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Whether you are a beginner or a seasoned investor who just moved to Japan, it takes time to understand how capital gains taxes work in Japan. Even if you understand Japanese, reading about complicated tax calculations in Japanese isn't always fun.
In my pursuit of financial independence, I studied a quite a bit about how taxes work, especially regarding capital gains. So, I decided to share my knowledge with others so that you can have an easier time.
Disclaimer I am not a tax professional. I am just some guy on the internet who researched many YouTube videos and blog posts and put together this guide with that information. Anything you do as a result of information from this post is your responsibility. Please consult a tax professional and do your due diligence before following the information here.
Note This article
- is solely focused on capital gains from financial securities only and does not cover capital gains from physical assets like real estate (yet).
- Capital gains from securities that are covered in this guide are public company's stock or ETFs you can buy from a regular securities platform and does not include private stock, i.e., if you obtain a startup's stock.
- aimed at individual investors and does not cover capital gains tax for corporations
However, I fully intend to update the guide with the above information after I put in time for adequate research.
With that aside, let's dive in.
- What is capital gains?
- What is the capital gains tax rate in Japan?
- Who is liable for capital gains tax in Japan?
- How do you get charged capital gains? (and different types of investment accounts in Japan)
- What is stock loss carry forward deduction (繰越控除)?
- Dividend Deduction (配当控除) in Japan
- Foreign Tax Deduction (外国税額控除) on Foreign Dividends in Japan
- Exit Tax
- Taxes for Cryptocurrency Gains
What is capital gains?
Straight from Investopedia, the definition of capital gain is an increase in a capital asset's value and is considered to be realized when the asset is sold.
An important point here is capital gains can only happen when an asset is realized and any profit has been realized, which means the stock has been sold and the profit has been paid out to you. So, it does not matter how much profit your portfolio is yielding so far, as long as it's not realized, there is no tax incurred on those unrealized profits.
What is the capital gains tax rate in Japan?
What is capital gains tax in the first place? The Investopedia page here has a good definition.
To give a simple example, you bought 1 stock for 10,000 yen and sold the same stock for 12,000 yen. Your capital gain is 2,000 yen, and that amount is liable for any capital gain tax. Dividend payouts are taxed under the bracket of “dividend income.” However, dividend income has the same tax rate as capital gains, therefore the full amount of the dividend is liable for tax.
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It is more important for corporations to make the above distinction as the capital gains and dividends tax rate is different.
Not all countries have capital gains tax. Countries like Monaco, The Cayman Islands, Singapore, Malaysia, and Hong Kong have no capital gains tax. Japan, unfortunately, does.
The capital gains tax in Japan is a flat 20.315%, regardless of your income level or how much capital gains you have. This tax rate is under a separate income tax system where each type of income is taxed differently. The opposite of a separate income tax is a consolidated income tax system, where all your income is consolidated and taxed marginally.
This rate exists because high-income earners can be taxed up to 55% under the consolidated tax system. If investing means having to pay 55% of profits in taxes, some might find it not so worthwhile and therefore not invest altogether. This will not turn out well for Japan's economy, and therefore the separate tax system is introduced.
For example, if the CEO of Softbank earns a salary of 200M yen a year, his salary tax would be almost 50%, so his take-home would be about 100M yen. On the other hand, if he receives dividends from his Softbank stocks, these will be taxed at 20.315% instead of 50%.
The 20.315% consists of 15.315% income tax and 5% residence tax. It is easier if you remember the tax for capital gains in Japan as approximately 20%. Moving forward, I will use 20% as the rate in examples for ease of calculation and understanding but note that the actual rate is 20.315%.
In the above example where your capital gain is 2000 yen, you would have to pay 400 yen (20% of 2000 yen) in taxes.
What about dividends in an accumulating ETF?
If you invest in ETFs, you might know there are two types of ETF when it comes to handling dividends. They are accumulating and distributing ETFs.
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Distributing ETFs like Vanguard's VTI, distributes dividends which means they are credited into your account in cash. These dividends are taxed. US funds have a requirement to distribute dividends, so you would have to choose a fund domiciled in a country like Ireland if you want your dividends reinvested.
Accumulating ETFs do not pay out dividends but are reinvested back into the fund, increasing its value. If you invest in Japanese ETFs via a Japanese securities platform, you can choose whether to reinvest or have the dividends paid out.
The key point here is that if you choose to reinvest the dividends or invest in an accumulating ETF, the dividends are not taxed until you decide to sell the shares. This can be beneficial to those who intend to be in Japan short term and will be moving to a country with a lower tax rate and want to sell there.
You will notice that in foreign platforms like Interactive Brokers, you do not have the option to choose whether you reinvest the dividends. Instead, you have to choose an accumulating ETF, like SWRD.
Who is liable for capital gains tax in Japan?
Any tax resident of Japan is liable for capital gains tax. Note that tax resident is different from a resident for immigration purposes.
As long as you are a tax resident of Japan, you are liable for this tax even if you moved to a foreign country. However, you do not have to pay residence tax in this case.
There are two types of tax residents: permanent tax residents and non-permanent tax residents. You are considering a permanent tax resident if you've lived in Japan for more than five years out of the last ten years. A permanent tax resident is liable for income tax on worldwide income, while a non-permanent tax resident is only liable for income tax on Japan-sourced income.
However, please note that this is not the case for capital gains tax. You are liable for taxes on worldwide capital gains on securities purchased outside Japan which you acquired after 1st April 2017, even on a foreign platform like Interactive Brokers, regardless if you are a permanent tax resident or not, as long as you are a tax resident of Japan during the sale.
If you purchase the securities before 1st April 2017, however, then it will be regarded as foreign-sourced income and only taxable if you remit it to Japan.
How do you get charged this tax?
First of all, there are three types of accounts you can choose when you start investing with a Japanese securities platform.
- Specified Account – Withholding (特定口座 – 源泉あり)
20.315% tax is automatically deducted upon any profit or dividend payout. No tax return is necessary.
- Specified Account – Non-Withholding (特定口座 – 源泉なし)
A report of your annual profits will be generated by your securities platform but taxes will not be withheld. This means you have to report it yourself.
- Ordinary Account (一般口座)
No report generated by securities platform and taxes will not be withheld. You have to calculate profits and report on your own. Those who invest using a foreign securities platform like Interactive Brokers, can consider your account as an Ordinary account.
How tax is charged in a Specified (Witholding) account?
As mentioned, tax is deducted automatically. But the way it happens needs a bit of understanding. Let's look at this example:
- In January, you made realized a profit of 1,000,000 yen. From the moment the profit is realized, your securities platform will take out 20% tax and only give you 800,000 yen.
- In February of the same year, you made a loss of 500,000 yen. If you calculate together with the first month's profit, your overall profit for the year so far becomes 500,000 yen. So the tax you are supposed to pay for the two transactions should be 100,000 yen. Seeing as you were already withheld 200,000 yen in the first month, 100,000 yen will be credited back into your account in this transaction.
- In March, you made a further loss of 1,000,000 yen. The total performance of your investments becomes negative 500,000 yen (1,000,000 yen in Jan – 500,000 yen in Feb – 1,000,000 yen in Mar). Since a loss or no profits means that no capital gains tax will be incurred, the 100,000 yen of tax withheld so far will be credited back to your account.
- And finally, in April, you realized a profit of 1,000,000 yen. The total performance up to this point comes back into the green at 500,000 yen profit. At that point, 100,000 yen (about 20%) will be withheld from you as tax.
To summarize, your securities platform will withhold (or give back) the tax upon each transaction with profit or loss, and not in one lump sum at the end of the year. This will continue within a calendar year and will reset from 1st January of the following year.
As you can see, taxes are calculated and done automatically for you in this account, meaning you do not have to do anything further in terms of tax. In a year where you have incurred a loss, you might choose to report the loss to carry it forward to the next year.
If you are a beginner investor or new to this, more often than not, this is the type of account you should go for.
How tax is charged in a Specified (Non-Witholding) account?
This type of account does not withhold your taxes. This means your platform will give your full profit to you, and you are required to report it on your company's year-end adjustment or tax return. It gives you a report that contains all the information you need to make that report. You can conveniently attach the report to your tax return as proof of the investment income.
Why would anyone choose this type of account if you have to report the tax yourself? Well, there are a two main reasons.
For those who use multiple securities platforms, using this type of account lets you calculate the total profit/loss of all platforms. If you use the withholding account, you might pay for profits on one platform when you didn't have to if you made a loss on another platform.
For those whose miscellaneous income is less than 200,000 yen a year, you do not have to pay income taxes on that amount. Read this article for more details.
How tax is charged in an Ordinary account?
Like the Specified (Non-Withholding) account, taxes are not withheld. In addition to that, no report is generated by your securities platform for your tax return. This means that you have to create this report and calculate your taxes manually.
Why would anyone choose this account when it sounds like Japanese tax reporting at level 99 difficulty. The two reasons I could find is that an Ordinary account lets you invest in private companies and corporations must use an Ordinary account.
If you use a foreign platform like Interactive Brokers, you'll find that they usually do not support Specified accounts, and the account can be regarded as an Ordinary account in Japanese terms.
What about NISA or iDeCo accounts?
If you've read my guide on investing in Japan, you might have heard of NISA or iDeCo accounts. These are essentially tax-free accounts that can be used in any of the above three accounts. There will be no tax incurred if you purchase stocks under these accounts, so for the sake of this article, you can freely ignore capital gains within these accounts.
What is stock loss carry forward deduction (繰越控除)?
This means that your loss in a year can be carry forward for three years (ten years for a corporation) and offset any taxes in those years.
For example, in 2021, you made a loss of 500,000 yen. And in 2022, you made a profit of 1,000,000 yen. Normally, you would have to pay 200,000 yen in taxes for 2022, but if you carry forward your loss from 2021, the total profit for those two years becomes 500,000 yen, therefore, you only have to pay 100,000 yen in taxes for 2022.
Note that even though capital gains and dividends are technically a separate income bucket, you have to calculate the loss as a total of both.
In order to carry forward, you have to file a tax return. In the above example, you would need to file a tax return for 2021, the year the loss was incurred.
Note that if you use a Specified (Withholding) account, and filed a tax return without including the stock loss, it is assumed that you chose not to declare it and the loss cannot be carried forward.
As stock loss can be carry forward for up to three years, you are required to file a tax return for every year following the loss to make use of it.
Here's another example on the calculation for this deduction:
- In 2021, you incurred 450,000 yen of loss.
- In 2022 and 2023, you did not sell any stock so there are no profits or loss.
- In 2024, you realized a profit of 350,000 yen. The 20% tax of 70,000 yen will now be 0 yen, tax to the loss you incurred in 2021.
On the other hand, the remaining 100,000 yen of loss will no longer be valid from 2025 since three years has passed since the loss.
For those who understand Japanese, this YouTube video has a good explanation.
Dividend Deduction (配当控除) in Japan
As explained earlier, the tax for capital gains tax including dividends is a flat 20%. This is under a separated tax system, where tax is incurred differently for each type of income without any relation to another type.
However, for dividends, you can actually choose to use a consolidated taxation system, which is a system where all your income is consolidated and taxed accordingly.
Why would you want to do so? Well, because of a tax deduction in Japan called Dividend Deduction (配当控除). This deduction is only applicable if you report dividends from Japanese stocks under the consolidated system. I need to emphasize that this applies only to dividends paid out by Japanese stocks.
The reason such a deduction exists is because Japanese corporations pay a corporate tax on their profits, which will then be distributed to shareholders in the form of dividends. If dividends are taxed again, this creates a problem of double taxation. As such, this deduction exists as a way to solve this problem.
So what is the percentage deduction?
|Taxable Income (including dividend income)||Income tax dividend deduction||Residence tax dividend deduction|
|Less than 10M yen||10%||2.8%|
|The amount above than 10M yen||5%||1.4%|
As you can see, if you file a tax return and your total taxable income is under 10M yen, the dividends tax rate becomes 7% instead of 20%. So, if 20% of taxes were withheld by your platform, the tax office will return about 13% to you.
The deduction is beneficial to those with taxable income of less than 9M yen a year. This is because of the tax bracket that a 9M taxable income falls under. See this article to learn about the income tax rate of Japan.
At a 9M or under income, the tax rate is 23%. You can deduct the dividend deduction of 10% to get an actual tax rate of 13%. Since 13% is less than 15.315% flat income tax on capital gains, you save 2.315% in taxes filing a tax return and claiming this deduction.
Practically speaking, 2.315% savings in dividend taxes is usually not enough for one to go through the trouble of doing tax returns just for this. Therefore, I would recommend this to those with a taxable income of under 6.95M a year.
As you can tell, the lower your income, the more beneficial to get this deduction. On the flip side, you actually lose money if file taxes this way if your taxable income is above 9M yen per annum.
So far, this has been about income tax. How about residence tax?
Residence tax is the opposite, where if you use the consolidated income system, you will be taxed more.
|Taxable Income||Residence tax||Residence tax dividend deduction||Resulting tax rate||Resident tax (flat rate) on capital gains|
|Under 10M yen per annum||10%||2.8%||7.2%||5%|
|More than 10M yen per annum||10%||1.4%||8.6%||5%|
As you can see, residence tax rate actually becomes higher on dividends if you choose to calculate tax as consolidated income.
It is beneficial for income tax, but not for residence tax. What should you do in this case?
You can choose to report each kind of tax with a different method. In other words, on your tax return, you choose consolidated taxation (総合課税) for income tax and reporting not required (申告不要) for residence tax.
Instead of choosing separated taxation (分離課税), why should I choose reporting not required (申告不要)?
This is to prevent the increase of national insurance amount. This is because the amount payable to national insurance is based on the taxable income for residence tax. Therefore, if you report dividend income, whether as separate or consolidated income, it will cause an increase in the payment amount for national insurance. If you choose “reporting not required,” then there will be no effect.
Of course, this does not mean that you are not paying for residence tax. This is because when you report dividend payments as consolidated income, residence tax is incurred on that amount as well.
You can also choose to declare that residence tax reporting is not required, separate from your tax return. You can do this by going to your municipality office and making a residence tax report (住民税申告書) and checking the “reporting not required (申告不要)” box on the form.
Foreign Tax Deduction (外国税額控除) on Foreign Dividends in Japan
For those who are investing in US ETFs or stocks, you will notice that dividends payouts are taxed at 10% by the US before it comes to you. Then, a further Japanese 20% tax is incurred.
For example, if you got 10,000 yen in dividends, 10% will be taxed by the US, leaving you 9,000 yen. Then, 20% will be taxed on the 9,000 yen, which gives you a final amount of 7,200 yen.
Of course, the percentage taxed at the foreign source is dependent on the country. For example, Russia stocks at taxed 15%, while Singapore stocks do not tax at the source. But I will use 10% as I suspect most of us might be invested in US stocks or ETFs.
In this case, you are taxed close to 30% instead of the usual 20%. What gives?
Well, this is where the Foreign Tax Deduction comes in. You can apply for this deduction and get back 10%, which is about 1,000 yen in the above example. You have to do this via your tax return.
If you invested in an accumulating ETF, note that you cannot use this deduction as the liability of the 10% falls on the ETF and not you, the investor.
How to calculate taxes for Ordinary accounts?
Since you are reading this English article, I will assume that a fair number of you have foreign securities accounts like Interactive Brokers. How can you report tax then?
The main goal here is to make your profits or loss clear from Interactive Brokers or any number of platforms you are using. The report can simply be a spreadsheet containing all your purchases and sales and the resulting profit in JPY. You should also attach all the transaction reports from your securities platform.
- You can include any expense, like brokerage fees, into the total cost of the stock.
- However, you cannot include third-party costs, such as the bank fee to transfer funds to your security platform.
- You cannot include fees for currency conversions in stock price but the currency conversion transaction.
- For currency conversion, any difference in the JPY value has to be reported as profit/loss. For example, if you convert 10,000 yen into 100 USD, and then 2 days later, you convert 100 USD back to yen and got 10,100 yen thanks to the yen getting stronger, then that 100 yen profit is liable for capital gains taxes.
- Some of your transactions are in a different currency, but the calculations have to show profit/loss in JPY. There isn't any defined method by the tax agency on how to convert currencies. However, as long as the method you use is consistent and you don't use different methods for different transactions to minimize the profits, you are fine. I personally use Google Sheet's
One strategy of short-term residents might be to invest while living in Japan but only sell those securities after they move out of Japan to somewhere with a much better rate or zero taxes on capital gains.
For example, if I invest monthly over ten years in Japan and have an unrealized portfolio of 10M yen, 2M yen would be incurred if I cash out while living in Japan. But if I move back to Singapore (and become a tax resident), where the tax rate for capital gains is zero, I can realize my entire portfolio and pay zero in tax.
Well, Japan is aware of this strategy, which is why they have introduced the Exit Tax recently, effective July 1st, 2020. However, you are only liable for this if you hold more than 100M yen (approx. 907K USD) in specific assets upon your departure. These assets are
- Securities (unrealized) like stocks, mutual funds, bonds, and others.
- Ownership of tokumei kumiai (silent partnerships) contracts
They do not include
- Non-financial assets like real estate property
This means that if you have a 110M portfolio on Interactive Brokers and 50M of that is profit, even if they are not settled (sold), you have to pay 10M yen (20%) in taxes on them upon departure.
Of course, instead of incurring the full exit tax, the smartest way is to sell off securities to reduce your portfolio to under 100M yen and pay capital gains on those before leaving. Additionally, you might want to sell off the “biggest losers” in your portfolio to incur as little tax as possible.
Another “loophole” is that this tax is only applicable to permanent residents (for immigration purposes) or those under spousal visas. So, if you have a three or one-year employment visa, then you are not liable for this tax. Especially if your company renews your visa for you, it's really not too much hassle to stay on this type of visa.
I have such a visa and a Japanese wife, so I would be staying on this visa as long as I can to avoid this since a spousal visa is always an option.
Taxes for Cryptocurrency Gains in Japan
EDIT For the latest guide on crypto taxes, I highly recommend this excellent article on the r/JapanFinance wiki.
Similar to capital gains of stocks or funds, profits from cryptocurrency gains are taxed. However, technically speaking, these are categorized under miscellaneous income (雑所得). However, since it might be what an investor might be interested in, I will briefly cover it in this section.
Similar to securities, you are only taxed when profits are realized. ie. You bought 1 Bitcoin for 4M yen and sold it for 5M yen. The 1M yen profit is eligible for tax.
Now that cryptocurrencies are accepted by merchants, taxes are also incurred when you make a purchase with cryptocurrency that has increased in price. The same principle applies when you exchange cryptocurrencies, ie exchange Bitcoin for Ethereum.
For crypto miners, any cryptocurrency that you mine is eligible for taxes as well.
These profits are generally regarded as miscellaneous income and expenses, which are mostly handling fees, can be calculated into the profit.
However, if you are a full-time cryptocurrency trader/miner, there is a possibility you can file those profits under business income (事業所得). But if you are just a salaryman doing cryptocurrency in your spare time, miscellaneous income will be the more appropriate category.
What is the tax rate of cryptocurrency gains in Japan?
Since cryptocurrency is not considered capital gains, but miscellaneous income, it does not have a flat rate.
The tax rate depends on your taxable income. To determine your taxable income and the corresponding tax rate, take a look at this article.
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As mentioned, I am not a tax professional. If you are more knowledgeable about the topic and spotted some mistakes or misconceptions, leave a comment and I will update the guide.