Capital gain tax vs Income tax

[HeavyMetal]

Good day everyone,

Question in subject - what's the difference between Capital gain tax, and Income tax?

I'm Japan resident and pay taxes in Japan only (I'm not from US thus no IRS etc.)
So let's say I do NOT have NISA etc. And I do some trading, and get some profit.
AFAIK such profit is eligible to Capital gain tax, which is 20% in Japan.
But can I claim trading to be my job (or one of)? Income taxes in Japan start from 10%. Can I just pay those 10% then (assuming profit is not huge, so it stays within that 10% earnings limits)?

Or everything relating to stocks automatically gets counted as capital gain.

Thanks!!

[StockBeard]

But can I claim trading to be my job (or one of)? Income taxes in Japan start from 10%. Can I just pay those 10% then (assuming profit is not huge, so it stays within that 10% earnings limits)?

I highly doubt that just because you claim your job is trader, that it means instantly your capital gains become a salary. I don't see how that would make any sense.

[HeavyMetal]

Hmm then it means traders do not pay any income tax? That sort of also doesn't make much sense...
Or maybe they really pay only capital gain. No idea

[StockBeard]

I'm not sure what confuses you so much.

Capital gain is income.
If you mean a trader whose only source of income is trading income and they have no salary, they still pay income tax. Except their income is from capital gain instead of a salary. It's just a different entry on the income tax sheets.

Edit: but you are right that you end up paying taxes in a different level than if you were getting this money through a salary. There are some deductions you don't get, the tax percentage, as you mentioned, is different, etc...

[mule96]

For dividends you can actually choose, if you want to tax them under the capital gains tax (分離課税、20.315%)、or income tax (総合課税)。So for people whos effective income tax rate is below 20.315%, this may be an option. But for this you need to file a Kakuteishinkoku, and for example dividends in Tokutei Kouza accounts get taxed at 20.315% rate.

Not only in Japan, but also in other countries, it is an often discussed topic, while people whos income is often based on capital gains pay much less tax than people with a ordinary income, even if they earn the same.

[Tkydon]

For dividends you can actually choose, if you want to tax them under the capital gains tax (分離課税、20.315%)、or income tax (総合課税)。So for people whos effective income tax rate is below 20.315%, this may be an option. But for this you need to file a Kakuteishinkoku, and for example dividends in Tokutei Kouza accounts get taxed at 20.315% rate.

Not only in Japan, but also in other countries, it is an often discussed topic, while people whos income is often based on capital gains pay much less tax than people with a ordinary income, even if they earn the same.

As Mule96 says, For Dividends, when you fill out your Kakutei Shinkoku you have to make the choice whether to just fill out Form B - Pages 1&2, in which case you elect to use the Aggregate Taxation Method (総合課税).
In this case, if this is your Only income, then your Marginal Tax Rate will apply:
Taxable Income After Allowances and Deductions,

upto 1,950k is taxed at 5%
1,950k to 3,300k is taxed at 10%
3,300k to 6,950k is taxed at 20%
6,950k to 9M is taxed at 23%
9M to 18M is taxed at 30%
18M to 40M is taxed at 40%
Over 40M is taxed at 45%

2.1% of the actual Tax amount calculated above is added as the Reconstruction Tax

10% Residential Taxes are charged on the Taxable Income.

This may well result in a lower tax bill than the Capital Gains Tax rate if your total income is very low.

If you elect to use the Separate Self-Assessment Dividend Taxation Method (分離課税、20.315%), by filling out Form B - Pages 1&2 AND Page 3, then the breakdown is
15% National Dividend Tax
0.315% Reconstruction Tax (i.e. 2.1% of the 15% above)
5% Residential Taxes

You would have to do the calculation to determine at what level of income the Separate Self-Assessment Method became more advantageous than the Aggregate Taxation Method. My rough calculation on the back of a spreadsheet, assuming purely Dividend Income and no other income, tells me it is at about Taxable Income of about Y6,265k Plus Allowances and Deductions.

If your Taxable Income is less than this, the Aggregate Method is more advantageous. Over this level, and the Separate Self-Assessment Method yields a lower total Tax Bill.

If it were purely Japanese Dividend Income against which you can claim the Credit For Dividends Allowance and no other income, then the cut off would be higher at about Y8,247k Plus Allowances and Deductions.

If it were purely Overseas Dividend Income against which you can NOT claim the Credit For Dividends Allowance and no other income, then the cut off would be about Y5,764k Plus Allowances and Deductions.

[HeavyMetal]

Thanks a lot for replies everyone, especially to Tkydon who added detailed calculations

Shall try to make a short conclusion

So it seems that in case overall yearly income (I understand it can be both, ordinary salaries like "freelance" or something, and capital gain from trading/investments/dividends) is not very high, and does not exceed around Y6,265k (6 mln yen per year), then tax may be calculated using the Aggregate Taxation Method (総合課税) which starts from 5% (and I guess that's what most freelancers below 6mln./year are using, they call it "white paper" or something). And in case income is higher other methods like Separate Self-Assessment Capital Gains Taxation Method can be chosen

That's what I was thinking too otherwise it would be strange that income from salary starts from 5% (btw I made mistake in my post saying it's 10%), and Capital Gain is always 20%

If I'm wrong with my conclusions hope someone shall give me a punch otherwise hope this topic will be useful to someone else not just me

Thanks again!!

[Tkydon]

So it seems that in case overall yearly income (I understand it can be both, ordinary salaries like "freelance" or something, and capital gain from trading/investments/dividends) is not very high, and does not exceed around Y6,265k (6 mln yen per year), then tax may be calculated using the Aggregate Taxation Method (総合課税) which starts from 5% (and I guess that's what most freelancers below 6mln./year are using, they call it "white paper" or something). And in case income is higher other methods like Separate Self-Assessment Capital Gains Taxation Method can be chosen

https://www.nta.go.jp/taxes/shiraberu/s ... df/050.pdf

See Page 10

For Individual Income Tax, for some types of income, you have a choice of the taxation method, and for others you have no choice and must use the stipulated taxation method.

My previous response was entirely about Dividend Income in response to Mule96's post.

I should have mentioned that profits from certain types of trading; particularly Crypto and some other trading activities, are treated as Miscellaneous Income and taxed at your Marginal Aggregate Taxation Rates.

"Income derived from transfer of shares or futures trading etc., conducted not in a business scale - Separate Self-Asessment Taxation"

If you were conducting shares or futures trading, etc., on a business scale, or other business, then you should register / incorporate and pay corporate taxes, which are more complicated than personal taxes. You would then be able to file the White Return, or receive permission to file the Blue Return, which would allow you to off-set expenses against business income.
You would have to speak with a qualified Tax Accountant.

Whilst the Taxation Rates for Dividend Income and Capital Gains are the same under the Separate Self Assessment Taxation Method, you can elect to have Dividend Income taxed under the Aggregate Taxation Method (when the cut-offs I mentioned determine whether the Aggregate or Separate Taxation Method is more advantageous), but Capital Gains is only taxable under the Separate Self Assessment Taxation Method.

That's what I was thinking too otherwise it would be strange that income from salary starts from 5% (btw I made mistake in my post saying it's 10%), and Capital Gain is always 20%

The lowest Marginal Aggregate Tax Band is:

Band (Taxable Income) = Marginal National + Reconstruction + Residents' Taxes = Total
Under 1,949,000 = 5% + 0.105% + 10% = 15.105%

The Capital Gains Tax Rate is fixed at:

Band = Rate (％) National - Reconstruction - Residents' Taxes = Total
No Limit = 15% + 0.315% + 5% = 20.315%


So the difference is not as great as you thought.

The next Marginal Aggregate Tax Band is:

Band (Taxable Income) = Marginal National + Reconstruction + Residents' Taxes = Total
1,950,000 to 3,299,000 = 10% + 0.21% 10% = 20.21%

which is almost the same as the Capital Gains Tax Rate, but notice the higher Residents' Taxes Rate than for the Capital Gains Tax, which would lead to a reduction in other charges that are assessed off of last year's Residents' Taxes amount; Medical Insurance, etc..

(Taxable Income is the amount actually subject to taxation after deduction of all applicable Allowances and Deductions to which you are entitled)



It's the last version published publicly by the MOF, and it is now over 12 years out-of-date (all numbers are wrong), but...

If you go

https://www.mof.go.jp/

English
The Policy of MOF
Tax Policy
Publication
>>Previous brochures(Link to National Diet Library)
>>Previous brochures(Link to National Diet Library)
>>Previous brochures(Link to National Diet Library)
>>Back Number

You'll find

Comprehensive Handbook of Japanese Taxes 2010 (December, 2010)

https://warp.da.ndl.go.jp/info:ndljp/pi ... /index.htm

Full Edition
https://warp.da.ndl.go.jp/info:ndljp/pi ... s2010e.pdf

Individual and Corporate Income Taxes Chapter
https://warp.da.ndl.go.jp/info:ndljp/pi ... 010e_c.pdf


I recommend the fully updated latest Tax Guide which can be purchased here:

https://zaik.jp/books/472-4.html

There was no update for 2021, and if there is an update for 2022, it will be published in Dec22 / Jan23 in time for 2022 Tax Season - Feb/Mar 2023.

[HeavyMetal]

Wow! Thanks a lot for reply and correction and all the details
Right, no much difference
I guess I was confused by that 10% residential tax, never knew I pay one But I guess I do cause I file official papers just like everyone. I'm bit dumb about it and get friend's help usually
Then it's basically same, yeah...