Korea's February token market inherits a dividend tax on trading gains that small stockholders avoid

The tax complaint concerns one slice of an investor's return. According to the financial investment industry, income from non-monetary trust beneficiary certificates and investment contract securities is withheld at 15.4%, local income tax included ^[3]. Once a holder's annual interest and dividend income passes 20 million won, it is taxed comprehensively at rates up to 49.5% ^[4]. A 10 million won gain from selling a fractional product in the secondary market costs 1.54 million won in withholding, and up to 4.95 million won for a comprehensive taxpayer ^[1]. A small shareholder making the same gain on a listed stock pays no tax on it ^[2]. "There is a problem in that even when transfer gains arise from buying and selling in the secondary market, they are taxed as dividend income, and this is an area that will require regulatory improvement going forward," an official at a major brokerage said ^[8].

Reaching the top rate takes a lot of other income. A buyer who fills the 100 million won annual purchase cap at one exchange would need 20 million won of taxable income from that position, a 20% return in a year, to cross the threshold on it alone ^[2]. So the 49.5% lands mostly on investors with large financial income elsewhere. The industry says they carry the heaviest burden, since even their capital gains join the comprehensive base ^[5].

If the government grants the parity the industry is asking for ^[6], demand ahead of the February launch ^[1] turns on liquidity alone. Without a fix, the gap may barely register, because many of the products under discussion pay dividends or interest while held ^[13]. The worse case is no fix and a market that high-income investors avoid. The report does not describe a government proposal to change the rule.

I think the second outcome is the likeliest, and that tax is the smaller of February's problems. Individuals are expected to start with small public fractional offerings and trust beneficiary certificates, because the first phase admits institution-only private money market funds and bonds plus unlisted shares held in trust ^[11]. Authorities want a soft landing built on private products that yield interest and dividends ^[12], and the industry does not expect frequent trading in them ^[13]. A tax on transfer gains costs a holder only as much as that holder earns from transfers. The harder problem is the order book: when bids and offers are thin, cashing out can be delayed and small trades can swing prices sharply ^[14].

The counter-thesis is that the two problems feed each other. A holder whose trading gain is taxed like a dividend has one more reason to hold to maturity, and each holder who does so thins the quotes further. Market participants point to equity-linked securities, largely held to maturity with limited exchange trading, and to equity-linked warrants, whose trading value plunged under excessively strict regulation ^[16]. My view is wrong if the first retail offerings earn mainly from resale, because then the tax on transfer gains becomes the main cost to holders.

For existing co-ownership products such as beef cattle and artworks, selling the security still requires a separate transfer of the stake in the underlying asset ^[10]. The FSC is reviewing those procedures, along with protection standards for business-type products ^[10]. The report says conditions for liquidity providers and market-making plans still have to be spelled out ^[15].