KOSPI crashes 10% as South Korea tax proposal triggers circuit breaker

A proposal to tax unrealized gains on stocks and real estate sent South Korea's KOSPI into its worst single-day crash since March.

The KOSPI plunged 10% to 8,203.84 on Tuesday, triggering a circuit breaker after lawmakers proposed taxing unrealized gains on stocks and real estate.

"The market was already flashing multiple overheating signals — SK Hynix's valuation exceeding Samsung Electronics' was the most glaring," said Lee Jae Mahn, a strategist at Hana Securities in Seoul. "The tax proposal was the trigger that broke the dam."

Samsung Electronics fell more than 7%, while SK Hynix tumbled over 10%, leading a broad selloff that hit every major sector. The decline triggered the 13th sell-side circuit breaker this year as foreign and institutional investors dumped shares. The KOSPI's 9.99% single-day drop was its steepest since March 4.

The selloff compounds pressure on South Korea's semiconductor-heavy index, which had been riding an AI-driven rally that pushed valuations to elevated levels. With the Federal Reserve expected to resume rate hikes — Bank of America forecasts 25-basis-point increases in September, October and December — and domestic tax policy now in flux, the KOSPI faces headwinds on multiple fronts.

Tax Forum Sparks Panic Selling

The proposal emerged from a tax reform forum on June 23 attended by lawmakers from the Democratic Party, the Progressive Party, the Social Democratic Party and the Cho Kuk Innovation Party, including Kim Young-hwan, Yoon Jong-oh, Cha Kyu-geun and Han Chang-min. The core proposal would shift South Korea from taxing income by form to a "comprehensive income" model that taxes net asset appreciation regardless of whether assets are sold.

Lee Sang-min, a senior researcher at the Korea Institute of Public Finance, argued at the forum that taxing only at the point of sale creates a "lock-in effect" where investors hoard assets to defer taxes, preventing capital from flowing to more efficient uses. The forum proposed a gradual implementation path: unrealized gains would be recognized as income in principle, but tax liability could be deferred until realization, with interest added for delayed payment. Properties and unlisted stocks with difficult-to-assess market values could maintain the current realization-based taxation, or the policy could initially target only high-net-worth asset holders.

Regulators Had Already Flagged Risks

South Korean financial regulators had been warning about market overheating before the selloff. Financial Supervisory Service Governor Lee Chan-chan said Monday that the agency is coordinating with the Financial Services Commission and the Korea Exchange on measures to curb volatility in leveraged ETFs tracking Samsung Electronics and SK Hynix, warning that side effects were "intensifying."

The KOSPI's decline also tracked a global tech selloff as expectations of higher U.S. interest rates weighed on the sector. Bank of America's Aditya Bhave predicted the Fed will raise rates by 25 basis points each in September, October and December, keeping them elevated through 2027. Goldman Sachs, Morgan Stanley and Deutsche Bank have also warned that services inflation, wage growth and energy price volatility could slow the pace of disinflation.

The won weakened past 1,300 per dollar as the selloff intensified, while the 10-year Korean government bond yield fell 12 basis points to 3.42% as investors sought safe-haven assets. The selloff mirrored declines across Asia, with Japan's Nikkei 225 falling 3.2% and Taiwan's Taiex dropping 4.1%.

Investors are now focused on Micron Technology's earnings this week as the next test for the semiconductor sector. A strong report would confirm the fundamentals of Samsung Electronics and SK Hynix, according to Dilin Wu, a strategist at Pepperstone Group. A miss, however, could deepen concerns that the AI hardware investment boom is losing momentum.

This article is for informational purposes only and does not constitute investment advice.