FX-related taxes on overseas investments

[akiaji]

Hi everybody. Hope you are enjoying the 3-day weekend.

I saw a couple threads on Reddit recently about taxes on FX gain.
https://www.reddit.com/r/JapanFinance/c ... _would_it/
https://www.reddit.com/r/JapanFinance/c ... _currency/

This got me thinking about the IBKR account I opened recently. I send JPY over, then convert to USD to buy index funds.
Planning to let these sit for many, many years, but once I decide to sell my position, I'll eventually need to convert the USD proceeds to JPY (either at the IBKR stage or after landing in my JPY bank account). Does this sort of conversion great a taxation related to the FX rates for the two currencies?

Thank you!

[RetireJapan]

I believe you need to keep track of the exchange rates to calculate the JP gain or loss.

(this is the main reason I sold out of US-listed stocks and ETFs this year. Just don't want to deal with it!)

[VG1]

Hi,

My question is different but also related to FX gain.

I bought some USD about 10 years ago around 90 (great!) and kept them in deposit until now (silly!).

Any way I am finally investing them.

I have heard that, even if I am no converting these USD back to JPY the difference between the price I bought them and the FX rate at the time I buy a USD denominated security was taxed as an FX gain.

For example: I bought 10,000 USD at 90 and now use these USD to buy US equity ETF when USD is at 138, I have to pay FX tax on
(10,000 * 138) - (10,000 * 90) = 480,000 JPY.

Any idea about this?

Thanks

[sutebayashi]

If you are investing your USD as is, then you are not converting them back to JPY, and so need not pay any fx gain for that, as per my understanding.

It’s only after you sell either your USD for JPY, or your investments back to USD, that you realize a taxable profit.

On the other hand, if you sold your USD for EUR or some other currency, then I believe you do need to do an implicit conversion to yen at that point and pay tax on it on any JPY “profit”, even though you now hold EUR.

[eagleyes]

I believe you need to keep track of the exchange rates to calculate the JP gain or loss.

(this is the main reason I sold out of US-listed stocks and ETFs this year. Just don't want to deal with it!)

Does it apply for stocks as well? So I have to calculate the average price in yen every time I purchase stocks and then when I sell make the delta to report the capital gain and the taxable amount?
But I have not converted yet these USD to JPY. So then when I effectively convert and if i make again I am taxed again for FX miscellaneous income.
Is my understanding correct?

If that it is the rule, that is the rule but I feel it is a an administrative burden and not really fair since I have not converted yet.

[sutebayashi]

I think the taxable event is when you are selling stocks / ETFs that you bought.

So let’s say you bought Amazon shares at 100 dollars, and sold them when they were 120 dollars. 20 dollars profit there, is easy.

I think one then converts 20 dollars to yen at the forex rate for that day when the profit was realized, and pay tax on that yen amount. If the forex rate were 100, you’d pay 400 odd yen. But you could pay those 400 yen of taxes with your yen savings.

Those 20 dollars of profit you have have now had tax due paid on them. If you convert them to yen, there should be no new tax due, because you paid tax on the capital gain of 20 dollars.

But let’s say you bought some dollars when the rate was 100, and now want to sell those dollars when the rate is 140. You would pay forex miscellaneous income tax on the 40 yen rate difference. You only pay tax on the gain for forex, not on anything else you did with your dollars during that time.

This is my understanding of these things and I might be wrong somewhere

At least for foreign stock purchases, if using a tokutei Koza account, the profits are calculated for you so that part is not such a problem, but I guess it is a hassle if one is not using a tokutei koza.

[TokyoBoglehead]

I think the taxable event is when you are selling stocks / ETFs that you bought.

So let’s say you bought Amazon shares at 100 dollars, and sold them when they were 120 dollars. 20 dollars profit there, is easy.

I think one then converts 20 dollars to yen at the forex rate for that day when the profit was realized, and pay tax on that yen amount. If the forex rate were 100, you’d pay 400 odd yen. But you could pay those 400 yen of taxes with your yen savings.

Those 20 dollars of profit you have have now had tax due paid on them. If you convert them to yen, there should be no new tax due, because you paid tax on the capital gain of 20 dollars.

But let’s say you bought some dollars when the rate was 100, and now want to sell those dollars when the rate is 140. You would pay forex miscellaneous income tax on the 40 yen rate difference. You only pay tax on the gain for forex, not on anything else you did with your dollars during that time.

This is my understanding of these things and I might be wrong somewhere

At least for foreign stock purchases, if using a tokutei Koza account, the profits are calculated for you so that part is not such a problem, but I guess it is a hassle if one is not using a tokutei koza.

Dividends also create a taxable event. So almost all American equity ETFs face this issue.

[eagleyes]

I think the taxable event is when you are selling stocks / ETFs that you bought.

So let’s say you bought Amazon shares at 100 dollars, and sold them when they were 120 dollars. 20 dollars profit there, is easy.

I think one then converts 20 dollars to yen at the forex rate for that day when the profit was realized, and pay tax on that yen amount. If the forex rate were 100, you’d pay 400 odd yen. But you could pay those 400 yen of taxes with your yen savings.

Those 20 dollars of profit you have have now had tax due paid on them. If you convert them to yen, there should be no new tax due, because you paid tax on the capital gain of 20 dollars.

But let’s say you bought some dollars when the rate was 100, and now want to sell those dollars when the rate is 140. You would pay forex miscellaneous income tax on the 40 yen rate difference. You only pay tax on the gain for forex, not on anything else you did with your dollars during that time.

This is my understanding of these things and I might be wrong somewhere

At least for foreign stock purchases, if using a tokutei Koza account, the profits are calculated for you so that part is not such a problem, but I guess it is a hassle if one is not using a tokutei koza.

Well that is the all point. I was thinking like you but apparently no. Rakuten says here https://www.rakuten-sec.co.jp/web/suppo ... oreign-us/ and in other places as well that you need to do the calculation like.
Acquisition price 100*100 = 10,000 Yen
Sold price 120*140 = 16,800 yen
Capital gain taxable 6,800 the forex impact is included and hence tax while you have not actually converted the USD.

So if you acquire one time and you took some memo it is ok but then the calculations become very complex if you start to buy at different points in time because the Fx rate is different every time.

I am sorry to get into the details but this is important. This is not as easy as just "get a tokutei koza and you do not need to do the calculations". I had stocks before coming to Japan which if I sell now will be subject to such calculations.

[sutebayashi]

Well that is the all point. I was thinking like you but apparently no. Rakuten says here https://www.rakuten-sec.co.jp/web/suppo ... oreign-us/ and in other places as well that you need to do the calculation like.

Thanks for pointing this out!

This is a pretty weird way to do it, to my mind, but if the yen ever returns to a strengthening trend it will be most welcome, since a strengthening yen means taxes due would be less.

So if you acquire one time and you took some memo it is ok but then the calculations become very complex if you start to buy at different points in time because the Fx rate is different every time.

I have suffered this pain when dealing with interest earned on foreign bank deposits.

I am sorry to get into the details but this is important. This is not as easy as just "get a tokutei koza and you do not need to do the calculations". I had stocks before coming to Japan which if I sell now will be subject to such calculations.

Thank you indeed for sharing the correct info on this. As for tokutei koza, my understanding would then be that so long as you start your investments in such an account, then you should lead an easy life, but if you happen to have overseas accounts then it will be an annoying and resource consuming process… (not only for the investor, but also for any people doing audits for the tax agency too I imagine!)

Dividends also create a taxable event. So almost all American equity ETFs face this issue.

Right, dividends too… so for dividends, I presume my idea of calculating income in yen terms on the day the dividend is earned is how this would work… I hope the tokutei koza is handling the calculation for that, in case of a Japan based account.

[Tkydon]

So if you acquire one time and you took some memo it is ok but then the calculations become very complex if you start to buy at different points in time because the Fx rate is different every time.

I am sorry to get into the details but this is important. This is not as easy as just "get a tokutei koza and you do not need to do the calculations". I had stocks before coming to Japan which if I sell now will be subject to such calculations.

You need to list up the Buy Price Paid x Exch Rate for each transaction

Sum up the total number of units or shares bought

Divide Total Units or Shares Bought by Total Yen Paid

This gives Average Yen Price Paid per Unit
In Japan you must use this Average Price, and not different transaction prices.
This becomes your Tax Basis.

Exchange Rates are available here:
http://www.murc-kawasesouba.jp/fx/past_3month.php

When you sell you Multiply the Selling Price by the Exch Rate
This gives the Yen Selling Price per Unit

You then subtract the Average Yen Price Paid per Unit from the Yen Selling Price per Unit, which gives you the Capital Gain (or Loss) per Unit

You multiply the Capital Gain per Unit by the Number of Units Sold, which gives you the Total Capital Gain

You'll notice this also works for Partial Sales.

This is then taxed at the Capital Gains Tax Rate of 20.315% (15% National, 0.315% Reconstruction and 5% Residents' Taxes)