Overseas Investors CASHING IN! Are YOU Missing Out on the US Boom?

South Korean retail investors are increasingly looking to greener pastures – and by pastures, I mean the U.S. stock market. Fueled by a massive U.S. equity boom, the number of South Korean retail investors reporting capital gains on their overseas stock investments more than doubled last year. Market analysts reported Friday this surge is raising eyebrows, especially among policymakers worried about potential capital outflows and the resulting currency volatility. It's a trend that's hard to ignore, and frankly, one I've been seeing bubble up anecdotally for a while now.

Overseas Investors CASHING IN! Are YOU Missing Out...

This shift in retail investor behavior is undeniably linked to the pandemic. With the South Korean capital market underperforming its global peers, especially the explosive growth of U.S. tech giants, many individual investors have jumped on the bandwagon of the "Magnificent Seven" – Apple, Microsoft, Alphabet, Amazon, Nvidia, Meta, and Tesla. Who can blame them, really? The returns have been tempting.

Data submitted by the National Tax Service to Rep. Park Sung-hoon of the opposition People Power Party paints a clear picture: a whopping 523,709 investors filed overseas stock capital gains tax returns for income earned in 2024. That’s a staggering 152.7 percent increase from the 207,231 filings recorded the previous year, hitting a new record high. It’s pretty obvious that this isn't just a passing fad; this is a major movement of capital.

Currently, South Korean investors holding overseas stocks are required to report their net annual profits to the tax agency in May of the following year. They pay a 22 percent capital gains tax on earnings exceeding 2.5 million won (about $1,700). It's a decent chunk of change, but clearly, it hasn't deterred investors from seeking returns abroad.

The surge in overseas stock holdings perfectly aligns with the U.S. market rally. In 2024, the S&P 500 and Nasdaq Composite indices gained 23.3 percent and 28.6 percent, respectively. That’s a considerable outperformance compared to South Korea’s KOSPI, which saw relatively modest gains of just 9.6 percent. It’s hard to argue with those numbers. South Korean investors, understandably, are chasing performance.

The numbers tell a compelling story. In 2020, the number of overseas capital gains tax filers stood at 139,909. It nearly doubled to 242,862 in 2021. After a dip to 100,374 in 2022 during a global market downturn, it rebounded to over 200,000 in 2023. Last year's figure was nearly four times that of 2020! It's been quite a ride for these investors.

Combined overseas stock capital gains in 2024 reached a massive 14.42 trillion won, more than quadrupling the 3.58 trillion won recorded the previous year. We saw it hit 11 million won in 2022 amid global market woes, then recover to 17 million won in 2023. Last year, it jumped by more than 10 million won, highlighting just how lucrative U.S. investments have been for these retail investors.

To put it simply, Korean investors are continuing to increase their U.S. stock holdings. Data from the Korea Securities Depository indicates that U.S. stocks under its custody were at $44.2 billion in 2022. That figure rose to $68.0 billion in 2023 and then skyrocketed to $112.1 billion in 2024. By the end of last year, we were looking at a whopping $163.6 billion. This is some serious money moving across borders.

This capital outflow is causing worry about foreign exchange volatility, prompting the government to act. They are introducing a return investment account (RIA) policy during an extraordinary parliamentary session. The plan, expected to be announced next month, will offer investors capital gains tax relief of up to 50 million won per person if they transfer their overseas stocks into an RIA and reinvest the proceeds into the domestic equity market. It's a clear attempt to lure capital back home, and it will be interesting to see if it works.