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As you know, you have to pay tax on all income in Japan. If you are a salaried company employee, this includes any income outside the salary your company pays to you. Not doing so is tax evasion and ignorance is not an acceptable excuse for not doing so.
In this article, I would like to share a rule called the 200,000 yen rule. Simply put, if your miscellaneous income is under 200,000 yen a year, you do not have to pay income tax on them.
Disclaimer I am not a tax professional; therefore, any advice or instructions you follow here is at your own risk. Please do your own research.
What is miscellaneous income?
First of all, there are two large buckets a business can fall under for tax purposes.
The two types are as a corporation or as an individual. The way taxes are applied is completely different for the two types.
- A corporation is when you incorporate a company, and it is a separate entity from you as a person, and corporate tax will apply.
- An individual is when you do business as an individual, and in this case, income tax is applied.
In some ways, the taxes for a corporation might be easier to calculate, since the profits are essentially income minus expenses. However, for an individual, depending on where your income comes from, you need to categorize them accordingly (to 10 different categories) and tax will be applied differently.
For example, severance pay or income rental properties each have different ways taxes are incurred, ie. rental income is taxed at a higher rate than severance pay. Another example is when a company employee renders services to a different company, this income will be categorized as employment income.
This article is for those who are receiving income as individuals.
As mentioned that are ten types of income for an individual taxpayer
- Interest Income (利子所得)
Income as the result of interest on public bonds and savings or distribution of profits from loan trusts and public bond investment trust.
- Dividend Income (配当所得)
Dividend payouts from stocks, funds, etc
- Real Estate Income (不動産所得)
Income from real estate like rent, rights of land, loan of ships or aircraft
- Business Income (事業所得)
Income as a result of business such as commerce, agriculture, fishery etc
- Salary Income (給与所得)
Monthly salary or bonus from your company
- Severance Income (退職所得)
Income you received from a company upon retirement
- Forest Income (山林所得)
Income from cutting down and selling trees from forests that have been owned for more than five years
- Transfer Income (譲渡所得)
Income as a result of the sale of business or home fixed assets
- One-Time Income (一時所得)
One-time income such as when you win the lottery or receive an insurance payout
- Miscellaneous Income (雑所得) This will be referred to as Other Income for distinction.
Income that does not fall into any one of the other nine buckets, such as interest on non-business loans, speaking fees, and royalties.
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As you can see, there is an income bucket called miscellaneous income. However, this 200,000 yen rule includes all other income except number five, Salary Income (給与所得), and number six, Severance Income (退職所得), in the above list. It is not limited to just the Miscellaneous Income bucket as listed above.
For the purpose of explaining this under-200,000 yen rule, when I mention “miscellaneous income”, it will refer to all other income except your salary and severance income. I will refer to miscellaneous income as per the tax categorization list as “other income” instead, for the purpose of distinction.
What is included in these type of income?
There are a few types of income that most often miss out on, but they are part of this miscellaneous income.
Income from selling goods on marketplace services
One of which is income from the sale of stuff that I don't need through platforms like Mercari. In this case, if you are selling things that you owned but don't need anymore, then you will likely incur no tax. This includes furniture, games, clothing, books, cars (for personal use), even the sale of precious metals under 300,000 yen.
However, if you are running a business through these marketplaces, i.e., buying at a low price and reselling at a higher price regularly. The profits from this will be considered business income or other income, thus have to be included in calculations for this 200,000 yen rule.
Income from point investment
Point investment (ポイント投資) is a feature provided by some services like Rakuten or PayPay that lets you invest your points to get more points.
The profits generated through such service is regarded as One-Time Income (一時所得). Even as one-time income, there is only a possibility for tax to be incurred when the profit exceeds 500,000 yen, which is hard to achieve for most.
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One thing to note is that this 500,000 yen threshold includes the value of gifts received from Furusato Nozei, which is typically 30% of the amount you donate. But once again, it is very hard to achieve 500,000 yen in profits even if you include this, therefore most do not have to worry about tax even considering this.
Of course, if you simply get points from some campaign, it does not incur tax. However, if you want to go completely by the book, there is a possibility that it could be considered as One-Time Income or Other Income if you perform some task, like answer a survey, and get points as a reward.
Now, there is an exception here. There is, in fact, a case where points are regarded as miscellaneous income. That is if you use a combination of cash and points to purchase stocks. For example, if you purchase a stock that cost 1,000 yen and used 100 points (worth 100 yen) as part of the sale. Upon purchase, the 100 yen is considered Other Income.
Unrelated, but when you decide to sell the stock, the purchase price will be regarded as 1000 yen (including the point portion) in the above example, and not 900 yen.
Even with all that said, there has never been a case when this has been pointed out by the tax office so far. You can imagine the amount of admin work that the tax office needs to go through to be aware of all the points earned. System-wise, we are not at the stage where we need to worry about the tax office auditing this aspect just yet.
What is the 200,000 yen rule for miscellaneous income?
So now that you are clear on what falls under miscellaneous income know that there is a benefit if your miscellaneous income is under 200,000 per year. You do not have to pay income tax. This rule is largely to reduce the amount of tax office man-hours for what they deem a small amount.
Let's take a look at an example here.
I run an affiliate website that generated 300,000 yen a year, and it incurred 150,000 yen of expenses in the same year. My net profit is 150,000 yen which is under the 200,000 yen threshold. Assuming I have no other miscellaneous income, I am not subjected to income tax on that amount.
However, even if my miscellaneous income is less than 200,000 yen, I am still subjected to 5% residence tax. Not reporting as such is considered tax evasion. Residence tax is applicable even if your profit is 1 yen.
This means that while you don't have to file a tax return (確定申告), you have to file residence tax report (市民税申告).
Another important thing to note is that once there is a need to file a tax return, for example, if you need to apply for a home loan deduction in the first year or if your salary is more than 20M a year, you cannot take advantage of the under 200,000 yen rule.
When you have to file a tax return, you need to include miscellaneous income on the tax return form. In this case, taxes will be incurred on those incomes, even if the total profit is less than 200,000 yen that year.
How does this work for investing?
When you open an account with a Japanese securities platform, there are basically three types of account:
- Specified Account – Withholding
20.315% tax is automatically deducted upon any profit or dividend payout. No tax return is necessary.
- Specified Account – Non-Withholding
A report of your annual profits will be generated by your securities platform but tax will not be withheld. This means you have to report it yourself.
- Ordinary Account
No report generated by securities platform. You have to calculate profits and report on your own.
The type of account can be selected upon creating an account. It can be also changed mid-year if no profits or dividends occurred. If profits or dividends have been paid out, then the new setting will only take effect the following year.
To take advantage of the “under 200,000 yen” rule, you have to use a Specified Account – Non-Withholding or Ordinary Account. This is because a Specified Account – Withholding deducts 20.315% tax whether your total profit is under 200,000 yen or not.
So, if profits from the sale of stocks, dividend payouts or ETFs, together with any other miscellaneous income, is under 200,000 yen, then it is applicable under this rule.
What about NISA accounts?
Those of you who have NISA accounts, which are tax-free accounts for investing, might wonder if profits from such account have to be included in the 200,000 yen? As NISA is tax-free, you can ignore profits from NISA accounts for the purpose of any kind of tax calculations including this rule.
In other words, even if you realized 50,000 yen of profit from your NISA account, the 200,000 yen threshold remains as 200,000 yen and not 150,000 yen.
How much can you actually save from the 200,000 yen rule?
Assuming your total profits from investment is 199,999 yen with no other miscellaneous income, you only have to pay 5% residence tax instead of 20.315%, saving approximately 30,630 yen worth of tax each year.
Even for long-term investors, selling just enough of your funds to get profits under 200,000 yen and buying into the same fund again seems like a worthwhile move as there isn't any wash-sale rule in Japan.
Of course, the cost here is the work of calculating profits and filing a residence tax report.
How to file residence tax report?
It depends on where you reside, but using Shibuya-ku as an example, you have to head to their website for instructions. In the case of Shibuya-ku, the period to report is 16th Feb to 15th April of the following year.
Basically, you have to head down to your city office with the following
- Residence tax report form
- Personal identification document(s) (My Number card, My Number notification slip, driver's license, residence card. Best just to bring everything, you know how it is)
- Proof of income (basically any documents that can prove the income such as your securities statement)
- Documents on current or previously applied residence tax deductions
The tax will be deducted from your salary moving forward. I would advise you to refer to your municipality-specific instructions.
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