Gov't blinks on new capital gains tax

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Gov't blinks on new capital gains tax

Finance Minister Hong Nam-ki announces the government's tax reform at the Korea Federation of Bank in Myeong-dong, Seoul, on Wednesday. [YONHAP]

Finance Minister Hong Nam-ki announces the government's tax reform at the Korea Federation of Bank in Myeong-dong, Seoul, on Wednesday. [YONHAP]

 
 
The government blinked on a new capital gains tax for stock investments, retreating after a public backlash.  
 
The tax will be applied on yearly profits exceeding 50 million won ($42,000), not 20 million won as originally announced. And a part of the tax will come in a year later than originally planned. 
 
In late June, the government said it would tax gains exceeding 20 million won made from stocks  from 2022. A tax of 20 percent would be applied on gains between 20 million won and 300 million won a year and 25 percent above that.
 
On Wednesday, it confirmed the tax rates but increased the floor to 50 million won and delayed implementation to 2023. Previously the government was planning to tax profits made on equity funds starting in 2022 and on stock investments starting in 2023. The tax on both will start in 2023. 
 
Instead of billing every month, the government has decided to tax every six months.  
 
A planned lowering of transaction taxes is unchanged.   
 
The government will lower the transaction tax to 0.15 percent from the current 0.25 percent by 2023. The transaction tax will be lowered 0.02 percentage points in 2021 and 0.08 percentage points in 2023.  
 
The government estimates a reduction of 500 billion won in taxes collected from stock exchanges in 2021, which will grow to 1.9 trillion won after the additional cut in 2023.  
 
Additionally, the government will be taxing cryptocurrency. The tax rate is set at 20 percent and will be technically considered other financial income. The first 2.5 million won in annual profits from cryptocurrency will be tax-exempt.  
 
The tax on cryptocurrency will be applied starting Oct. 1, 2021.  
 
Profits made from other investments such as overseas stocks, non-listed stocks, bonds and derivatives will also be taxed 20 percent. Only profits below 2.5 million won are exempted. Other investments will be taxed on their combined profit instead of being separately taxed. 
 
“The [tax] reforms will ensure neutrality in taxation among financial investment products by simplifying complicated taxation methods,” Finance Minister Hong Nam-ki said on Wednesday. “They will contribute to the development of the financial market by introducing a wide variety of financial products.”  
 
He stressed that retail investors’ tax burden will be reduced because the transaction tax will be lowered from 2.5 percent to 1.5 percent by 2023. 
 
“Excluding the top 2.5 percent, the other 97.5 percent of stock investors will enjoy the same tax exemptions on their profits as they currently do,” Hong said. 
 
The new capital gains tax wasn't popular, adding to the falling popularity of President Moon Jae-in, who faces other serious challenges including a failed policy to cool the real estate market and sexual harassment allegations against high-profile members of the ruling Democratic Party including the late Seoul Mayor Park Won-soon.  
 
The government claims that most retail investors will not be affected by the tax. It says that 97.5 percent of retail investors, or 5.9 million people, earned profits of less than 50 million won a year. The new tax will only affect the top 2.5 percent of retail investors, or about 150,000 individuals.  
 
Korea Exchange, which operates the stock market, estimates that retail investors number around 6.12 million.
 
The Finance Ministry has said the new taxes were not aimed at increasing the government’s coffers.  
 
Some members of the public think the government is chipping away at any lucrative investment opportunity, especially real estate.  
 
Last Friday, Moon unexpectedly commented on the capital gains tax, stressing that taxation should not discourage retail investors, hinting at a change in the government’s initial proposal.  
 
“President Moon said this is the time to support retail investors who have held up the stock market,” said Blue House spokesman Kang Min-seok. “President Moon said the local stock market needs to be strengthened, and the role of retail investors should be considered important.”
 
In its latest tax reforms, the government has created a new category in which individuals that makes more than 1 billion won in annual income will have to pay 45 percent in taxes. Currently, individuals who make more than 500 million won a year are taxed at 42 percent.  
 
With the change, the government expects to collect 900 billion won from 16,000 taxpayers.  
 
The tax reforms also include benefits in relation to the coronavirus pandemic, including a lighter tax burden on small businesses.  
 
The government will be applying lower value-added taxes to businesses with annual revenues below 80 million won.  
 
In the last two decades, lower value-added taxes were applied to businesses with annual revenue below 48 million won.  
 
However, the lowering of value-added taxes will not apply to real estate rental companies and bars and saloons.
 
Additionally, an exemption for paying value-added tax for businesses with revenues of less than 30 million won has been expanded to businesses with revenues of less than 48 million won.  
 
“Through [the tax reforms,] 570,000 small self-employed business owners' tax burden will be reduced 480 billion won a year,” Hong said.  
 
To encourage spending, the government has decided to raise the tax deduction for credit card spending.  
 
The year-end deduction for credit card spending for individuals making more than 120 million won is 2 million won. This will be raised to 2.3 million won. For individuals making less than 70 million won, the tax deduction of 3 million won will be raised to 3.3 million won.  
 
However, the higher deductions are only for this year.  
 
“This year’s tax reforms also include the higher taxation on residential properties to stabilize the housing market that was announced in the Dec. 16, June 17 and July 10 [real estate] measures,” Hong said.  
 
On July 10, the government announced its 22nd set of real estate stabilization measures, which raised the maximum comprehensive real estate tax from 3.2 percent to 6 percent for individuals who own three or more housing units, or two in regulated areas, which includes all districts in Seoul.
 
The plan also included greater taxes for owners of single apartments with assessed values exceeding 900 million won, which was announced in December’s real estate measures.  
 
According to the Finance Ministry, the government should collect 900 billion won more tax as a result of the increase in the comprehensive real estate tax. However, the bump is only expected next year and not in the following years.  
 
According to a National Tax Service report on Friday, the government collected 2.67 trillion won in comprehensive real estate taxes last year. This was a 42.6 percent increase compared to the previous year.  
 
The number of people that paid the tax also increased 28.4 percent year-on-year to 595,000.  
 
BY LEE HO-JEONG   [lee.hojeong@joongang.co.kr]

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