[Deep Dive] The Financial Investment Income Tax Reintroduction Debate and Tax Equity Dilemma: Background of Retail Investor Backlash and Future Prospects

18 Months After Abolition: The Resurgence of the Financial Investment Income Tax Debate

The Financial Investment Income Tax (FIIT), which was finally abolished in December 2024 after two fierce battles over its postponement, is resurfacing as a core topic in the stock market in the second half of 2026. As domestic and global stock markets exhibit strong upward momentum driven by the rally of large-cap tech and semiconductor sectors fueled by artificial intelligence (AI) demand, the logic of "tax equity" regarding capital income is coming back to the fore. While its abolition received overwhelming support from general retail investors at the time, the prolonged bull market is causing the necessity of the system to be re-evaluated.

'Taxes Follow Income': The Dilemma of Tax Equity and Revenue Collection

Under the current tax system, general retail investors who do not meet the major shareholder criteria (holding a 1% stake or more than 5 billion KRW in a single stock) do not pay taxes on capital gains from domestic stock trading. However, as the KOSPI index recently showed a strong rebound and leading semiconductor stocks surged by over 2%, visualizing significant capital gains, issues regarding equity compared to earned income are being raised once again.

Key Arguments from Academia and Politics

• Normalization of Fundamental Tax Principles: Tax experts and civil society organizations point out that maintaining a tax vacuum on capital income, despite the stock market expanding to a scale incomparable to the past, violates the fundamental principle that "taxes follow income."
• Resolving Tax Regressivity: Certain political factions argue that during market booms, the capital gains of high-net-worth individuals increase exponentially, and the current structure, which concentrates tax exemption benefits on them, must be urgently overhauled.
• Addressing Revenue Shortfalls: The deepening burden on national finances and tax revenue shortfalls since 2025 also act as practical factors fueling the debate on reintroducing the FIIT.

Fierce Backlash from Retail Investors and Fears of Capital Flight

Upon hearing news of these reintroduction discussions, retail investor communities immediately pushed back fiercely. Investors cite the painful experience from the past when the imminent introduction of the FIIT caused sidelined capital to flee the market and put downward pressure on stock prices.

Exacerbation of the 'Korea Discount' and the Rush to Foreign Stocks

The biggest concern is capital outflow. In a situation where market skepticism remains regarding the effectiveness of the government-led Corporate Value-up Program, increased taxation could drastically reduce the relative attractiveness of the Korean stock market. In particular, with the US NASDAQ market continuing its record-breaking rally in 2026 centered on AI tech stocks like Nvidia and Meta, adding an extra tax burden to the domestic market will inevitably accelerate the "US stock migration" of retail investors. In fact, voices are growing among investors that they should completely transfer their funds to overseas stocks or alternative assets like spot Bitcoin ETFs, which offer higher returns and a more transparent market environment.

Future Prospects: Prolonged Uncertainty and Portfolio Strategies

Currently, the government and financial authorities are maintaining a cautious stance, stating that they will not engage in concrete discussions on the reintroduction of the FIIT, conscious of the market's extremely sensitive reaction. The political burden of resurrecting the system immediately is simply too high.

However, as academia and parts of both the ruling and opposition parties continue to raise the issue, the uncertainty surrounding the FIIT is expected to act as a potential risk to the market for the time being. From an investor's perspective, it is necessary to closely track the impact that tax system reform discussions will have on domestic market supply and demand. Simultaneously, rather than being concentrated in a single asset class, a flexible and diversified portfolio management strategy considering tax efficiency across domestic stocks, foreign stocks, and alternative assets has become more crucial than ever.