RetireJapan

Long time lurker, first time poster, so please go easy on me.

I'm currently trying to work out taxation on tokutei koza (特定口座) profits.

My understanding is that as long as you are a salaried employee who goes through nenmatsu chosei at the end of every year, you don't need to file an income tax return for any tokutei koza profits under 200,000 yen, because it counts as part of the miscellaneous income (雑所得) exemption. Of course, if you have other sources of miscellaneous income outside of your salary, these would also have to be factored in.

HOWEVER even though you don't have to pay income tax (around 15%) on miscellaneous income, you still have to pay residence tax (about 5%), so you need to file a separate residence tax return at your local city hall.

So, if you are realizing only relatively small tokutei koza profits, it's best to set up your account without automatic tax deductions (源泉なし), and just file a separate residence tax return.

My questions are -

1) Is the situation above correct?

2) If so - this means that you can effectively withdraw 200,000 profit yearly from your tokutei koza account, paying only around 5,000 yen tax on it?

Doesn't this mean that a good strategy for minimizing long-term taxation of tokutei koza, if you have investments that are showing profit, is to sell holdings up to a profit of 200,000 yen yearly (taking care not to go over), and then to repurchase at a higher initial value? The overall value of your holdings would stay the same, but the notional profit made on them would be smaller. This would seem to save a lot of tax, compared to holding onto the shares for say 10 years and then paying 20% on all the profits at one go.

As I said, this is my first time posting, so please let me know if I have missed something obvious...!

I though the principle of tokutei kouza was that taxes are automatically taken as they need to be and that you don't have to do anything, or am I misunderstsanding your question?

Tax is only deducted from tokutei koza if you set it to be (by selecting the tax deduction setting, or 源泉あり). This can be disadvantageous if your yearly profits are less than 20 man, as it means you will pay up to 4 man in tax unnecessarily without the possibility to reclaim it (at least this is my understanding of the system).

If you set the account to 源泉なし (no tax withholding), you need to file tax returns yourself separately.

Essentially what I am wondering about is a form of tax profit harvesting using the 200,000 yen miscellaneous income deduction, which would allow you to book 20 man of profit a year and only pay 1 man of resident tax on it now, instead of 4 man of resident + income tax later. Maybe not riches but it might be worth doing over a number of years to minimize eventual tax bill. Would be interested to hear people’s thoughts on it though!

That is very interesting and not something I had considered.

I'm probably too lazy to try this (pretty much allergic to paperwork, so happy to lose money to avoid it) but it seems to have potential