What is Tax-Loss Harvesting?
Tax-loss harvesting involves selling an investment that has declined in value to realize a capital loss, which can offset capital gains from other investments. In Japan, capital gains are taxed at approximately 20.315% (income tax 15.315% plus resident tax 5%). If you have 500,000 yen in realized gains and harvest 500,000 yen in losses, you save roughly 101,575 yen in taxes. You then reinvest the proceeds in a similar (but not identical) asset to maintain your portfolio allocation.
Strategy and Timing
The most common approach is to sell a losing position and immediately buy a similar fund. For example, selling a TOPIX index fund at a loss and buying a Nikkei 225 index fund maintains Japanese equity exposure while realizing the tax loss. In Japan, there is no wash-sale rule like in the US, so you can repurchase the same security immediately. Year-end (November-December) is the most popular time for tax-loss harvesting as investors review annual gains and losses before the tax year closes.
Key Considerations
Tax-loss harvesting defers taxes rather than eliminating them - the replacement investment has a lower cost basis, meaning larger taxable gains when eventually sold. However, deferral has real value due to the time value of money. In taxable accounts, harvesting losses of 1-2% of portfolio value annually can add 0.5-1.0% to after-tax returns over time. This strategy is irrelevant in tax-advantaged accounts like NISA or iDeCo where gains are already tax-free or tax-deferred.