Cryptocurrencies have been with us for some time now, and more investors are getting comfortable with the idea of holding crypto assets such as Bitcoin and Ethereum as part of their overall investment portfolios.

One issue that has come up for investors currently residing in Japan and holding Bitcoin and other cryptocurrencies is the tax treatment here. There seems to be some confusion with investors as to how they think gains on these assets are taxed, with many believing that capital gains tax is applicable.

Others may not even be aware that they need to report their gains, and some may think they don’t need to report because the authorities will not find out about their transactions (not a good idea). The fact is that the way Japan taxes cryptocurrencies and other digital assets poses a huge problem that could end with a nasty surprise for many.

How are Bitcoin and other Cryptocurrencies taxed in Japan?

Unfortunately, Japan taxes crypto in the worst possible way: as miscellaneous income. What does this mean for the investor? It means that you could be looking at taxes on your gains of up to 55%. That’s right, Japan will take most of the winnings on your crypto asset bet, even though you took all the risk.

The good news for long-term holders is that as long as you don’t sell the asset, no taxes are due regardless of the increase in value of the cryptocurrency itself.

However, as soon as you sell your crypto for fiat currencies, trade it for other cryptocurrencies, or spend the Bitcoin on goods and services, any gains you made are added to your overall income for that year. Please see the table below showing Japan’s income tax brackets (and note the table does not include the flat 10% additional inhabitant tax).

You can imagine that if you are not just holding, but actively trading your crypto currencies on an ongoing basis, filing your taxes each year can become a potential administrative nightmare if you are not keeping records of all the transaction values.

An example to illustrate the problem:

Let’s say you are a permanent employee in Japan earning an income of 15M JPY. In this case, the top portion of your income (9-15M JYP portion) is taxed at 33% (plus 10% inhabitant tax, so 43% total).

You own some bitcoin which you purchased a few years back and have made handsome profits. You now want to sell some of your bitcoin to lock in the gains. You decide to sell two bitcoins, which you purchased at 1M JPY and are now valued at 7M JPY. This means you have a taxable gain of 12M JPY.

Well, the first 3M JPY of gains will be taxed at 43%, and the second 3M JPY will be taxed at 50% (ouch!). That’s right; Japan will take nearly half the winning through tax.

Example 2

You might say, “well, I don’t earn such a high salary, so it’s not such a big problem.”
Let’s imagine you are earning 3M JPY per year, and you have two bitcoin you want to sell. But, again, you bought them at 1M JPY and are now selling them at 7M JPY, so your taxable income from the sale is 6M JPY.

Then, you will pay 20% tax (plus 10% inhabitant, so 30% total) on approximately the first 4M JPY and 23% (plus the 10% inhabitant tax, so 33% total) on the remaining 2 M JPY.

Paying about one-third of the gains in taxes is undoubtedly better than 55%, but still nowhere near as good as what the tax would be if it were treated as capital gains: 20%. In our opinion, most investors would be pretty happy to pay the 20% tax, which would seem fair and in line with how other assets are taxed in Japan, such as property and stocks. Up to 55%, however, seems excessive and unfair.