South Korea Increases Capital Gains Tax Threshold for Stock Investors

In an effort to mitigate market volatility and foster a healthier investment environment, the South Korean government has announced a significant easing of the capital gains tax rules for stock investors. Starting next year, major shareholders will encounter a raised capital gains tax threshold, going from the existing 1 billion won ($766,000) to 5 billion won ($3.83 million), according to a Finance Ministry statement on Thursday.

Revised Tax Regulations

The revision process involves amending the Enforcement Decree of the Income Tax Act, a move that streamlines implementation since it bypasses the requirement for National Assembly approval. This update comes as a relief to shareholders who have been grappling with the implications of capital gains taxation on their investment portfolios.

South Korea's current tax framework imposes a 20 percent capital gains tax on investors whose stock holdings in a single company surpass 1 billion won. Those who own stocks worth more than 300 million won are taxed at an increased rate of 25 percent. However, with the forthcoming changes, shareholders with investments of up to 5 billion won will now be exempt from this tax obligation.

Market Impact and Historical Context

The move aims to reduce the end-of-year stock sell-off trend, where investors liquidate their holdings to avoid tax liabilities, thus dampening stock prices. This financial behavior has been particularly noticeable around the tax base date, which typically occurs two days before the last trading day of the year.

The lowering of capital gains tax thresholds is not new, with the government having progressively reduced the limit from 10 billion won since the tax was introduced in 2000. Despite these decreases, only a small fraction of retail investors are affected, with the National Tax Service reporting that last year, 7,045 people were subject to the tax, representing merely 0.05 percent of all retail investors.

Government Strategy and Economic Perspectives

The current administration, under President Yoon Suk Yeol, has been actively exploring ways to stimulate the stock market, which included an ambitious proposal to raise the threshold to 10 billion won and remove stake requirements. This proposal, however, stirred controversy, drawing criticism for appearing to benefit the wealthy.

With the general elections approaching, the government has expedited the revision without bipartisan consensus, taking actions such as banning short selling from November to appeal to voters. Although there are concerns regarding potential tax revenue losses due to the eased rules, Finance Ministry officials believe the impact will be minimal as those with holdings above 5 billion won or with substantial stakes will continue to be taxed.

Finalization of the revised capital gains tax parameters is expected to take place at an upcoming Cabinet meeting, with the new rules set to be effective from January 1st.

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