Wael Ziada, the head of research at EFG Hermes, one of the Middle East's largest investment banks, said the proposed law wasn't clearly explained or discussed, causing the "extreme reaction" in the market.
"A lot of brokerage firms had no response to their clients" on how the law will be imposed, when it will take effect or how to calculate the tax, he said. "This is a case of total chaos."
Ziada said the gains from such a tax don't justify the "damage" that occurred in the market because it will be a challenge to collect it. The Exchange said in a statement Sunday the law has been sent to the interim president for approval.
"In my view, until we see the law and if this is the way decisions will be taken going forward, there will be damages," Ziada said.
A dozen Egyptian investors gathered outside the exchange Sunday to protest the law.
"We came here to protest those random decisions by the government," said Aly Youssef, one of the investors. "Investors have lost huge amounts due to those random decisions."
The sharp drop also followed Egypt's presidential election last week, which saw retired army chief Abdel Fattah el-Sissi, who led the July military overthrow of Islamist President Mohammed Morsi, reportedly trounce his only competitor. Official results are expected in the coming days.
"Following Egypt's elections, we expected a positive impact on the stock exchange. We predicted that benchmark will exceed the 9,000-point mark but the proposed draft tax ... had a negative impact on the benchmark," said Amir Youssef, a stock exchange broker.
The current interim government and el-Sissi have said tough measures will be taken in the coming months to reduce a crippling budget deficit, internal debts and ease unemployment, officially estimated at 13 percent. That likely will include new taxes and cuts to huge state subsidies on energy and food, though details have yet to be announced.
Egypt's Cabinet also has drafted a new budget, with the deficit continuing to hover at around 12 percent. The proposed budget has a 10 percent increase in public expenditures from the current financial year budget of $115 billion.
Oil-rich Gulf countries have injected about $20 billion in aid, small grants and fuel products into the Egyptian economy following Morsi's ouster. The new budget, with the financial year beginning in July, features only $2.4 billion in Arab aid until August, the government statement said.