FX Tax Calculation Guide: A Comprehensive Resource for Traders

When you make a profit from FX (Foreign Exchange Margin Trading), many people wonder, "What about taxes?" Even if you make a profit, without a correct understanding of taxes, you could face unexpected burdens or the risk of undeclared income.

This article provides a comprehensive explanation of everything FX traders need to know about taxes, from the basic concepts of taxation in FX trading to specific calculation methods, the scope of deductible expenses, and the procedures for filing a final tax return. Whether you are a beginner or an experienced trader, acquire the knowledge to optimize your tax burden and continue trading with peace of mind.

[Disclaimer]

• Tax laws are subject to change, so it is always recommended to verify the latest information.
• It is recommended to consult with a tax accountant or other professional for detailed tax matters.

1. FX Tax Classification and Basic Calculation Method

In Japan, profits from FX are generally classified as "miscellaneous income." Specifically, income derived from over-the-counter (OTC) FX trading and exchange-traded FX (such as Click 365) is subject to "separate self-assessment taxation."

What is "Miscellaneous Income" under Separate Self-Assessment Taxation?

"Separate self-assessment taxation" is a tax method where income is calculated and declared separately from other income (such as employment income or business income). This has the advantage that, no matter how large your FX profits are, they are not subject to the progressive tax rate system for income tax, and a flat tax rate applies.

Applicable Tax Rates:

• Income Tax: 15%
• Special Reconstruction Income Tax: 0.315% (2.1% of the income tax amount)
• Local Inhabitant Tax: 5%

Total: 20.315%

For example, if you make a profit of 1 million JPY from FX, approximately 203,150 JPY will be levied as tax.

Formula for Calculating Taxable Income

FX taxes are not levied on the entire profit. The taxable amount is the profit earned from trading minus the "necessary expenses" incurred for the trade.

Taxable Income = Profit from FX Trading - Necessary Expenses

The 20.315% tax rate mentioned above is applied to this "Taxable Income."

2. Scope of Deductible Expenses

To manage your tax burden appropriately, it is crucial to accurately declare expenses incurred in connection with FX trading as "necessary expenses." Deductible expenses are those that are recognized as directly and reasonably necessary to generate profits from FX trading.

Specific Expense Items

The following are common items generally recognized as deductible expenses:

• Trading Fees: Transaction fees paid to FX brokers.
• Information Gathering Costs:
  • Purchase costs for FX-related books, newspapers, and specialized magazines.
  • Subscription fees for paid economic news services and analysis tools.
  • Participation fees for FX seminars and study groups.
• Communication and Electricity Costs: A portion of internet connection fees and electricity costs used for FX trading. If you trade from home, you need to allocate these costs proportionally based on usage, known as "household apportionment."
• Equipment Costs:
  • Purchase costs for computers, monitors, tablets, etc., specifically used for FX trading (may be subject to depreciation).
  • Purchase costs for related software.
• Transportation Costs: Travel expenses for attending FX seminars, study groups, or meetings with tax accountants.
• Tax Accountant Fees: Fees for consulting or delegating FX tax return preparation.

Points to Note for Expense Deduction

• Retention of Receipts and Statements: For all items declared as expenses, be sure to keep receipts, credit card statements, bank transfer records, etc. These serve as evidence during tax audits.
• Household Apportionment: When claiming household communication fees, electricity bills, or rent as expenses, you must be able to reasonably explain the proportion used for FX trading. For example, you need a basis such as "50% of computer usage time is FX-related."

3. Loss Carryforward for FX Losses

FX trading does not always result in profit. If you incur a loss during the year, there is a system called "loss carryforward deduction" that allows you to offset that loss against profits in subsequent years. This is a very important tax benefit for FX traders.

Benefit of Carrying Forward Losses for 3 Years

Losses incurred in FX trading can be carried forward for up to 3 years by filing a tax return. For example, if you incur a loss of 1 million JPY in 2023, you can deduct that loss from profits earned in 2024, 2025, or 2026.

Example:

• 2023: FX loss of 1 million JPY
• 2024: FX profit of 500,000 JPY → Offset against the 1 million JPY loss from 2023, resulting in 0 JPY taxable income (remaining loss of 500,000 JPY carried forward to the next year).
• 2025: FX profit of 800,000 JPY → Offset against the remaining 500,000 JPY loss from 2023, resulting in 300,000 JPY taxable income.

Conditions for Applying Loss Carryforward

To apply the loss carryforward deduction, you must continue to file a tax return every year for the year the loss occurred and the subsequent three years. Even if there is no profit and no tax liability in a given year, you must file a return to carry forward the loss. Failing to do so will result in losing the right to carry forward the loss, so be careful.

4. FX Tax Filing Procedures and Important Notes

If you earn a certain level of profit from FX or wish to utilize the loss carryforward deduction, you must file a final tax return.

Who Needs to File a Tax Return

• Individuals with employment income: If the total of miscellaneous income, including FX profits, exceeds 200,000 JPY annually.
• Individuals without employment income (e.g., homemakers, pensioners): If the total income, including FX profits, exceeds 380,000 JPY (basic exemption amount) annually.
• Individuals wishing to use loss carryforward: Even if no profit was made, a tax return must be filed to carry forward losses to subsequent years.

Documents Required for Tax Filing

Prepare the following documents for your tax return:

• Annual Transaction Report (Payment Record): Issued by your FX broker. Be sure to obtain it as it summarizes your annual profits and losses.
• Receipts and Statements for Necessary Expenses: As mentioned above, proof for all expenses you claim.
• Withholding Slip (if you have employment income): Issued by your employer.
• Identity Verification Documents: Such as My Number Card (Individual Number Card).
• Seal/Hanko (if required for stamping)

Preparing and Submitting the Tax Return

1. Preparation of the Tax Return Form: You can easily create your tax return using the "Tax Return Preparation Corner" on the National Tax Agency's website by following the on-screen instructions. By using e-Tax (electronic filing), you can submit your return from home without visiting a tax office.
2. Submission Methods:
   • Electronic submission via e-Tax
   • Submission in person at a tax office window
   • Submission by mail
3. Submission Deadline: Generally, from February 16th to March 15th of the year following the target year. Be aware that late payment penalties may be imposed if the deadline is missed.

Conclusion: FX Tax Knowledge is an Essential Skill for Traders

When pursuing profits in FX trading, a correct understanding of taxes is indispensable. By comprehending the separate self-assessment taxation system, properly declaring expenses, and maximizing the use of loss carryforward deduction, you can optimize your tax burden and maximize the profit remaining in your hands.

While filing a final tax return may seem complex at first glance, it is not difficult if you utilize the tools provided by the National Tax Agency and grasp the key points explained in this article. If you have any uncertainties, do not hesitate to consult with a tax accountant or other professional to continue your FX trading with confidence.

[Disclaimer]

• Tax laws are subject to change, so it is always recommended to verify the latest information.
• It is recommended to consult with a tax accountant or other professional for detailed tax matters.