Capital gains tax on US stocks in Japan (and US)

[Logan5]

Hi guys. New member here. I did some searching here, as well as online but for some reason it’s hard for me to find a real concrete answer. So I thought I would just explain the situation, and maybe get some good input.

I am American, and I’m a tax resident of Japan. I opened a interactive brokers account last year, mainly to buy some ETFs and maybe play around with some individual stocks. A while back I bought some individual stocks from some small tech companies, that have turned a pretty big profit in the last month. I am thinking about selling, just to make a quick profit on my gains. I know that in the US I will be hit with short term capital gains tax, But I’d rather pay that, then see all of my gains evaporate (which seems to be common with a lot of small tech companies, as one announcement will cause the price to skyrocket up, before leveling back down to where they used to be.)

I know that short term capital gains is basically included as your income in the US, but since I do the FEIE (foreign earned income exclusion) every year, I assume that my capital gains would be my only “taxable income.” Which, if I sell, will put me in the 10% bracket.

I also know that capital gains on foreign stocks are taxed at 20% in Japan. So, where am I little bit confused is, is this a case of unavoidable double taxation? I know I’ve read that you’re supposed to be able to get a tax credit, but from what I’ve read it doesn’t sound like a very smooth process. Some say you get a tax credit from Japan for the 10% you already paid in the US, but others have said you get it from the US. It’s all a bit confusing for me.

So I guess, what I’m asking, is what’s the procedure here? Say I decide to sell these stocks for a short term capital gain. If I was just dealing with the US, I wouldn’t have a problem figuring this out, but I’m trying to figure out what to declare/fill out here in Japan to make sure that I’m not getting totally taxed 30% on it.

I feel like this is a pretty common situation, but through all the forums, here and on other websites, I can never seem to find a really concrete answer.

Thank you.

[Kanto]

The Foreign Earned Income Exclusion (FEIE, using IRS Form 2555) allows you to exclude a certain amount of your FOREIGN EARNED income from US tax. For tax year 2019 (filing in 2020) the exclusion amount is $105,900. What this means is that if, for example, you earned $112,000 in 2018, you can subtract $105,900 from that leaving $6,100 as taxable by the US. But beware: this $6,100 is taxable at tax rates applying to $112,000 (the so-called "stacking rule"). The exclusion applies only to foreign earned income. Other income, such as pensions, interest, dividends, capital gains, US-sourced income, etc., cannot be excluded with the FEIE. You are liable for full US tax on this type of income.

https://www.americansabroad.org/us-taxe ... the%20FEIE.

You would need to file under FTC not FEIE to avoid capital gains tax in America.

https://www.irs.gov/individuals/interna ... iance-tips


Caveat: This is just from what I understand. I am not an American or a tax expert.

[Logan5]

Yeah. I’m aware that I can only claim FEIE on my income in Japan. So my capitol gain tax would counted as income in the US and here in Japan.

From my understanding Japan has a 20% tax rate on capitol gains. For this trade (if I sell) I would incur a %10 short term capital gain tax in the US.

I just want to make sure I don’t have to end up paying %30 total taxes. I know Japan and the US have a tax treaty to avoid double taxation, but from what I’ve read on line, it doesn’t seem to be a straight forward process, and some still get stuff paying a total 30% on things like capitol gains, and dividends.

[Kanto]

My understanding is the way to avoid this tax is by making sure you invest in American Funds in order for your returns to qualify as Qualified Dividends.

However, I am out of my depth on this topic.

[TokyoWart]

For your US return you still get the Standard Deduction ($12,200 for Single or $24,400 for Married Filing Jointly) after taking the FEIE so at least that amount of the short term gain is excluded (unless your earned income exceeds the FEIE limit and you’re using the Standard Deduction for it). The situation is even better for long term gains because there is a 0 percent bracket when your earned income is under $40,000 (Single) or $80,000 (MFJ) but that calculation actually adds your foreign income back in (despite the FEIE) calculate the tax bracket for unearned income. Unfortunately, Japan will be taxing you on it.

[Logan5]

I didn’t realize I could still take the standard dedication after FEIE. That would really be great if I was in the US, because I wouldn’t have to pay tax on my short term capital gains (it would be under $12,000), but Japan wants to tax me on it just because, why not?

I guess it makes no difference that that money would never come to Japan. IB is funded through my US bank account, and that’s where the money would go, if I sell, and stay to be reinvested somewhere else.

[Logan5]

Also, to ask a second question, can the basic deduction (¥380,000) be used on capital gains? So if I only had a profit of ¥200,000 from selling, I could take the basic deduction and not have to pay taxes on those short term capital gains?

[captainspoke]

I didn’t realize I could still take the standard dedication after FEIE. That would really be great if I was in the US, because I wouldn’t have to pay tax on my short term capital gains (it would be under $12,000), but Japan wants to tax me on it just because, why not?

I guess it makes no difference that that money would never come to Japan. IB is funded through my US bank account, and that’s where the money would go, if I sell, and stay to be reinvested somewhere else.

Uh, you did say that were a tax resident of Japan? Isn't that the "just because" part?

To flip that, no matter how many decades you've been gone, the US wants (requires) you to file tax returns and pay necessary taxes on your worldwide gains/income forevermore, and even have someone (your executor) file a final tax return for you after you die. And it doesn't matter if you brought any of that 'back' to the US or not.

(and that leaves out the FBAR, another forever thing, and the penalties for failing to submit that)