Definition
In Korea, the capital gains tax (yangdo income tax) is a tax the government charges on the pure profit you make when you transfer an asset to someone else. Covered assets include real estate such as land and buildings, apartment pre-sale rights, and stocks. The tax is not figured on the full sale price. It is figured only on the gain you actually keep, after subtracting what you spent to buy the asset and various related costs.
What matters is how much you made, not how much you sold for
Let's use limited-edition sneakers to see how it works. Say you bought a pair for 100,000 won and resold it for 150,000 won. 150,000 won lands in your bank account, but your real profit is 50,000 won. Capital gains tax works the same way. It is a tax on the profit only, not on the whole amount you receive. Selling a pair of sneakers you wore once or twice isn't subject to this tax. If you resell things again and again like a business, the income may be taxed separately as business income.
What if you sell a taxable asset for less than you paid, at a loss? You made no money and actually lost some, so your capital gains tax is 0 won. The basic rule is simple: no profit, no tax.
The value-added tax (VAT) you pay when you shop at the store is added to the full price of most goods. (Unprocessed foods such as rice and vegetables are exempt.) Capital gains tax is clearly different, because it applies only to the new income created when an asset rises in value.
Costs and holding time are subtracted, so the tax shrinks
When you sell expensive real estate like a house or land, the math gets much more careful. Say you bought a home for 300 million won and sold it for 500 million won. The whole 200 million won is not treated as profit right away. Costs of buying and selling, such as the fee paid to a licensed real estate agent and the acquisition tax, count. So do costs that raised the home's value, such as the expense of extending the balcony. Together they are treated as necessary expenses, and they are subtracted from your profit first.
There is also a perk for people who hold an asset for a long time. It aims to discourage people from flipping real estate in a short time for speculation, and to help people who settle in one place and actually live there. The best-known example is the long-term holding special deduction, which cuts the amount used to calculate your tax in proportion to how long you held the asset.
So even if two people each made the same 200 million won gain, the final tax they actually pay can be completely different. One flipped the home after just 1 year. The other lived there for 10 years and then sold.
A little more precisely
To be a little more precise, capital gains tax is a completely different kind of tax from a monthly paycheck or money earned from a business. It covers a large, irregular sum that comes up only once every few years. So Korea does not add it to your other income. It uses a separate classification system that calculates the capital gain on its own.
Also, you don't owe tax whenever you sell any asset. It mainly arises when you trade assets named in the tax law. These are homes such as apartments and villas, shops, land, pre-sale rights, and overseas stocks or the stocks of major shareholders in Korean companies.
There's more. If a household owns just one home and sells it after holding it for 2 years or more, the sale price up to 12 billion won gets a full tax exemption. (If the area was designated as a regulated area when the home was acquired, 2 or more years of residence is required too.) This safeguard protects ordinary people so that the tax burden doesn't stop them from moving to a new home.
Common misconceptions
The tax is charged on the whole amount that lands in your account when you sell a house or stocks.
The tax is not charged on the full sale price. It is charged only on the remaining profit (the capital gain), after subtracting the costs and fees you paid to buy. If you sold at a loss, you owe no tax at all.
Where you meet it
You bought an apartment for 300 million won and sold it for 500 million won, and the tax is calculated on the 200 million won gain in price.
You trade U.S. stocks and make a gain of more than 2.5 million won in a year, then report and pay tax on the amount over that.
In one sentence
Capital gains tax applies only to the real gain you pocket when you sell an asset. If you sell at a loss or meet the exemption requirements, you pay no tax.