Japan’s Crypto Problem – How is Bitcoin taxed?

Written by Martin Zotta

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.

Japan Tax Bracket (JPY)Japan Income Tax Rate
Less than 1.95m5%
40m and above45%

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.

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Another problem: Losses cannot be deducted from your income

Being heavily taxed in Japan for your crypto gains as income is bad enough. What makes this problem worse is that you will also not be able to deduct any cryptocurrency losses from your income or other assets, unlike you can with real estate.

A potential inheritance nightmare waiting to happen

Here’s another problem that could affect the loved ones of investors: inheritance tax in Japan. That Japan has some of the highest inheritance taxes in the world is widely known and understood. However, you may not be aware that when someone dies, the crypto assets they pass on to their loved ones will be valued at the price at the time of the death.

Bitcoin and crypto, in general, is still a newish asset class and thus very volatile, which means that you could have a situation where a beneficiary “receives” a significant crypto inheritance and is taxed accordingly, but by the time they can get their hands on the asset the value could have dropped drastically.

In case you are wondering, inheritance tax in Japan also goes as high as 55%. Surprise, surprise.

Japans Crypto Problem - How is Bitcoin taxed

What can be done about it?

You can do a few things to minimize the damage, but in general, if you are buying the cryptocurrency yourself, there will be taxes to pay. Some simple steps you can take are:

  • Split your crypto sales into multiple tax years. Rather than selling two bitcoins at once, like in the examples above, sell one this tax year and the other in the following tax year.
  • Suppose you have a spouse with a lower income than you or no income at all. In that case, you could have them purchase and hold the cryptocurrencies instead of you (although this brings other issues to consider, such as gift tax limitations and the fact the crypto is then legally in your spouse’s name).
  • Leave the country if you have massive gains you want to realize. Yes, in extreme scenarios, this is something that people will likely do, especially when the numbers are big enough.
  • Keep your realized crypto gains to under 200,000 JPY per year, in which case no income tax is due.

The smarter way to hold cryptocurrencies

If you are considering adding Bitcoin and other cryptocurrencies to your overall portfolio, the best step to make may be to structure how you will hold it before purchasing it.

Through Argentums Active Portfolio Management Service, we can advise on Bitcoin and blockchain funds and ETFs as an additional part of a lump sum structured investment portfolio for clients. This allows you to invest in cryptocurrencies in a tax-efficient manner as well as diversify your overall risk.

Bitcoin ETFs are also now available in monthly investment plans. This allows people to invest smaller amounts in this asset and benefit from unit-cost averaging.  It’s an easy way to get some exposure to this asset class while not taking too much risk.

To learn more about the individual requirements and minimum investment amounts you need to take advantage of this opportunity, get in touch with your Argentum advisor.

If you are not currently a client, get in touch with us to schedule a free consultation.

Argentum Wealth does not provide tax, legal or accounting advice. This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal or accounting advice. You should consult your own tax, legal and accounting advisors before engaging in any transaction.

Argentum Wealth Management is licensed through the Japanese Financial Services Authority to give financial advice. The FSA strongly recommends that you only receive financial advice and services from a locally licensed and regulated firm.

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