Summary

  • The report said investors have filed amended tax refund claims with South Korea's tax authority over a tax dispute surrounding return of capital (ROC) from high-yield U.S. ETFs, drawing attention to the possibility of future tax refunds.
  • It said that after the Ministry of Economy and Finance's interpretation led to broader arguments for non-taxation of ROC, securities firms began weighing responses including jointly retaining law firms, as they monitor the possibility of changes to the tax framework for U.S. covered-call ETFs more broadly.
  • The report said that if the tax authorities accept the refund claims and shift ROC from dividend income tax to capital gains tax, the different tax rates could create winners and losers among investors and have a significant impact on the broader community of Korean retail investors in overseas assets.

Forecast Trend Report by Period

Tax Dispute Over Billions of Dollars in U.S. ETF Distributions

'They Taxed Money I Was Just Getting Back'

Angry Investors File Collective Objections

South Korean retail investors in overseas stocks have filed a collective objection with tax authorities, arguing that securities firms have been taxing distributions from high-yield U.S. covered-call exchange-traded funds incorrectly. The investors say Korean brokerages are treating an item that is non-taxable under U.S. tax law as taxable income.

According to the financial investment industry on November 5, investors in U.S. ETFs recently filed amended tax refund claims with the National Tax Service, alleging that brokerages overcharged dividend income tax on high-yield U.S. ETFs.

At the center of the dispute is return of capital, or ROC. ROC refers to the portion of an ETF distribution that returns part of an investor's principal rather than fund income, a concept recognized under U.S. tax law. In the U.S., the ROC portion of a distribution is not taxed. Korean brokerages, following guidance from the National Tax Service, have been withholding dividend income tax on ROC as well.

The issue shifted in June, when the Ministry of Economy and Finance said money received by a shareholder due to a capital reduction should be treated as deemed dividends only to the extent it exceeds the ETF's acquisition cost. The ministry added that the final factual determination should be made by the tax authorities and other relevant bodies. Investors took that to mean ROC should not be taxed if it does not exceed the purchase price. Brokerages now see the outcome of the refund claims as a ruling that could significantly reshape how taxes are calculated on high-yield U.S. ETFs.

Tax Dispute Centers on YieldMax, Ultra-High-Yield Covered-Call ETFs

Brokerages Watch Refund-Claim Ruling, Weigh Hiring Law Firms

The securities industry is closely watching the tax authorities' judgment on ROC because it could have a significant impact on the broader tax regime for U.S.-listed ETFs. ROC makes up a large share of distributions from U.S. ETFs. In some covered-call ETFs, ROC accounts for nearly 100% of distributions. Industry estimates show Korean investors received ROC distributions amounting to hundreds of millions of dollars this year from high-yield U.S. ETFs. Securities firms are considering response measures, including jointly retaining law firms.


Tax Dispute Began With Ultra-High-Yield ETFs

The current refund claims are being led by Korean investors in YieldMax ETFs. YieldMax ETFs are ultra-high-yield covered-call products managed by U.S. asset manager Tidal. The funds gained popularity in South Korea by offering large distributions through aggressive options strategies tied to underlying assets such as Tesla and Strategy. As of the end of 2025, the YieldMax NVDA Option Income Strategy ETF, or NVDY, had an annualized distribution rate of 50.87%. The YieldMax MSTR Option Income Strategy ETF, or MSTY, stood at 70.36%.

In high-yield covered-call products such as YieldMax ETFs, ROC accounts for a large portion of distributions. Covered-call ETFs typically pay investors weekly or monthly distributions. Under U.S. tax law, however, distributable earnings are finalized only after year-end accounting. If distributions paid during the year are later found to have exceeded profits as defined under tax law, the excess is classified as a return of invested capital, or ROC.

ROC is treated as non-taxable in the U.S. Because it is considered a return of money already paid in, it is not taxed as dividend income. Instead, it is reflected later in capital gains when the covered-call ETF is sold. The principle is similar to the way reduced-capital dividends from Korean stocks are not subject to dividend income tax.

Different Tax Codes in Korea and the U.S. Add to Industry Confusion

The problem is that Korea has no equivalent concept to ROC. South Korea imposes a 15% withholding tax on distributions from U.S. ETFs as dividend income. Taking that into account, the National Tax Service said last year that ROC should be taxed as dividend income. That is why securities firms have been imposing dividend income tax on ROC as well.

Investors later approached the Ministry of Economy and Finance and asked for a formal interpretation, according to industry officials. In June, the ministry said money acquired by shareholders due to a capital reduction can be taxed as deemed dividends only to the extent it exceeds the amount used to purchase the ETF. The dispute now turns on what should count as a "capital reduction." Investors say the term can be interpreted to include ROC.

One person familiar with the YieldMax investors' position said they had prepared grounds and supporting materials to show ROC can be treated as a return of capital. From the tax authorities' perspective, there is no reason to reject the refund claims, the person added.

The securities industry takes a more cautious view. One brokerage official said it remains unclear whether the "capital reduction" cited by the finance ministry can be directly equated with ROC. Korean tax law has no concept equivalent to returning investors' original principal in the same way as ROC. Whether ROC qualifies as a reduction of capital under Korean law requires further review.

Potential Fallout for Investors in U.S. Covered-Call ETFs

The tax authorities' eventual conclusion could have a broad market impact, participants say. One certified public accountant said the ROC issue surfaced now largely because investment in U.S. covered-call ETFs has surged. ROC is not limited to covered-call products and applies across U.S. ETFs more broadly, so the effect on taxes tied to distributions for Korean retail investors in overseas assets could be substantial.

The market impact would be greater if the tax authorities accept the refund claims. In that case, market participants say ROC would probably be treated under capital gains tax rather than dividend income tax. That would not affect all investors the same way. Dividend income tax starts at 15%, while capital gains tax is 20%.

One investment industry official said the shift could benefit people subject to South Korea's comprehensive financial income tax, who can face a 45% dividend income tax burden. For ordinary investors, however, it could mean paying 5 percentage points more in tax.

Woo-il Shim

Korea Economic Daily