The Kospi and other market indicators are displayed on a board at Hana Bank's dealing room in Jung-gu, Seoul, on Tuesday. [Yonhap]
The Kospi and other market indicators are displayed on a board at Hana Bank's dealing room in Jung-gu, Seoul, on Tuesday. [Yonhap]

A debate has emerged over whether paper gains on assets such as real estate and shares — profits not yet locked in through a sale — should be treated as taxable income.

At a forum held Tuesday by ruling and opposition party lawmakers and civic groups on "gaps in asset income taxation and the shift to a comprehensive income tax system," participants argued that taxation should be based on a taxpayer's actual increase in net worth and economic capacity, regardless of whether an asset has been sold.

The proposal draws on what is known as the "net worth accretion theory" — the idea that taxable income should be defined not only by income as it is earned but by any increase in a taxpayer's net assets. Under this view, if the value of assets such as shares or real estate rises, that gain should be treated as income even before the asset is sold.

Lee Sang-min, a senior research fellow at the Narasallim Institute for Fiscal Studies, said at the forum that "if asset values have risen, the taxpayer's economic capacity has already increased," adding that "whether the asset has actually been sold is not the essential criterion for determining whether economic capacity has grown."

Lee also argued that "if taxation occurs only at the point of realization, taxpayers have an incentive to hold on to assets to avoid or defer taxes, creating a lock-in effect" that "prevents capital from moving to where it can be used more efficiently."

Park Ki-san, a director at the Federation of Korean Trade Unions representing labor, urged stricter taxation of capital and asset income, calling for the revival of the financial investment income tax, a reduction in tax exemptions concentrated among high earners, and the addition of new nominal tax brackets to raise the effective tax rate on the ultra-wealthy.

The proposals drew considerable pushback, however. Critics said the approach risks creating overlapping tax liabilities and could undermine the basic foundations of a free-market economy and the existing tax system.

Among investors, reactions ranged from "Will we be compensated if our stocks lose value?" to "Will the government refund money if real estate prices fall?" Even setting aside those concerns, critics warned that allowing loss carryforwards and deductions could cause fiscal burdens and administrative costs to surge.

There is also the problem of owing taxes on an asset that has risen in value but has not been sold, leaving the taxpayer without the cash to pay. For example, if an apartment purchased for 1 billion won ($651,000) rises in value to 2 billion won, the owner shows a paper gain of 1 billion won but has not actually received any cash. In such a case, the taxpayer may have to sell the asset or take out a loan to cover the tax bill.

Real estate is already subject to multiple taxes — acquisition tax, property tax, the comprehensive real estate holding tax and capital gains tax — meaning that extending taxation to unrealized gains could draw criticism as effective double taxation.

Setting a valuation standard also poses challenges. While the market value of listed shares can be assessed at a given point in time, unlisted shares and real estate are far harder to price for tax purposes, leaving any assessment open to disputes over fairness.

Academics broadly agreed on the need to close gaps in asset income taxation, but said any transition to a new system would require a cautious approach.

Park Ki-baek, a professor at the University of Seoul's Graduate School of Taxation, offered a generally positive assessment of moving toward the net worth accretion model, but said "proceeding in a way that changes the current system as little as possible may be the best way to avoid unnecessary controversy down the road."

Moon Sung-hoon, a professor of business administration at Hallym University, called the net worth accretion theory "a fitting concept in that it can capture a taxpayer's ability to pay regardless of the source or form of income," but said the shift "is not simply a matter of expanding the tax base — it requires a full redesign of the system, including when taxation occurs and how it is legislated."


bbo@heraldcorp.com