
  • Include supplementary measures like loss carryforwards and loss-profit netting to ease investor burden.

• Securities transaction tax should be gradually eliminated. Key tasks include:

  • Gradually reduce transaction tax rates while introducing capital gains tax.
  • The goal is to prevent double taxation and improve tax fairness.
  • Adjusting with time gaps is realistic to minimize revenue loss.
  • Ultimately eliminate transaction tax and fully transition to capital gains taxation.

✅ Strengthening Tax Fairness

• Capital income taxation should be expanded. Key measures include:

  • Comprehensively tax capital gains not just from stocks and bonds but various financial products.
  • Reduce tax blind spots by adjusting tax exemptions and reductions.
  • Narrow the gap in tax burden between labor income and capital income.
  • Consider reasonably adjusting comprehensive taxation standards for financial income.

• Reduce tax-exempt proportion and broaden tax base. Key directions include:

  • Gradually adjust excessive deductions and exemptions in middle and low-income brackets.
  • Raise effective tax rates so more people bear appropriate tax burden.
  • Gradual approach needed to avoid sudden burden increases.
  • Priority should be strengthening tax fairness and redistribution effects rather than revenue expansion.

✅ Social Consensus and Careful Implementation

• System design minimizing market shocks is needed. Key tasks include:

  • Rapid system changes can negatively impact investor sentiment and capital markets.
  • Allow sufficient grace period and phased implementation for market adaptation.
  • Improve understanding of the system through investor education and public relations.
  • Pre-check side effects through simulation and trial operations.

• Overall tax structure reform is needed. Key directions include:

  • Capital gains tax should be promoted as part of overall tax system reform, not standalone.
  • Comprehensive design considering linkages with income tax, corporate tax, property tax, etc. is needed.
  • Social discussion with participation of government, National Assembly, experts, and stakeholders should precede.
  • Establish medium to long-term roadmap and clarify phased goals and schedules.

4️⃣ Related Terms

🔎 Financial Investment Income Tax

• Financial Investment Income Tax was a system designed to comprehensively tax financial investment income.
  • The Financial Investment Income Tax was a system that would have comprehensively taxed income from stocks, bonds, funds, and derivatives. It was scheduled for 2023 implementation but was postponed due to investor opposition and market shock concerns, then finally abolished in 2024.
  • Core elements included: First, basic deductions of 50 million won for domestic stocks and 100 million won for KOSDAQ/overseas stocks. Second, taxation at 20% (25% over 300 million won) on amounts exceeding basic deductions. Third, easing investor burden through loss carryforwards and loss-profit netting. Fourth, planned gradual reduction and elimination of securities transaction tax.
  • Reasons for abolition included strong opposition from individual investors, concerns about stock price declines and capital market contraction, and political burden. After abolition, how to supplement financial asset capital gains taxation remains a policy task. The Budget Office suggested that similar systems need medium to long-term review. However, many opinions suggest that higher basic deductions and gradual approaches are needed to secure social acceptance upon reintroduction.

🔎 Securities Transaction Tax

• Securities transaction tax is a tax imposed on stock trades themselves.
  • Securities transaction tax is imposed at a fixed rate on transaction amounts when buying and selling stocks, taxing the trading act itself regardless of profit or loss. Current rates are 0.20% for KOSPI and 0.23% for KOSDAQ, automatically collected on sales.
  • Issues with securities transaction tax include: First, investors must pay taxes even on losses, making it unfavorable. Second, if capital gains tax is introduced, it becomes double taxation with transaction tax. Third, it increases trading costs and can hinder market liquidity. Fourth, from a tax fairness perspective, taxing transactions rather than profits is unreasonable.
  • Many countries have abolished transaction taxes and transitioned to capital gains taxation. Korea also planned to gradually reduce transaction tax when introducing the Financial Investment Income Tax, but the transaction tax remains after the Financial Investment Income Tax was abolished. The Budget Office proposed gradually eliminating securities transaction tax along with capital gains tax introduction. However, transaction tax secures about 5 trillion won in annual revenue, so sudden elimination could burden finances, requiring careful approach.

🔎 Income Redistribution

• Income redistribution is a function that reduces income gaps through taxes and welfare.
  • Income redistribution refers to policy functions that reduce inequality by transferring income from high-income to low-income groups through taxation and social security systems. The purpose is to improve social stability and fairness by reducing market income gaps in disposable income.
  • Redistribution occurs in two main ways. First, collect more taxes from high-income groups through progressive taxation. Income tax, corporate tax, and property tax fall into this category. Second, transfer income to low-income groups through welfare spending. This includes basic pensions, unemployment benefits, and housing support.
  • Korea's redistribution effect is lower than the OECD average. The market income Gini coefficient is high but the disposable income Gini coefficient does not improve much, indicating weak redistribution function. This is because capital income taxation is inadequate and the proportion of tax-exempt individuals is high, making tax progressivity insufficient. The Budget Office emphasized the need to enhance redistribution effects through strengthening capital gains taxation and expanding the tax base. Long-term, comprehensive redistribution policies encompassing both taxation and welfare are needed.

🔎 Tax-Exempt Proportion

• Tax-exempt proportion is the percentage of wage earners who pay no income tax.
  • Tax-exempt proportion refers to the percentage of total wage earners who have no income tax obligation due to various deductions and exemptions. Korea's tax-exempt proportion is about 40%, which is high because deductions in middle and low-income brackets are excessively designed.
  • A high tax-exempt proportion creates several problems. First, tax burden concentrates on some high-income earners, potentially increasing tax resistance. Second, the tax base narrows, reducing tax revenue stability. Third, tax fairness and redistribution functions weaken. Fourth, taxpayer awareness decreases, reducing interest in fiscal soundness.
  • Most OECD countries have low tax-exempt proportions. A structure where more people pay taxes even at low rates is more favorable for fiscal soundness and fairness. The Budget Office proposed gradually adjusting labor income deductions and tax credits to reduce tax-exempt proportion and raise effective tax rates. However, rapid changes can increase burden on middle and low-income groups, requiring sufficient discussion and gradual approach. Protecting real disposable income by expanding welfare benefits along with increased tax burden is also important.

5️⃣ Frequently Asked Questions (FAQ)

Q: Will regular investors have to pay more taxes if capital gains tax is introduced?

A: High basic deductions will be set so small investors are not affected.

• The Budget Office's proposal sets high basic deductions like 100 million won or more initially so regular investors have no tax burden. The previous Financial Investment Income Tax also had basic deductions of 50 million won for domestic stocks and 100 million won for KOSDAQ/overseas stocks. This level affects very few individual investors.
• The purpose of capital gains tax is not to impose taxes on all investors, but to fill tax gaps for high capital gains to improve tax fairness. Small investors receive tax-free benefits within basic deductions, and burden can be eased through supplementary measures like loss carryforwards and loss-profit netting. Also, if securities transaction tax is gradually reduced and eliminated, trading costs decrease, potentially improving the investment environment. The key is sufficiently protecting small investors and securing social acceptance in system design.

Q: Why should securities transaction tax be eliminated?

A: To avoid double taxation between capital gains tax and transaction tax and improve fairness.

• Securities transaction tax is imposed on stock trades themselves, requiring tax payment regardless of profit or loss. Since investors must pay taxes even on losses, it's unfavorable and lacks fairness. If capital gains tax is introduced, taxing profits while also imposing transaction tax creates double taxation. This is why many countries have eliminated transaction taxes and transitioned to capital gains taxation.
• However, securities transaction tax secures about 5 trillion won in annual revenue, so sudden elimination burdens finances. Therefore, gradually reducing transaction tax rates while introducing capital gains tax, then ultimately eliminating it completely, is realistic. This way, investors see reduced trading costs, government manages revenue stably while improving tax fairness, and time gaps minimize market shocks.

Q: Will capital gains tax actually reduce inequality?

A: Strengthening capital income taxation is important for redistribution effects, but has limitations alone.

• Higher-income earners have higher proportions of capital income, but current systems don't adequately tax this, worsening inequality. Strengthening capital gains taxation increases tax burden on high-income earners, and expanding welfare for low-income groups with that revenue enhances redistribution effects. It can improve tax fairness by supplementing the labor income-centered tax structure.
• However, capital gains tax alone cannot solve inequality. First, work to reduce tax-exempt proportion and broaden tax base must be done together. Second, linkages with other taxes like corporate tax and property tax must be considered. Third, welfare spending expansion and social safety net strengthening must be parallel for actual redistribution. Fourth, policies ensuring equal opportunities in education, healthcare, and housing are also important. Capital gains tax is one pillar of inequality reduction, but comprehensive approaches encompassing tax, welfare, and social policies are needed.

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