Bloomingbit Newsroom

The abolition of the Financial Investment Income Tax (Capital Gains Tax) has effectively been confirmed, revealing challenges for the '2-Year Grace Period for Virtual Assets (Deferral of Taxation)'. On the 8th, a related person from the Democratic Party's Policy Committee communicated with Bloomingbit, stating, "Although there is no discussion on the abolition of the capital gains tax, it is expected that a grace period will be granted for the sake of equity in the situation where the Financial Investment Income Tax is abolished." The capital gains tax, scheduled to be implemented on January 1st next year, primarily targets gains from the transfer and lending of virtual assets according to the Income Tax Act. If the income exceeds 2.5 million won annually, a tax of 22%% (including local tax) is imposed. Domestic investors have strongly opposed the excessive taxation on virtual assets, which are not protected, and as a result, the government proposed a plan in July to extend the start of the capital gains tax from the existing 2025 to 2027 by two years. Although the government announced the grace period plan, the Democratic Party, which had shown opposition to the government's stance, held the majority, making it uncertain whether the grace period plan would pass the National Assembly. In this situation, the Democratic Party's leadership recently expressed their intention to abolish the Financial Investment Income Tax, gaining support for the grace period and abolition opinions. Accordingly, the grace period plan for the capital gains tax is expected to be confirmed by 2027. On this day, Min Byung-deok, a member of the Democratic Party, also stated to Bloomingbit, "The virtual asset sector should be recognized as an industry through the Commercial Act, and it can be seen as a fair taxation," adding, "Currently, it is correct that the capital gains tax is being deferred." On the other hand, if the capital gains tax is deferred, it is pointed out that as much as the extended time, clear regulations related to virtual assets should be established, and a systematic taxation standard, infrastructure, and consumer protection measures should be structured. In particular, issues such as the approval of monthly settlement funds, expansion of basic exemption amounts, and other tax equity issues are highlighted as major resolution tasks. Hwang Doo-hyun, Son Min, Bloomingbit reporter

Korea-US Interest Rate Gap 1.5%%P Exchange Rate Policy 'Variable' Changes US Interest Rate Lowered, but Exchange Rate Remains High Still High at 1380 Won Level Increase in Household Debt Also Noted Experts Say "Interest Rate Freeze Likely" Economic Burden Requires Lower Rates, but Two Months of Consecutive Rate Cuts 'Speed Adjustment' Lee Chang-yong, Governor of the Bank of Korea. Photo=Kim Beom-joon, Korea Economic Daily Reporter The US Federal Reserve (Fed) lowered its policy interest rate by 0.25 percentage points, but the Bank of Korea's exchange rate policy remains uncertain. Although the won-dollar exchange rate, which surged before the US presidential election, has slightly decreased (appreciation of the won), it is not at a reassuring level, and household debt issues have not been resolved. The expectation is that it will be difficult for the Bank of Korea to continuously lower the interest rate, which started the pivot (exchange rate policy shift) last month. Narrowed Korea-US Interest Rate Gap On the 7th (local time), the Fed decided to lower the policy interest rate from 4.75-5.0%% to 4.50-4.75%% by 0.25 percentage points at the Federal Open Market Committee (FOMC) regular meeting, narrowing the interest rate gap with Korea (3.25%%) from 1.75 percentage points to 1.50 percentage points. The interest rate gap between the two countries stimulates capital movement towards the higher interest rate side. The higher interest rate in the US is a factor that draws capital outflows from Korea and increases the won-dollar exchange rate. With the Fed's interest rate cut, the interest rate gap has narrowed, and the exchange rate fell on this day. In the Seoul foreign exchange market, the won-dollar exchange rate (as of 3:30 PM) traded at 1386.40 won, down 10.20 won from the previous day. Although the Fed's interest rate cut was a relief for the exchange rate, the level remains high. The exchange rate rose more than 6%% from 1307.80 won at the end of September. Lee Chang-yong, Governor of the Bank of Korea, recently stated in a meeting with reporters that "the exchange rate, which was not a concern at the October Monetary Policy Committee, has become a concern." Another key factor in the Bank of Korea's interest rate decision is the financial stability situation, which is not severe. Although the financial authority's household debt increase, which surged to 10 trillion won in August, decreased significantly to 5 trillion won in September, it rebounded to 6 trillion won last month. Despite Growth Concerns, 'No Change' in November Decision Despite this, the price and growth indicators strongly suggest the need for an interest rate cut. The consumer price index rose 1.3%% last month, the lowest level since January 2021 (0.9%%). The need to maintain high interest rates for price stability has disappeared. The domestic gross domestic product (GDP) grew by 0.1%% in the third quarter. According to the International Monetary Fund (IMF), several global investment banks (IBs) recently lowered their growth forecasts for Korea this year from 2.5%% to 2.3%% by 0.2 percentage points. This governor also stated last month that "the possibility of this year's growth rate falling below 2.4%% (the Bank of Korea's previous forecast) is high," suggesting a range of 2.2-2.3%%. The reason for the growing call for an interest rate cut is to alleviate the economic burden. Experts predict that the possibility of lowering the base rate at the Monetary Policy Committee meeting on the 28th of this month is low when considering such a dilemma comprehensively. Cho Young-gu, a researcher at Shinhan Financial Investment, predicted that "as the exchange rate increase is more burdensome than economic deterioration, the Bank of Korea will decide to freeze the interest rate this month." The Bank of Korea emphasizes that the situation in Korea is different from that of the US, which continuously lowered interest rates at the FOMC in November following September. A Bank of Korea official said, "While the US raised interest rates rapidly from 0-0.25%% to 5.25-5.50%% annually, Korea raised them by 3 percentage points from 0.50%% to 3.50%% annually," adding, "As the pace of increase was faster, the pace of decline will also be felt." It is analyzed that Korea does not have to choose continuous rate cuts like the US. The possibility that the US interest rate cut speed could be faster than market expectations due to Donald Trump's victory in the presidential election is also a factor that supports the 'speed adjustment theory.' If Trump's definitive fiscal policy, tax cuts, and other measures become a reality, it could act as a factor for price increases. Yoo Sang-dae, Deputy Governor of the Bank of Korea, said at a market situation inspection meeting related to the US presidential election and FOMC on this day, "The uncertainty surrounding the major countries' exchange rate policies has increased," adding, "We will closely monitor the impact of US policy changes on our financial and economic conditions and respond as needed." Reporter Kang Jin-kyu

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