NISA and Your U.S. Tax Return

What American residents of Japan need to know before (and after) opening a NISA account

NISAと米国税務 — 在日アメリカ人が知っておくべきこと

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The short version

NISA is tax-free in Japan. It is not tax-free in the United States. If you are a U.S. citizen or green card holder living in Japan, the mutual funds inside your NISA account are almost certainly PFICs (Passive Foreign Investment Companies) under U.S. law. PFICs are taxed under one of the most punitive regimes in the Internal Revenue Code — and because Japan collects no tax on NISA gains, you have no Japanese tax to credit against the U.S. tax.

The result is an account that is genuinely tax-free for your Japanese neighbour, and genuinely taxable for you.

Why this happens

Japan’s NISA was expanded in 2024: up to ¥3.6 million per year (a ¥2.4M growth quota plus a ¥1.2M tsumitate quota) and a ¥18 million lifetime cap, with gains and dividends free of Japanese tax.

The United States, however, taxes its citizens on worldwide income regardless of where they live, and it does not recognise foreign tax-favoured accounts unless a treaty says otherwise. The U.S.–Japan tax treaty does not exempt NISA.

Worse, U.S. law treats foreign pooled investments unfavourably by design. A Japanese toshi shintaku (投資信託) is a foreign corporation earning mostly passive income and holding mostly passive assets — the definition of a PFIC. The rules were written in 1986 to stop Americans from deferring tax through offshore funds. They catch ordinary savers abroad as collateral damage.

How PFICs are taxed

There are three regimes. Most people end up in the worst one by default.

1. Excess distribution — §1291 (the default)

With no election, this applies automatically. When you sell at a gain or receive an unusually large distribution, the gain is spread day-by-day over your entire holding period; the portion allocated to earlier years is taxed at the highest ordinary rate for each year (37% for years from 2018) — never at capital-gains rates — and daily-compounded interest is charged on the resulting deferred tax from each year’s filing deadline. The longer you hold, the worse it gets: time itself works against you.

2. Mark-to-market — §1296

For qualifying funds, you may elect to include each year’s unrealised gain as ordinary income. No interest charge — but you pay tax on paper gains, and if you already held the fund, the first election year is taxed under the old §1291 rules (a “deemed sale”). The exit toll must be computed before the election is praised.

3. QEF — §1295

The most favourable regime — but it requires an annual information statement from the fund, which Japanese asset managers do not produce. For Japanese retail funds, it is a textbook entry, not an option.

Form 8621 — one per fund, per year

A separate Form 8621 is filed for each fund, for each year. Three funds inside one NISA means three forms. There is a narrow exception when all your PFICs total $25,000 or less ($50,000 married filing jointly) and nothing was sold — but it is an exception to filing, not to the tax.

And a sting in the tail: a required-but-unfiled Form 8621 can hold open the statute of limitations on your entire tax return. The return never becomes final.

Your NISA is also a reportable account

Separately from the PFIC rules, the account counts toward the FBAR (required once all foreign accounts together exceed $10,000 at any point in the year) and Form 8938 (for those abroad, generally from $200,000 at year end). These are reports, not taxes — but non-willful FBAR penalties start above $16,000 per report.

What people usually ask next

“Should I close my NISA?” Not necessarily — closing is itself a taxable disposition under §1291. The right answer depends on your gains, holding period, and plans. Some Americans in Japan use the NISA quota for individual Japanese stocks instead — a direct shareholding is not a PFIC.

“What about iDeCo?” Similar exposure, plus a harder question about how the pension wrapper itself is classified. It deserves its own analysis, not a rule of thumb.

“I’ve had a NISA for years and never filed 8621.” This is common and fixable. The Streamlined Foreign Offshore Procedures let non-willful filers catch up — three years of returns, six years of FBARs, offshore penalties waived.

The underlying problem

Most Americans in Japan are served by two professionals who never speak to each other: a U.S. preparer who does not know what a NISA is, and a Japanese accountant who does not file U.S. returns. NISA sits exactly on that seam — invisible to the Japanese side (nothing to report; it is tax-free) and misunderstood by the U.S. side (it looks like a retirement account; it is not). That is why this problem is so often discovered years late.

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This article is general information, not advice on any specific situation. PFIC analysis depends on the particular funds held, holding periods, and elections made. Thresholds and rates shown are for 2025 and change annually.