Capital Gains Distributions vs Dividends

[AmericanInJapan]

In a phone conversation with a tax agency official a few weeks ago, I asked if there was a particular method for reporting CGD. He asked what they were. I explained they were a kind of dividend, paid by the mutual fund company itself. Did they amount to a lot of money? Yes, sometimes as much or more than dividends. He couldn't answer but said he would check. I eventually received in the mail several pages of regulations and reporting procedures for foreign assets, but nothing really specific about 'capital gains distributions'.

Google translator renders the term as キャピタルゲインの分配. Is this the standard term in Japanese? The official I spoke to was not familiar with the term.

[Tkydon]

Capital Gain is Jouto Shotoku in Japanese 譲渡所得.

Basically, the tax rate is the same for Capital Gains or Dividends under the Separate Taxation Method. Kakutei Shinkoku Form B - Page 3 第三表.
20.315% (15% National, 0.315% Reconstruction, and 5% Residents' Taxes), so it doesn't make much difference.

If they are Dividends, then they will probably be subject to Withholding Tax in the Source Country.
This can probably be reduced, but not eliminated under the Tax Treaty between Japan and that country.
If Tax is withheld in the Source Country, then you can claim that as the Foreign Tax Credit against the Japan Tax.
For dividends, there is no calculation. You simply report the Gross amount of the dividend.

If they are Capital Gains, then they will probably Not be subject to Withholding Tax in the Source Country, so there will be no need to claim Foreign Tax Credit.
For Capital Gains, you will need to calculate the Capital Gain, probably the difference between the Average Yen Cost as the Cost Basis and the Japanese Yen value on distribution, which would then be taxable at the Capital Gain tax rate.

[adamu]

Interesting, I'd like to know the answer too. My guess is that you should treat it as a capital gain, since that's what it is, but I don't know what the Japanese regulations are when they're paid out by a fund.

It could also be that you only need to pay capital gains on the fund value itself when you sell, and everything else is treated as a dividend.

[captainspoke]

And so pops up an advantage for ETFs, which rarely--if ever--have capital gains distributions. Mutual funds, jigger things around differently, and such distributions occur without any input from the investor, and it can even be the case that you can sell shares at a loss and still have some of these gains distributions. As such ETFs are usually seen as being tax-efficient, since you don't get tagged with inadvertent gains along the way--only when you choose to sell.

For the question above, I'd certainly call them a distribution, analogous to a dividend. To declare them as gains, you'd need to know the purchase and sale prices (and those dates) for all the securities that produced the distributed gain. Which I think would be an impossible task.

[AmericanInJapan]

As to CGD, I found a hint this morning in the bottom left corner of the flowchart on page 62 of the Reporting Cap Gains For Tax Purposes Guide, Reiwa 3:

https://www.nta.go.jp/taxes/shiraberu/s ... f/Q/Q1.pdf

The 配当所得 (dividend income) box, it reads: 公募株式投資信託の の収益の分配...など.

'Koobo kabushiki tooshi shintaku': that sounds like a mutual fund to me. 'shuueki no bunpai': cap gains distributions?

In other words, treat CGD as dividends. Maybe.