the government will increase the securities transaction tax (from 0.15% to 0.20%) on the sale of stocks on the KOSPI and KOSDAQ from next year. we summarize the main contents, including expanding the burden of ultra-short-term trading and taxing 'reduced dividends' of major shareholders.

securities transaction tax is a tax paid when selling stocks. Regardless of whether you make a profit or a loss, when you sell a stock, a certain percentage of the sale price is taken as tax. recently, the government announced that the KOSPI and KOSDAQ securities transaction tax rates will increase by 0.05 percentage points from 0.15% to 0.20% starting next year. While you typically pay 0.15% tax when you sell a stock, next year you will pay more for the same amount. the news of the increase in the securities transaction tax is of interest to individual investors.

what is a securities transaction tax?

a stock transaction tax is a tax on the sale of stock. it is levied on a "withholding" basis, meaning that a percentage of the amount you sell your shares is automatically collected as tax. it is characterized by the fact that the tax is applied when a trade is made, whether it is a profit or a loss. for example, if you sell 100 million won worth of Samsung Electronics stock, 150,000 won will be withheld as tax at a rate of 0.15%.

will this change from next year?

starting from January 1, the transaction tax rate will be 0.20% for transactions on or after January 1, 2019. currently, the transaction tax rate for both KOSPI and KOSDAQ is 0.15%, but from next year, it will increase to 0.20% for both markets. for example, if you sell 100 million won worth of stock next year, you will pay 50,000 won more in taxes, from 150,000 won to 200,000 won. on the other hand, long-term investors or small investors who don't trade stocks on a regular basis will be less affected by the tax increase because they trade less frequently.

who will pay?

the tax burden is particularly high for short-term and ultra-short-term investors who buy and sell stocks frequently. the tax burden is much higher for investors who buy and sell multiple times a day than for those who hold stocks for longer periods of time and then sell them.

how much tax revenue will increase

the Ministry of Strategy and Finance estimates that the reform will raise about 12 trillion won ($12 billion) in additional tax revenue over the five-year period from 2026 to 2030. estimates from other organizations are similar. the increase in taxes paid when selling stocks will also help government finances.

taxing large shareholder dividend reductions

a reduced dividend is a dividend that returns capital reserves that a company has built up to shareholders. in the past, dividend income tax has not been levied on dividends because the dividend is paid out of equity rather than company profits. However, as in the recent case of Merits Financial Holding, there has been a problem with large shareholders receiving large dividends through reduced dividends. the government saw this as a "trick" and decided to introduce taxation on major shareholders.
according to the amendment, large shareholders of listed companies and shareholders of certain stakes in unlisted companies will only have to pay dividend income tax on the portion of the amount received as a reduced dividend that exceeds the purchase price of the stock. For example, in the case of Merits Financial Holdings Chairman Choi Joong-ho, who received KRW 360 billion in tax-free reduced dividends, the excess amount will be taxed if it exceeds the purchase price of the stock. however, minority shareholders of small and medium-sized companies in the K-OTC market are exempt from taxation. this rule also applies to dividends on or after January 1 of next year.

FAQs

Q. when will the increase in securities transaction tax take effect?
A. It will be applied to transactions sold on or after January 1, 2019. for example, if you sell 100 million won worth of stock, you will pay a tax of 200,000 won (0.20%), up from 150,000 won (0.15%).

Q. which investors will face a higher transaction tax burden?
A. Short- and ultra-short-term investors who buy and sell stocks frequently will face a higher burden. each trade is taxed at a higher rate, which increases the tax burden for investors who make frequent ultra-short trades. on the other hand, long-term investors and small investors will not be affected as much because they trade less frequently.

Q. what is reduced dividend taxation?
A. Reduced dividends that distribute capital reserves were not taxed in the past, but from now on, the dividend income tax will be imposed on the portion of the amount received by the majority shareholders of listed companies (and shareholders of non-listed companies) that exceeds the acquisition value.

Q. if I am not a majority shareholder, am I subject to the reduced dividend tax?
A. Only major shareholders of listed companies and major shareholders of unlisted companies are taxed. ordinary investors and minority shareholders are not subject to the tax.

conclusion: The increase in the securities transaction tax is expected to significantly increase the taxes paid when buying and selling stocks. let us know your thoughts in the comments.