Time to revisit the investment income tax

"Let's take the KOSPI to 5,000."

Few phrases better capture how dramatically South Korea's stock market has changed over the past year. When President Lee Jae-myung used the slogan a year ago, it embodied a distant aspiration. When Samsung Electronics union members invoked it during a strike campaign last month, it sounded almost like a threat to the market's momentum. The contrast reflects a broader reality: South Korea's capital market has grown stronger, and the baseline for stock valuations has risen accordingly.

The surge in shares of Samsung Electronics and SK hynix has created a growing class of investors sitting on sizable gains. South Korea's market appears finally to be breaking free from its longstanding reputation for chronic undervaluation and the so-called "Boxpi" era. That progress should be welcomed. It also raises a legitimate question. Is it reasonable for investors to reap hundreds of millions of won in capital gains without paying any tax? The renewed debate over the financial investment income tax stems from that simple issue.

The tax would apply a 20% to 25% rate to annual gains exceeding 50 million won from stocks, funds and other financial investments. It was approved through amendments to the income tax law in 2020 and was originally scheduled to take effect in 2023. Following strong opposition, implementation was postponed for two years before the measure was repealed altogether through a bipartisan agreement at the end of 2024. Critics argued that taxing investment gains was inappropriate when average annual returns since 2010 had been only 3.3%. Others warned that major investors could pull money from the market. Some suggested revisiting the issue only after the KOSPI surpassed 4,000. The market has now cleared that benchmark with room to spare. Other reforms once cited as prerequisites, including revisions to the Commercial Act and broader capital-market reforms, have also been enacted. The case for further delay has become increasingly difficult to make.

Yet the government continues to tread carefully. Deputy Prime Minister and Finance Minister Koo Yun-cheol recently described the issue as one to be considered when market conditions are sufficiently mature. The problem is that such a standard can always be pushed further into the future. Even if the KOSPI were to reach 10,000, some would still argue that the market remains undervalued or that taxation could dampen investor sentiment. Rather than postponing the discussion indefinitely, the government should present a clear roadmap that gives investors certainty and time to adjust.

One sensible approach would be to link implementation to South Korea's inclusion in the MSCI developed markets index. Admission to the index is expected to attract roughly $30 billion in stable passive investment flows. The government hopes the country will be added to the MSCI watch list this month and is aiming for full inclusion as early as next year. Most markets already classified as developed economies maintain well-established capital gains tax systems. Making MSCI inclusion the trigger for implementation would provide investors with both a clear rationale and a predictable timeline.

That does not mean restoring the previous version of the tax without changes. Even before its repeal, shortcomings in the proposal were evident. Policymakers must ensure greater consistency across asset classes, including cryptocurrencies and real estate. The tax code should also encourage long-term investment while discouraging short-term speculation. The objective should be broader than simply raising revenue. What is needed is a comprehensive redesign of the capital-income tax framework.

No investor welcomes a larger tax bill. Yet a system that taxes wages and business income while largely exempting capital gains is difficult to defend on grounds of fairness. Policymakers cannot indefinitely sidestep that reality out of concern for the country's millions of retail investors. If South Korea is serious about becoming a truly advanced capital market, the debate over fair taxation should begin in earnest.