- What exactly is an “exchange gain”?
- The tax treatment of ‘interest’ and ‘exchange gains’ on foreign currency deposits differs.
- Be careful with the idea that ‘no tax is incurred unless you convert back to yen’
- It may also be relevant when shopping with foreign currency
- What happens if you buy U.S. stocks with foreign currency?
- The tax rules for ‘FX’ and ‘foreign currency deposits’ are different
- The higher your income, the higher the potential tax rate on exchange gains
- What if you incur an exchange loss?
- If you hold foreign currency for a long period of time,
- Holding foreign currency itself is not a bad thing
- Summary | Check Your Taxes Especially When You Make a Profit from a Weak Yen
With the yen continuing to weaken, more people are holding foreign currency deposits and foreign currency-denominated assets.
“I’m worried about holding only yen, so I’ll hold some dollars too.”
“I hold foreign currency for overseas travel.”
“I’m converting to dollars to buy US stocks.”
I imagine the number of people doing this is increasing.
Holding foreign currency is one way to diversify your assets. However, what you need to know here is the tax issue.
With foreign currency deposits, it is not just the interest that is taxed.
The “exchange gains” generated by the weak yen may also be subject to taxation.
Moreover, this is not limited to when you convert back to yen.
In this article, I will explain in a way that is easy for investment beginners to understand what kind of taxes are applied to foreign currency deposits and exchange gains.
What exactly is an “exchange gain”?
An exchange gain is a profit generated when the yen becomes weaker than it was when you bought the foreign currency, increasing the yen-equivalent value of that foreign currency.
For example,
Suppose you purchased 10,000 dollars for 1 million yen when 1 dollar was 100 yen.
After that,
if you convert it back to yen when 1 dollar becomes 150 yen,
10,000 dollars × 150 yen = 1.5 million yen
it becomes.
In other words,
1.5 million yen – 1 million yen = 500,000 yen
This 500,000 yen is the exchange gain.
Conversely, if you convert dollars bought at 1 dollar = 100 yen back into yen at 80 yen, an exchange loss occurs.
The tax treatment of ‘interest’ and ‘exchange gains’ on foreign currency deposits differs.
This is a somewhat complicated area.
Regarding the interest on general foreign currency deposits held at domestic banks, 20.315% is withheld at the source in principle. In other words, because the bank deducts the tax, you usually do not need to file a tax return yourself for the interest.
On the other hand, exchange gains generated from buying and selling regular foreign currency deposits are generally treated as ‘miscellaneous income.’ Research materials from the National Tax Agency also indicate that in practice, exchange gains and losses arising from individual foreign currency deposits are treated as miscellaneous income.
In other words,
Interest = often subject to withholding tax
whereas,
Exchange gain = may require a tax return
is the difference.
Be careful with the idea that ‘no tax is incurred unless you convert back to yen’
This is the most important point to know in this article.
Many people may think,
‘Profit is only realized when dollars are converted back to yen.’
They might think so.
However, this is not necessarily the case for tax purposes.
For example,
You hold dollars and exchange those dollars for euros.
In this case, you have not converted them back to yen.
Even so, there are cases where a foreign exchange gain is treated as realized based on the difference between the yen-equivalent value when the dollars were acquired and the yen-equivalent value of those dollars when exchanged for euros.
Materials from the National Tax Agency’s Tax College also outline the practical treatment of recognizing foreign exchange gains or losses at the time, for example, when dollars are exchanged for another foreign currency such as euros.
In other words,
“not converted back to yen = profit is not realized”
is not necessarily the case.
It may also be relevant when shopping with foreign currency
Another point to be aware of is
when you use foreign currency to purchase goods or services
.
For example,
suppose you bought dollars when 1 dollar was 100 yen, and then later, when 1 dollar was 150 yen, you used those dollars to make a purchase while traveling abroad.
For tax purposes, since you are considered to have exchanged the foreign currency you held for another asset or service, a foreign exchange gain may have arisen on that foreign currency.
In other words,
it is not a matter of “it doesn’t apply because I haven’t converted the dollars into yen,”
but rather that
you need to consider foreign exchange gains even at the time you use foreign currency for something
.
A similar line of reasoning applies when using foreign currency-denominated debit cards abroad.
What happens if you buy U.S. stocks with foreign currency?
There are also cases where you use dollars from a foreign currency deposit to purchase U.S. stocks.
Even here,
it cannot be simply said that
“no foreign exchange gain has occurred because the dollars have not been converted back to yen.”
For example,
consider a case where you acquired 10,000 dollars when 1 dollar = 100 yen
↓
the rate became 1 dollar = 150 yen
↓
and you used those 10,000 dollars to purchase US stocks.
In this scenario,
what was worth 1 million yen when the dollars were acquired is worth 1.5 million yen when the stocks are purchased.
In such a transaction, there is a possibility that a foreign exchange gain resulting from exchanging foreign currency for another asset will be recognized.
However, regarding exchange rate fluctuations when the foreign stock itself is sold, they may be included in the calculation of capital gains or losses on the stock. National Tax Agency documents also indicate cases where exchange rate fluctuations during the holding period of foreign stocks are treated as part of the revenue amount related to the stock transfer and are not separated into miscellaneous income.
Since the treatment here changes depending on the transaction method, it is safer to check with a tax accountant, especially if the amount is large.
The tax rules for ‘FX’ and ‘foreign currency deposits’ are different
Another point that is easy to misunderstand is
that the tax mechanisms for foreign currency deposits and FX are different
point.
For certain domestic FX transactions, profits are treated as ‘miscellaneous income related to futures transactions, etc.’ and are basically subject to separate self-assessment taxation, such as 15% income tax and 5% local tax.
On the other hand, ordinary foreign exchange gains from foreign currency deposits are, in principle, subject to comprehensive taxation as miscellaneous income.
In the case of comprehensive taxation, it is added to other income such as salary.
Therefore, the higher a person’s income, the higher the tax rate may be.
“Since it is the same profit from the rise in the dollar, the tax should be the same”
is not the case.
The higher your income, the higher the potential tax rate on exchange gains
When exchange gains from regular foreign currency deposits are treated as miscellaneous income subject to comprehensive taxation,
income tax is calculated by adding them to your salary income and other earnings.
Since income tax is progressive, the tax rate increases as your income rises.
Therefore,
if you hold a large amount of foreign currency and move it after a significant depreciation of the yen,
you may end up with more taxable income than you expected.
In particular,
if you are someone who “holds a large amount of dollars bought at a low exchange rate many years ago,”
it is a good idea to check the exchange rate at the time of acquisition.
What if you incur an exchange loss?
Conversely, there are cases where the yen strengthens and you incur an exchange loss upon selling your foreign currency.
While there are cases where certain gains and losses can be offset within miscellaneous income, you cannot freely offset these losses against other income such as salary income.
Therefore,
it is generally best not to assume that “because I lost money on foreign currency, I can deduct it from my salary income to lower my taxes.”
Tax treatment may vary depending on the nature of the transaction and its continuity.
For exchange gains, “records” are very important
If you hold foreign currency for a long period of time,
you might find yourself in a situation where
“you don’t know when or at what rate you bought it.”
This is something that tends to happen.
However, to calculate foreign exchange gains,
the yen-equivalent amount at the time of acquisition
must be understood.
Therefore,
・When you purchased the foreign currency
・How many dollars you purchased
・The exchange rate at the time of purchase
・When you sold, exchanged, or used the foreign currency
・The exchange rate at that time
it is important to keep records of such details.
Especially if you have purchased foreign currency in multiple installments, the calculations become complex, so be sure to keep your transaction history and do not throw it away.
Holding foreign currency itself is not a bad thing
After reading this far,
“Isn’t it better not to hold foreign currency because it’s troublesome?”
some people might think.
That is not the case.
Not concentrating all your assets in yen and
diversifying your currencies
is one option to consider when planning your asset formation.
In particular, those of us living in Japan tend to have assets skewed toward the Japanese yen,
Salary in yen
Savings in yen
Pension in yen
Real estate in Japan
as shown above.
Holding overseas assets or foreign currency can lead to currency diversification of your overall assets.
However,
it is better to think of ‘holding foreign currency’ and ‘understanding the taxes involved’ as a set.
Summary | Check Your Taxes Especially When You Make a Profit from a Weak Yen
When the yen weakens,
‘My dollar assets have increased!’
you naturally want to celebrate.
However, what is important is that an increase in the yen-converted amount is different from the actual profit you can use.
In the case of foreign currency deposits,
not only is interest taxed,
but
exchange gains may also be subject to taxation.
Furthermore,
converting back to yen,
exchanging for another foreign currency,
shopping with foreign currency,
or purchasing other assets with foreign currency
are situations where calculating exchange gains may also be necessary.
For those who will be utilizing foreign currency from now on,
it is worth considering not just ‘how much it will increase,’ but ‘how much will remain after taxes.’
In asset management, choosing investment products is not the only important thing.
Only by considering exchange rates, taxes, fees, and the balance of your entire portfolio can you achieve true asset formation.
If you hold foreign currency deposits or overseas assets, why not take this opportunity to check
when and at what rate you acquired the foreign currency
.
