As discussed in this related post, it is common for customers of Japanese brokerages to receive investment income that they are not obliged to declare on a tax return. Typically this would be dividend/interest/distribution income, or capital gains realized in a designated withholding account. As described below, there are some situations in which it may be in taxpayers’ interests to declare their profits/losses for income tax and/or residence tax purposes, even when they are not obliged to do so.
To begin with, though, it's worth clarifying that: if you have investment income you are not obliged to declare and you file a tax return without declaring that income, it is not possible to subsequently file an amended tax return to declare that income. As soon as the return has been filed without declaring the income, the taxpayer is deemed to have irrevocably chosen not to declare the income. So taxpayers should carefully consider the pros and cons of declaring such income before they file their tax return.
Declaring taxable losses is generally in a taxpayer’s interests. However, to maximize the benefit of declaring taxable losses (including losses carried forward from previous years), a taxpayer may need to also declare profits that they are not obliged to declare. The classic example of this would be a taxpayer who realized losses in a taxable account at one brokerage but profits in a withholding account at a different brokerage. By declaring both accounts, the losses in the first account can be used to offset the profits in the second account and the taxpayer can receive a refund of some of the tax that was withheld by the second brokerage.
If your deductions (e.g., basic deduction, health/pension premium deduction, iDeCo deduction, insurance deductions) exceed your declared income, you can apply the unused deductions to your investment income by declaring such income.
Similarly, if your declared income is insufficient to fully benefit from a residential mortgage tax credit, furusato nozei tax credit, or any other credit, you can declare your investment income to access the unused portion of the credit. (Since the limit on the furusato nozei credit is proportional to taxable income, people who wish to maximize their furusato nozei credit may choose to declare their investment income for this reason.)
Some countries withhold income tax on investment income (typically dividends/interest) accrued by non-residents. To mitigate the double-taxation effect, Japanese residents can claim a foreign tax credit with respect to withheld foreign income tax. However, it is necessary to declare the relevant foreign-source income in order to claim such a credit. Accordingly, some taxpayers may wish to declare certain investment income on their income tax return (even when not required to do so) for the purpose of claiming a foreign tax credit with respect to foreign taxes that were withheld from that investment income.
A more complex version of this would be where a taxpayer wants to increase the proportion of their declared income that comes from foreign sources, to increase the size of the foreign tax credit they can claim. Since the foreign tax credit is limited by the proportion of a taxpayer’s income that is foreign-source, it will often be in a taxpayer’s interests to maximize the proportion of their income that is foreign-source (without proportionally increasing their foreign tax liability). Choosing to declare foreign-source investment income (dividends paid by foreign companies/funds, for example) could be one way to achieve this.
It will occasionally be necessary for taxpayers to use their tax return or a municipal tax certificate to prove their income to third-parties (the Immigration Services Agency, a rental agency, a mortgage lender, etc.). In these situations, it will typically be in the taxpayer’s interest for their declared income to be as high as possible. Some people may prefer to declare investment income for this reason.
People with a taxable income of less than 9 million yen/year who are receiving dividends from Japanese companies (or funds invested primarily in Japanese companies) may be able to reduce the income tax they pay on their dividend income by subjecting it to “general taxation” (総合課税).
Declaring dividends as subject to “general taxation” will cause them to be combined with the taxpayer’s other income and taxed at the taxpayer’s marginal income tax rate. But it will also give the taxpayer access to the dividend tax credit. The dividend tax credit is only applicable to shares in Japanese companies and some mutual funds that mainly invest in Japanese companies, but it can reduce the effective income tax liability on dividends by up to 10%, which will typically bring the effective tax rate below the standard 15.315% for anyone with a taxable income of less than 9 million yen/year (see here).
Note that the dividend tax credit applicable to residence tax cannot bring the effective tax rate lower than the standard 5% applicable to undeclared dividends. So even if a taxpayer is subjecting their dividend income to general taxation for income tax purposes, they should usually “undeclare” the income for residence tax purposes.
To begin with, though, it's worth clarifying that: if you have investment income you are not obliged to declare and you file a tax return without declaring that income, it is not possible to subsequently file an amended tax return to declare that income. As soon as the return has been filed without declaring the income, the taxpayer is deemed to have irrevocably chosen not to declare the income. So taxpayers should carefully consider the pros and cons of declaring such income before they file their tax return.
Offsetting losses
Declaring taxable losses is generally in a taxpayer’s interests. However, to maximize the benefit of declaring taxable losses (including losses carried forward from previous years), a taxpayer may need to also declare profits that they are not obliged to declare. The classic example of this would be a taxpayer who realized losses in a taxable account at one brokerage but profits in a withholding account at a different brokerage. By declaring both accounts, the losses in the first account can be used to offset the profits in the second account and the taxpayer can receive a refund of some of the tax that was withheld by the second brokerage.
Applying excess deductions and credits
If your deductions (e.g., basic deduction, health/pension premium deduction, iDeCo deduction, insurance deductions) exceed your declared income, you can apply the unused deductions to your investment income by declaring such income.
Similarly, if your declared income is insufficient to fully benefit from a residential mortgage tax credit, furusato nozei tax credit, or any other credit, you can declare your investment income to access the unused portion of the credit. (Since the limit on the furusato nozei credit is proportional to taxable income, people who wish to maximize their furusato nozei credit may choose to declare their investment income for this reason.)
Claiming a foreign tax credit
Some countries withhold income tax on investment income (typically dividends/interest) accrued by non-residents. To mitigate the double-taxation effect, Japanese residents can claim a foreign tax credit with respect to withheld foreign income tax. However, it is necessary to declare the relevant foreign-source income in order to claim such a credit. Accordingly, some taxpayers may wish to declare certain investment income on their income tax return (even when not required to do so) for the purpose of claiming a foreign tax credit with respect to foreign taxes that were withheld from that investment income.
A more complex version of this would be where a taxpayer wants to increase the proportion of their declared income that comes from foreign sources, to increase the size of the foreign tax credit they can claim. Since the foreign tax credit is limited by the proportion of a taxpayer’s income that is foreign-source, it will often be in a taxpayer’s interests to maximize the proportion of their income that is foreign-source (without proportionally increasing their foreign tax liability). Choosing to declare foreign-source investment income (dividends paid by foreign companies/funds, for example) could be one way to achieve this.
Demonstrating a high income
It will occasionally be necessary for taxpayers to use their tax return or a municipal tax certificate to prove their income to third-parties (the Immigration Services Agency, a rental agency, a mortgage lender, etc.). In these situations, it will typically be in the taxpayer’s interest for their declared income to be as high as possible. Some people may prefer to declare investment income for this reason.
Accessing a lower tax rate on dividends
People with a taxable income of less than 9 million yen/year who are receiving dividends from Japanese companies (or funds invested primarily in Japanese companies) may be able to reduce the income tax they pay on their dividend income by subjecting it to “general taxation” (総合課税).
Declaring dividends as subject to “general taxation” will cause them to be combined with the taxpayer’s other income and taxed at the taxpayer’s marginal income tax rate. But it will also give the taxpayer access to the dividend tax credit. The dividend tax credit is only applicable to shares in Japanese companies and some mutual funds that mainly invest in Japanese companies, but it can reduce the effective income tax liability on dividends by up to 10%, which will typically bring the effective tax rate below the standard 15.315% for anyone with a taxable income of less than 9 million yen/year (see here).
Note that the dividend tax credit applicable to residence tax cannot bring the effective tax rate lower than the standard 5% applicable to undeclared dividends. So even if a taxpayer is subjecting their dividend income to general taxation for income tax purposes, they should usually “undeclare” the income for residence tax purposes.