Capital gains tax scheme may cost millions of dollars: FSS Chief

Financial Supervisory Service Gov. Lee Bok-hyun speaks during a press briefing on the capital gains tax on Friday at the agency's headquarters in western Seoul. [YONHAP]

The proposed capital gains tax scheme may cost the financial market hundreds of millions of dollars in implementing the necessary system, warned Financial Supervisory Service (FSS) Gov. Lee Bok-hyun, suggesting that the initial plan should be scrapped.

The chief financial watchdog also urged policymakers to promptly make the decision on whether to abolish the plan or not instead of merely extending the ongoing grace period, saying that "it is necessary to make things predictable for market players.”

The comments came on Friday during a press briefing held after Lee attended a meeting with market experts and academics on the capital gains tax at the FSS headquarters in western Seoul.

"It will likely cost well more than tens of billions of won for our financial market players to implement the infrastructure necessary [regarding the capital gains tax], and there are also concerns on whether such a system will be able to be set up in time,” said Lee.

On Thursday, the governor called for the initial plan of the capital gains tax to be abolished, saying that “it will add woes and confusion to 14 million retail investors.”

The capital gains tax — first introduced by former President Moon Jae-in — was scheduled to take effect in 2025 after the Yoon Suk Yeol administration implemented a two-year extension of the grace period in 2022. Under the proposed plan, retail investors would owe 20 to 25 percent on gains from domestic stock trading valued above 50 million won ($38,000).

The president vowed to scrap the plan altogether in January this year. However, the government and the People Power Party, aligned with Yoon, faced strong opposition from the liberal Democratic Party (DP), which will continue to hold the majority in the incoming National Assembly. As both parties have yet to find common ground, speculations have been rising recently that the legislature may once again extend the grace period.

On Thursday, retail investors opposing the capital gains tax rallied on the street in front of the DP's headquarters in western Seoul, demanding the party to abolish the scheme.

While acknowledging that “the scheme has been designed under the principle that ‘when income exists, so does taxation,’” Lee also pointed out that the implication of the plan is too broad and complex, making it hard to predict.

The governor stressed that the capital gains tax may drive retail investors away from the domestic stock market, and discourage them from long-term trading.

Moreover, addressing a question on his previous comment that "extending the grace period for the capital gains tax is cowardice,” which was made a month prior, Lee said that "there are some opinions that we need to extend the [ongoing] grace period, but I believe that we should engage in a serious discussion and make the final decision.”

Lee apologized if his strong wording offended anyone.

BY SHIN HA-NEE [shin.hanee@joongang.co.kr]