Capital gains tax on the disposition of shares by individuals is undergoing major reform. Various special measures are being introduced with a view to revitalizing Japanese stock markets by giving special incentives to individual investors in their stock investments.
In general, capital gains from the sale of shares by individuals are taxed separately from other income.
Withholding tax based on actual gains
An individual taxpayer (who is a resident of Japan or a non-resident of Japan who has a permanent establishment in Japan) must pay capital gains tax based on any actual gains through their tax assessment. However, with respect to certain listed shares, they can elect to be subject only to a withholding tax of 1.05% on the sales price of the shares in lieu of paying tax based on actual gains through his or her tax assessment.
The withholding tax system based only on the sales price will be abolished as of December 31 2002. Instead, an optional withholding tax system based, in principle, on the actual capital gains will be introduced to lessen the administrative burden on individual taxpayers in calculating and reporting capital gains to the tax authorities. To opt into the new withholding system, taxpayers must designate an account where the taxpayer can hold certain listed shares.
Tax rate reduction
Generally, for individual taxpayers, the basic tax rate for capital gains from shares is 20% (plus 6% for local tax). From January 1 2003, the tax rate for capital gains from certain listed shares will be reduced to 15% (plus 5% for local tax). As a temporary measure, capital gains realized from the sale of certain listed shares that have been held for at least one year will be taxed at a further reduced rate of 7% (plus 3% for local tax).
For each year, capital losses resulting from a sale of shares can be deducted from capital gains, but capital losses can only offset capital gains realized from the sale of shares and not other income. Capital losses not used in a given year cannot be carried forward to future years. As of January 1 2003, subject to certain conditions, taxpayers will be permitted to carry forward unused capital losses for up to three years to offset capital gains realized from the sale of shares in those years.
Other special measures
In addition, various other special measures are being introduced (most will be effective from January 1 2003) to make stock investments more attractive to individuals. For example, until December 31 2005, there is a special deduction available of up to ¥1 million ($8,000) in relation to capital gains realized from certain listed shares that have been held for at least one year.
Overall these new rules are highly criticized because they are too complicated to understand and administer. It has been reported that further amendments to these rules to achieve simplicity will probably be proposed by the Ministry of Finance in the near future.