[Maeil Business News] Stock transfer and financial tax system
- SKKGSB
- Hit11692
- 2022-06-30
Professor Youngju Nielsen (Faculty Chair of AI MBA, Associate Professor of Finance) has written a column about the stock market on MK News (Maeil Business News).
After becoming accustomed to the financial market and tax system in the United States, I found the Korean system similar but different, so it often presents surprises. Something new that I learned recently as stock transfer tax became a hot topic is that there is no wash sale in Korea.
In the US, wash sales prevent paying less tax through loss in stock investment while reducing overall income. If a sale of stock records a loss, in order to re-purchase the same stock, the buyer must wait 30 days. The following is a detailed explanation of a fictional case.
Let’s say that an investor bought Stock A for $100, and it is now trading for $75. There is a loss that has not been realized. On the other hand, in the same year, the investor bought Stock B for $50 and sold it for $75, so they realized profits. In this case, the investor has to pay capital gains tax. However, they can realize the loss by selling Stock A in order to reduce the total profits. If we take this case to the extreme, and they re-purchase Stock A after the loss is realized, then, they only reduce the tax without great changes to their whole portfolio. It is wash sales that prevent such underhand tax reduction.
In Korea, capital gains tax is not imposed on domestic stocks, so the extreme case above is not possible with domestic stocks. However, similar cases are possible if an investor buys or sells American stocks. The US Internal Revenue Service (IRS) imposes a capital gains tax on stocks, and wash sales are related to the IRS, so Koreans who buy American stocks, but are not bound by IRS rules regarding wash sales, can avoid tax. In short, Korean investors can realize the loss on certain American stocks, and then re-purchase them immediately. Although this is feasible, few individual investors can generate great profit in this manner.
In comparison, the earnings from long-term stock investment (more than a year) are subject to capital gains tax of 0%, 10%, or 20%, depending on the investor’s income level. The earnings from short-term investments follow the investor’s income tax rate, which varies from 10% to 37% as of 2021. It is, therefore, better not to proceed with ‘short orders’, especially for wealthy investors.
For this reason, since the 1990s, asset management experts have been making tremendous efforts to maximize the tax effect and to increase the return on total assets without breaking the wash sale rule. This is because raising the return on all assets by about 1% using the tax effect is much easier and more reliable than raising the return by 1% through investment strategies. In addition, the biggest current topic in US fintech is hyper-personalized finance, and at the center of this is an algorithm that perfectly reflects the individual's finances and optimizes taxes.
Even in the eyes of ordinary people who are not tax law experts, I think the US capital gains tax will almost equate profits from investment to those generated through other methods. Of course, there are devices that encourage long-term investment to prevent severe short-term investment.
Since the last term, the Korean government has been in lengthy discussions about reforming financial tax laws. Capital gains tax is central to these, and the impact of capital gains tax on the capital market is under active discussion. I, therefore, hope that financial tax laws will be reformed after careful discussion and review of all aspects of Korean people's lives, including not only capital markets, but also various social problems, including ways to close legal loopholes.
Original article in Korean: https://www.mk.co.kr/opinion/contributors/view/2022/06/496767/