Principal investment/gains separated when selling?

[cocacola]

I think I might have asked this question before, but I can't, for the life of me, find the thread that I may have started.
Apologies, if this is my second time asking this.

If I have 10万 invested in a mutual fund, and the investment has increased in value to 15万, if I sell 7万 of that investment, will the entire 7万 have cap gains tax applied? Or just the 5万 part?

Essentially, I am wondering if there is a distinction between the principal amount invested vs. the amount of gains of a mutual fund.

Another example (using the same numbers above): if I sell the entire investment, (all 15万 of it), would the entire sale have cap gains tax applied?

Sorry for the n00b q.

Thank-you!

[RetireJapan]

I believe how this is handled is that brokers track the average purchase price (for funds or shares), then subtract that from the price you sell it for.

The difference (if positive) is the capital gain. Capital gains tax is due on that amount unless in a NISA or iDeCo account.

If you have had capital losses in the same year or in recent years you maybe able to cancel out some of the gains (your broker will do that for you automatically in a tokutei account).

[Tkydon]

Firstly, you have to calculate the Average Price of all Units of the Mutual Fund or ETF owned.
If they were purchased in a single transaction, then the Average Price is simply the Price Paid.
If they were purchased over multiple transactions, then the Average Price = Total Units Owned / Total Amount Paid

You then calculate the Capital Gain on the Number of Units Sold

Capital Gain = Number of Units Sold x Selling Price - Number of Units Sold x Average Price Paid - Any Transaction Fees
= Number of Units Sold x (Selling Price - Average Price Paid) - Any Transaction Fees

When you sell more of the units in the future, the Selling Price will be different, and the Average Price Paid may also be different if you subsequently purchase more units of the same Mutual Fund or ETF....

[YouMeWeThem]

You have to think in terms of share value when determining capital gains taxation.

You buy 100 shares at 100 yen each, your average share price is 100 yen.

Then you buy 100 shares at 110 yen each, your average share price is now 105 yen.

Then you sell 50 shares at 120 yen each. We can calculate the profits of this sale with this formula: (current share price - average share price) x shares

In this example, (120 - 105) x 50 = 750 yen is considered profit. You are only taxed on profits. So assuming you are using the combined tax method then you'll pay 20.315% of that 750 yen to the tax man. That's about 152 yen. So your take home would be 6,000 - 152 = 5,848 yen.

If you have a 特定 tokutei account then they do this calculation for you.

[cocacola]

I believe how this is handled is that brokers track the average purchase price (for funds or shares), then subtract that from the price you sell it for.

The difference (if positive) is the capital gain. Capital gains tax is due on that amount unless in a NISA or iDeCo account.

If you have had capital losses in the same year or in recent years you maybe able to cancel out some of the gains (your broker will do that for you automatically in a tokutei account).

Hmm.... I think I understand what you're saying....

So, the value of the capital gains is actually not the total value of the sale... it's:

Code: Select all

(price at time of sale - the average purchase price) x number of shares = capital gains

↑ is this correct to deduce how capital gains is being calculated?

If that is the case, then the principal amount will be used to calculate the capital gains, yes?

And, if the capital gains are positive, the 20.315% cap gains tax will be applied only to that capital gains value, not the entirety of the value of the sale?

Example:

• 10万 initially invested @500 yen per share. 200 shares purchased
• Price-per-share increses to 750 yen.
• New valuation of investment is 15万
• Average price of each share is 625 yen, so the capital gain is 125 yen per share
• I want to now sell enough shares to take 5万 from the investment, which equals the sale of 80 shares.
• To figure out the capital gain from this sale, multiply 80 shares by 125 yen, which equals 1万円.
• 20.315% capital gains tax will be applied to the 1万円, which comes to 2,032円 of tax that needs to be paid.

Ack, I am so bad at this haha. Is my work above correct?

And, what if I start selling my initial investment amount? I am guessing that the capital gains calculations will also be applied to the initial investment? If that's the case, and the share price at time of sale is higher than when the initial investment shares were purchased, further capital gains tax will still need to be paid on sale of the shares from the initial investment amount?

Thanks for any insight!

[cocacola]

You have to think in terms of share value when determining capital gains taxation.

You buy 100 shares at 100 yen each, your average share price is 100 yen.

Then you buy 100 shares at 110 yen each, your average share price is now 105 yen.

Then you sell 50 shares at 120 yen each. We can calculate the profits of this sale with this formula: (current share price - average share price) x shares

In this example, (120 - 105) x 50 = 750 yen is considered profit. You are only taxed on profits. So assuming you are using the combined tax method then you'll pay 20.315% of that 750 yen to the tax man. That's about 152 yen. So your take home would be 6,000 - 152 = 5,848 yen.

If you have a 特定 tokutei account then they do this calculation for you.

Ah, okay, so my arithmetic above... is correct?

[YouMeWeThem]

In your bullet points are you leaving out some purchases that caused your average share price to jump from 500 to 625? The calculation after that looks right.

(750 - 625) x 80 = 10,000 yen in profit which is subject to capital gains taxation.

And, what if I start selling my initial investment amount?

Your initial investment is no more or less relevant than subsequent investments in terms of calculating your average share cost, which is all that matters for calculating capital gains.

[cocacola]

In your bullet points are you leaving out some purchases that caused your average share price to jump from 500 to 625? The calculation after that looks right.

(750 - 625) x 80 = 10,000 yen in profit which is subject to capital gains taxation.

Ah, sorry, the 625 is the average share price between 500 and 750. I should have made it more clear.

And, what if I start selling my initial investment amount?

Your initial investment is no more or less relevant than subsequent investments in terms of calculating your average share cost, which is all that matters for calculating capital gains.

But, if I initially purchased at 500 for the initial investment, sell all of the gains at 750 (leaving me with exactly the same amount as the initial investment), if I then sell the initial investment at 750, would that also be applicable to cap gains tax?

I think I'm confusing myself.

[RetireJapan]

But, if I initially purchased at 500 for the initial investment, sell all of the gains at 750 (leaving me with exactly the same amount as the initial investment), if I then sell the initial investment at 750, would that also be applicable to cap gains tax?

I think I'm confusing myself.

There is no 'original investment'. Japan does not allow you to segment your investments up like that.

There is only your total investment, and the average purchase price.

[YouMeWeThem]

Ah, okay then your understanding does appear to be off a bit.

Let's use your numbers for simplicity's sake. You've purchased 200 shares @500 yen a share (assuming no fees) so your average share cost is 500 yen.

If today you sold 80 shares @750 yen then your capital gains would look like (750 - 500) x 80 = 20,000 yen. This sale has no effect on your average share cost. You've still paid 500 yen for each of the shares you own.

So tomorrow when you sell the remaining 120 shares @751 yen then your capital gains would look like (751 - 500) x 120 = 30,120 yen.