Taxing Unrealized Gains? Controversy Over "Will Losses Be Compensated?"

Calls are emerging to treat unrealized gains from real estate or stock market investments as income and impose taxes on them.

At a forum held on June 23 under the theme of "Exploring the Tax Gap in Asset Income and the Shift Toward Comprehensive Income Taxation," attended by lawmakers from both ruling and opposition parties and civic groups, it was argued that taxation should be based on the actual increase in net assets and economic capacity, regardless of whether the assets have been sold or what form they take.

The argument is that this serves as an alternative to address the issue where taxation only at the time of profit realization creates a tendency to hold onto assets to avoid or defer taxes, thereby hindering the efficient movement of capital.

Proponents cited the expected benefits of resolving the unfairness where wage earners pay taxes as soon as they receive their salaries while asset holders can defer taxes indefinitely, and reducing the means for ultra-high-net-worth individuals who generate income through real estate and stocks to evade or delay tax payments.

However, such tax items for ultra-high-net-worth individuals are prone to overlap, and the side effects of creating a poorly designed system could outweigh the benefits.

Some point out that it could potentially shake the very foundations of the free market economy and the tax system.

While it may seem to align with the basic principle of taxation—that "where there is income, there is tax"—it faces the counter-question: "Will losses also be compensated?"

If an investor pays taxes on valuation gains in the first year of stock investment, but incurs a loss in the second year, can the taxes already paid be returned or compensated? Even if losses are technically carried forward for deductions, it would lead to a surge in fiscal burden and administrative costs, and tax revenue stability would decline if asset value fluctuations are significant.

There is also the issue of having to pay taxes when one does not have cash because the assets that have increased in value have not been sold.

For example, if an apartment worth 1 billion won rises to 2 billion won, a profit of 1 billion won occurs on paper, but since no cash has been realized, the owner might have to sell the property or take out a loan to pay the taxes.

Taxing unrealized gains could reduce investors' expected returns.

In particular, in fields like venture or innovation investment, where one might endure initial losses before eventually generating large profits, such a tax could diminish incentives and dampen the willingness to invest.

In the case of real estate, there is already a dense tax net in place, including acquisition tax, property tax, capital gains tax, and comprehensive real estate tax, which are imposed at each stage of a transaction.

Adding taxes on unrealized gains here would make it difficult to avoid criticism of double taxation.

There are also practical hurdles to taxation.

While the value of actively traded listed stocks can be assessed at a specific point in time, it is difficult to determine the market price for non-listed stocks or real estate to serve as a tax basis, which is bound to trigger controversy over appropriateness.
※ Please note: This article was translated by AI and may contain errors.