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Introduction

If you are an expat living in Japan or a Japanese national looking to invest in foreign currencies, you may have heard about "dollar-denominated insurance" or "dollar-based insurance." While these insurance policies are a popular choice, especially for those looking to hedge against currency fluctuations, it is essential to understand their tax implications when it comes to filing your tax returns.

What is Dollar-Denominated Insurance?

Dollar-denominated insurance refers to insurance policies that are denominated in a foreign currency, such as the US dollar. These policies are attractive to investors because they offer protection against currency fluctuations while providing insurance coverage.

How Does it Work?

When you purchase a dollar-denominated insurance policy, you pay the premiums in the foreign currency. If the value of the foreign currency increases, the value of your insurance coverage also increases. Conversely, if the value of the foreign currency decreases, your insurance coverage decreases.

Tax Implications of Dollar-Denominated Insurance

If you have a dollar-denominated insurance policy, you must report it on your tax return. The premiums you pay are considered foreign-sourced income and are subject to taxation in Japan. You must report the premiums paid and the insurance benefits received in yen on your tax return.

How to Report Dollar-Denominated Insurance on Your Tax Return

To report dollar-denominated insurance on your tax return, you must complete Form 16 (Statement of Foreign Income). In this form, you must report the premiums paid and the insurance benefits received in yen.

Conclusion

Dollar-denominated insurance is a popular choice for investors looking to hedge against currency fluctuations. However, it is essential to understand the tax implications of these policies when it comes to filing your tax returns. Make sure to report your dollar-denominated insurance policy on your tax return using Form 16 to avoid any penalties or fines.