Do I need to file a tax return for cashback from overseas forex trading? This article explains the differences between overseas and domestic forex trading and points to note regarding tax filing

With overseas forex brokers, cashback may be offered when opening an account, making a deposit of a certain amount, or completing a certain number of trades

Additionally, you can receive cashback by going through cashback websites

Since this type of cashback is not considered profit earned from trading, some people may wonder whether they should file a tax return once the amount exceeds a certain limit

This article explains whether you need to file a tax return for cashback received from overseas forex trading, and the fundamental differences between overseas and domestic forex trading

Cashback is subject to taxation

To put it simply, cashback received from overseas forex trading is taxable and subject to taxation. Although it's not profit earned from trading, cashback is still money and can be withdrawn just like money you deposited yourself or profits earned from trading

Therefore, it is treated the same as regular cash and is subject to taxation, so you will need to file a tax return if it exceeds a certain amount. If you make a profit from FX trading, do not distinguish between the profit you made and the cashback, but calculate the total amount together

Trading tickets are not subject to taxation

The way cashback is handled varies among FX brokers. In some cases, it is awarded in a form that can be withdrawn like profits, while in other cases, it cannot be withdrawn and can only be used as margin for trading

The latter type of cashback is often called a "trading ticket," but trading tickets are not subject to taxation. This is because, as explained earlier, trading tickets "cannot be withdrawn."

If you only use one overseas forex account, there is no problem. However, if you use multiple overseas forex accounts and the nature of the cashback differs from one to the other, you must carefully distinguish between cashback that requires tax reporting and cashback that does not

Points to note when filing your tax return

If you are trading in forex overseas and need to file a tax return, you should pay attention to the following points

• The account title is miscellaneous income
• Unrealized losses and unrealized gains are not included
• Pay attention to when the cashback is awarded
• The tax filing period is approximately from February 15th to March 15th

Let's explain each of these points in detail

The account title is miscellaneous income

When filing your tax return, the most important thing is determining which of the ten income categories your income falls into

Even if you understand that it's not business income or real estate income, many people probably struggle with how to classify it as income

Profits earned from FX trading are classified as "miscellaneous income," so when filing your tax return, you can simply declare them as miscellaneous income

Unrealized losses and unrealized gains are not included

In FX trading, there are many situations where you have what is known as "unrealized gains" or "unrealized losses."

For example, if you buy 10 lots (100,000 units) of USD/JPY when the exchange rate is 1 dollar = 140 yen, and then the rate rises to 1 dollar = 150 yen, at that point your position will have generated a profit of 1 million yen

However, the 1 million yen profit is not realized until the position is closed, and this is what is called "unrealized gain" (unrealized loss is based on the same concept)

In FX trading, only profits realized between January 1st and December 31st are taxable. Therefore, as long as you have unrealized gains, you do not need to file a tax return, no matter how large your profits are

Those who currently have unrealized gains should carefully consider when to realize those gains, taking into account factors such as the need to file a tax return

Pay attention to when the cashback is awarded

The timing of when cashback is awarded varies depending on the FX broker and the type of cashback offered

Cashback rewards given in response to deposits are often credited with little time lag after the deposit, but cashback rewards based on trading volume over a certain period are generally credited after a calculation period has passed

In this case, even if the trade eligible for the cashback was made by December 31st, if the cashback was actually credited on or after January 1st of the following year, you do not need to include the cashback amount in your tax return for that year

If the timing of the cashback is uncertain and could span across the new year, you need to carefully check that point

The tax filing period is approximately from February 16th to March 15th

Self-employed individuals and freelancers with experience filing tax returns will have no problem, but many salaried employees may have never filed a tax return before

In such cases, you might wonder when you should file your tax return

The tax filing period is generally from February 16th to March 15th every year

The period may be extended or shortened depending on various social circumstances, so we are using the expression "approximately," but basically, you should prepare to complete the filing process within one month, from February 16th to March 15th

Tax offices tend to get crowded towards the end of the filing period, so it's best to file your taxes as early as possible

Differences between overseas and domestic forex trading

Up to this point, we've been discussing this under the assumption that you're using an overseas forex broker, but there are also forex companies within Japan

While both companies essentially offer the same services, they differ significantly in how the profits earned are taxed

Those who have primarily used domestic FX companies but are considering trying overseas FX should thoroughly understand the differences in tax regulations between the two

Below, we will explain the differences in tax classification, tax rates, and profit/loss offsetting between overseas and domestic forex trading

Differences in tax classifications

There are three tax classifications: "comprehensive taxation," "separate taxation based on declaration," and "separate taxation based on withholding." Overseas FX is subject to the "comprehensive taxation" system, while domestic FX is subject to the "separate taxation based on declaration" system

The difference between comprehensive taxation and separate taxation is as follows (we will omit the explanation of withholding tax for now)

• Comprehensive taxation: A system where income is combined with other income such as salary income, and tax is levied on the total amount
• Separate taxation: A system where income is taxed separately from other income

It's important to know that even with the same FX trading, the tax classification differs depending on whether you use an overseas FX company or a domestic FX company

Difference in tax rates

The applicable tax rates also differ between overseas and domestic forex trading, as follows:

• Overseas Forex: Progressive tax rates under the progressive tax system
• Domestic FX: A flat tax rate of 20.315%

Calculating taxes is simpler for domestic FX trading. Whether your profit is 1 million yen or 100 million yen, you only need to pay taxes calculated by multiplying that amount by 0.20315. The breakdown of "20.315%" is "income tax: 15%, local inhabitant tax: 5%, and special reconstruction income tax: 0.315%."

In contrast, overseas forex trading uses a progressive tax system, meaning that the higher your income, the higher the tax rate used to calculate your tax liability. The tax rates based on income are as follows:

Taxable income amount (rounded down to the nearest 1,000 yen)	Income tax rate (deduction amount)	Resident tax rate	Total tax rate
1,000 yen to 1,949,000 yen	5% (0 yen)	10%	15%
1,950,000 yen to 3,299,000 yen	10% (97,500 yen)	10%	20%
3.3 million yen to 6,949,000 yen	20% (427,500 yen)	10%	30%
6,950,000 yen to 8,999,000 yen	23% (636,000 yen)	10%	33%
9 million yen to 17,999,000 yen	33% (¥1,536,000)	10%	43%
18 million yen to 39,999,000 yen	40% (¥2,796,000)	10%	50%
40 million yen and up	45% (¥4,796,000)	10%	55%

Comparing the tax rates shown in the table above with the "20.315%" tax rate applied to domestic FX, it becomes clear that if your FX income exceeds 3.3 million yen, you will have to pay more in taxes on overseas FX

While overseas forex trading allows for high leverage, potentially leading to enormous profits, it's important to keep in mind that around half of those profits could be taken away in taxes

Differences in offsetting profits and losses

As the Japanese characters for "profit and loss" suggest, offsetting losses against profits is a system for calculating taxes. Whether trading overseas or domestically, profits earned from forex trading are treated as miscellaneous income and cannot be offset against other income such as salary income

Similarly, it is not possible to offset profits and losses between overseas and domestic forex trading. If you make a profit of 2 million yen in overseas forex trading while incurring a loss of 2 million yen in domestic forex trading, the 2 million yen loss will not be taxed, but the 2 million yen profit will be taxed

However, it is possible to offset profits and losses between the same trades, such as having two overseas forex accounts. In a case similar to the example mentioned earlier, if the 2 million yen profit and loss are both from different overseas forex accounts, offsetting them will result in a taxable amount of 0 yen

In addition, with overseas forex trading, profits and losses can be offset against gains and losses from investments in the same tax and income categories. Typical examples include cryptocurrencies and affiliate marketing

Regarding domestic FX trading, profits and losses from futures and options trading can be offset against each other

In addition, losses incurred in domestic FX trading can be carried forward for up to three years, so if you make a profit in subsequent years, you can offset the carried-over losses against the profits

Differences in Taxation Systems Between Overseas and Domestic Forex Trading [Summary]

The differences between overseas and domestic FX in terms of tax classification, tax rates, and loss offsetting are summarized in the table below

FX brokers	Overseas FX	Domestic FX
income classification	Miscellaneous income	Miscellaneous income
Tax classification	Comprehensive taxation	Separate taxation upon declaration
tax rate	Income tax: 5% to 45% Resident tax: 10%	Flat rate 20.315%
Offsetting profits and losses	Profits and losses from overseas forex trading and cryptocurrency trading can be offset against each other	Profits and losses from domestic FX trading, as well as from futures and options trading, can be offset against each other
Loss carryforward	Not possible	Available for 3 years

While the basic mechanics of FX trading remain the same regardless of whether you use an overseas or domestic FX broker, you should understand that the tax systems on your earnings differ significantly before deciding which broker to choose

How to obtain an annual transaction report

To track your annual profits from overseas forex trading and file your tax return accordingly, obtaining an annual trading report is essential

Therefore, we will explain how to obtain trading reports using "MT4 (=MetaTrader4)" and "MT5 (=MetaTrader5)," which are widely used by overseas FX brokers

Steps to obtain a trade report in MT4

The procedure for obtaining a trade report in MT4 is as follows:

1. Launch MT4
2. Select "Account History" from the menu at the bottom
3. Set the transaction report period to "Start" January 1st and "End" December 31st, then select "OK"
4. Once you have reviewed the history, select "Save Report"

Steps to obtain a trading report in MT5

Next, here's how to obtain a trading report in MT5:

1. Launch MT5
2. Select "Account History" from the menu at the bottom
3. Set the transaction report period to "Start" January 1st and "End" December 31st, then select "OK"
4. Once you have reviewed the history, select "Save Report"

It's almost the same as with MT4, but in MT5, after selecting "Save Report," you can obtain the trading report in XML file format by selecting "Report" -> "Open XML."

Documents and procedures required for filing your tax return

Based on the explanation so far, you should be able to determine to some extent whether or not you need to file a tax return

However, if you have never filed a tax return before, you may not even know how to do it

The following explains the documents and procedures required for filing your tax return

There are two types of tax returns

Tax returns can be broadly divided into two types: "white return" and "blue return."

• White tax return: Easier to file, but you cannot receive the deductions available to blue tax return filers
• Blue return filing: Allows for special deductions, but requires financial statements such as an income statement

White tax returns are easy to file, even for those without specialized accounting knowledge. However, you will not be eligible for the "special deduction for blue tax returns" that is available when filing a blue tax return

Blue return filing is a method of filing tax returns mainly used by people who run businesses. While it requires financial statements such as profit and loss statements, it allows for an income deduction of 550,000 yen or 650,000 yen (depending on the procedure) through the "special deduction for blue returns" mentioned above

Filing a blue tax return is a bit more work, but once you learn the procedures, you'll be able to manage it, and most importantly, you can receive an income deduction of 550,000 or 650,000 yen, which is a huge benefit. If you're making a decent profit from overseas forex trading, I recommend choosing a blue tax return to save on taxes

Documents required for filing your tax return

When filing your tax return, various documents are required depending on the type of business you run and the assets you own, but the following are some of the essential documents

• Documents showing annual income and expenses (such as annual transaction reports)
• Identity verification documents (such as a driver's license or passport)
• My Number Card
• Documents related to various deductions (such as social insurance premiums and mortgage payments)
• Withholding tax slip (for company employees and others with salary income)

Additionally, although you are not required to submit them, you should keep receipts and other documents necessary for verifying expenses

Without these documents, you will not be able to fill in the required information on your tax return

How to file your tax return

There are three main ways to file your tax return:

• Submit your completed tax return directly to the tax office
• Submit the completed tax return by mail
• Submit online using e-TAX

If you choose to prepare a paper tax return instead of filing it online, there are several methods you can consider

The National Tax Agency's website has a "Tax Return Preparation Corner" where you can easily create your tax return by entering the necessary information. Since it's a system provided by the government, you can use it with confidence, but the user interface is somewhat lacking

You can also prepare your tax return using tax return software such as freee or Money Forward. Even those without knowledge of bookkeeping or accounting can complete their tax return by simply entering the necessary information, and the software is very user-friendly

During tax filing season, tax offices and special venues set up spaces where you can prepare your tax return while consulting with staff. If you are unsure about online procedures or using tax filing software, it is a good idea to prepare your tax return in person at one of these locations

If you're not confident you can prepare your tax return on your own, or if you don't have the time to prepare it, one option is to ask a tax accountant to prepare it for you

You can either submit the tax return you've prepared in this way directly to the tax office, or you can submit it by mail. In either case, be sure to take sufficient care to submit it by the deadline

Using e-TAX allows you to complete the entire process of preparing and submitting your tax return online, so it's recommended for those who want to minimize the hassle

Important points regarding taxes on overseas forex trading

With overseas forex trading, it's not uncommon to earn more than your regular job, so many people worry about paying taxes. Below, we'll explain in detail the important points regarding taxes on overseas forex trading

The results of overseas forex trading are completely transparent to those in Japan

As mentioned earlier, overseas forex trading is subject to a progressive tax rate, so the more you earn, the larger the percentage of your earnings that you have to pay in taxes

For example, if you make a profit of 8 million yen in domestic FX trading, you would have to pay approximately 1.6 million yen in taxes. However, if you make the same amount of profit in overseas FX trading, you would have to pay approximately 2.7 million yen in taxes

Therefore, some people may be looking for ways to prevent the tax authorities from finding out about the profits they've made from overseas forex trading, but for the reasons listed below, all results from overseas forex trading are completely transparent to the domestic authorities

• All records of transactions with overseas forex brokers, such as bank transfers and card payments, are kept by the financial institution
• If there are large deposits or withdrawals, the domestic bank will submit a "Report on Overseas Remittances, etc." to the tax office
• The National Tax Agency can obtain information on international remittances through a tax avoidance scheme called "CRS"

Therefore, if you neglect to pay the taxes you owe on profits earned from overseas forex trading, the tax authorities will definitely find out. In the worst case, you may have to pay more taxes than you originally owed due to penalties for failure to file, so it is wise to quietly go through the process of filing your tax return

While incorporating your business rather than trading as an individual can lower your tax rate, this method involves certain costs and effort, so it's best to consider it only after you've established a stable income

To prevent your company from finding out about your overseas forex trading, you need to take precautions

For company employees, there may be a clause in the company's employment regulations prohibiting side jobs. Whether or not FX trading constitutes a side job depends on each company's policy, but some people may want to keep it a secret from their company

Company employees pay taxes through "withholding tax," which is deducted from their monthly salary. This deduction includes profits from FX trading

Therefore, if a significantly large amount is deducted from your salary, it may raise suspicion that you are doing some kind of side job

To avoid this, simply choose "ordinary collection" as your method of paying resident tax

By doing this, local taxes will no longer be withheld from your monthly salary, making it less likely that your company will find out that you are making profits from FX trading

However, be aware that choosing ordinary collection means you will have to handle the payment procedures yourself and keep the necessary funds on hand

Frequently Asked Questions about Taxes on Overseas Forex Trading

If you've only recently started trading forex overseas and have never dealt with taxes or filed tax returns related to forex before, you probably have many concerns about taxes on overseas forex trading

Below, we will answer frequently asked questions about taxes on overseas forex trading in a Q&A format. If you have any concerns about taxes on overseas forex trading, please refer to this information

What period should I use to calculate profits from overseas forex trading?

Tax returns are filed annually for income earned between January 1st and December 31st. Therefore, profits from overseas forex trading are also calculated for the period from January 1st to December 31st

Unrealized gains and losses are not subject to taxation, so be careful when handling positions held across year-ends

How much profit do I need to make from overseas forex trading before I need to file a tax return?

Whether you are a salaried employee or not makes a difference. If you are a salaried employee, you will need to file a tax return if your profit exceeds 200,000 yen, and if you are not a salaried employee, you will need to file a tax return if your profit exceeds 480,000 yen

If your profit is below that amount, you generally do not need to file a tax return

Which type of forex trading requires paying more taxes: overseas forex or domestic forex trading?

Because the applicable tax rates differ between overseas and domestic forex trading, it's impossible to say definitively which one will result in higher taxes

While the tax rate applied to domestic FX is a flat 20.315%, for overseas FX, the tax rate is 20% if the income is between 1.95 million yen and 3.299 million yen, and 30% if the income is between 3.3 million yen and 6.949 million yen

Therefore, until your FX income exceeds 3.3 million yen, you will have to pay more taxes with domestic FX, but after that, you will pay more taxes with overseas FX

Can losses incurred in overseas forex trading be carried forward to subsequent years?

In overseas forex trading, losses incurred cannot be carried forward to subsequent years. In domestic forex trading, losses can be carried forward for three years. By being able to carry forward losses, you can reduce your tax liability by offsetting them against profits earned in subsequent years

For example, let's say you carried forward a loss of 1 million yen incurred in domestic FX trading last year, and you made a profit of 1 million yen in domestic FX trading this year. In this case, if you hadn't carried forward the loss, you would be taxed on the 1 million yen profit. However, since you carried forward last year's loss, it offsets the profit, so you don't have to pay any tax

In this respect, domestic FX trading is clearly superior to overseas FX trading

If I'm employed by a company, will my company find out that I'm trading in overseas forex?

If you make a profit from overseas forex trading, your taxes will be calculated based on the sum of your salary from your company and your profits from overseas forex trading

Therefore, if local taxes are withheld at the source, a significantly large amount of tax may be deducted from your salary, which could potentially lead to your company finding out that you are doing any kind of side job, including FX trading

However, unless your company prohibits side jobs, there shouldn't be a problem, and even if you do get caught, it's likely only by an employee in charge of accounting, so you don't need to worry too much about it

If you have reasons for not wanting your company to find out about your overseas forex trading, you can eliminate the possibility of them finding out through withholding tax by paying your resident tax through the "ordinary collection" method

Can I use the Furusato Nozei (hometown tax donation) system to reduce taxes on overseas forex trading?

While hometown tax donations are an effective tax-saving measure, they can also be used as a tax-saving method for profits earned from overseas forex trading

The amount of tax savings you can expect from the Furusato Nozei (hometown tax donation) system varies depending on your income, so it's a good idea to use tools on Furusato Nozei websites to determine the appropriate donation amount

summary

This page explains how to think about taxes and how to file a tax return on cashback and profits earned from overseas forex trading

Finally, let's review the important points once again

• Cashback received is subject to tax filing, just like profit
• Cashback and profits are classified as "miscellaneous income" when filing your tax return
• Unrealized losses and unrealized gains are not subject to taxation
• There are differences in tax classifications and the way profits and losses are offset between overseas and domestic forex trading
• It is recommended to file your tax return using the blue return system, which allows you to receive special deductions
• You cannot conceal the profits you make from overseas forex trading

Cashback received from overseas forex trading is subject to taxation just like profits. Overseas forex trading is subject to a progressive tax rate, and the combined income tax and local tax rate can reach up to 55%

However, thinking, "I'd rather not file a tax return and keep quiet than pay such a high percentage of taxes," is nothing but a bad idea. Even with overseas forex trading, the tax authorities can obtain all records of deposits and withdrawals, so a little investigation will quickly reveal that you are evading taxes

If tax evasion is discovered, you will have to pay additional taxes, such as a penalty for failure to file, in addition to the taxes you were originally required to pay. Therefore, be sure to file your tax return through the proper procedures