The Cryptocurrency Problem – How are Bitcoins taxed in Japan?

Cryptocurrencies have been with us for some time and more and more investors are comfortable with the idea of ​​​​having crypto assets such as Bitcoin and Ethereum as part of their investment portfolios.

One issue that has arisen for investors residing in Japan who hold Bitcoin and other cryptocurrencies is the tax treatment here. There is some confusion among investors about how they believe gains on these assets are taxed, with many believing capital gains tax applies.

Others are not even aware that they need to report their earnings and some may think that they do not need to do so because the authorities will not discover their transactions (which is not a good idea). The reality is that the way Japan taxes cryptocurrencies and other digital assets poses a huge problem that could end up with a nasty surprise for many.

How are Bitcoins and other cryptocurrencies taxed in Japan?
Unfortunately, Japan taxes cryptocurrencies in the worst possible way: as miscellaneous income. What does this mean for the investor? It means you could be facing taxes on your earnings of up to 55%. That’s right, Japan will take most of the profits from your bet on crypto assets, even if you took on all the risks.

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, exchange it for other cryptocurrencies, or spend Bitcoin on goods and services, the profits made are added to your total income for that year. See the table below showing Japan’s income tax bands (and note that the table does not include the flat 10% additional tax for residents).

You can imagine that if you are not only holding but also actively trading your cryptocurrencies on an ongoing basis, filing your taxes each year can become a potential administrative nightmare if you don’t keep records of all transaction values.

An example to illustrate the problem:
Let’s say you are a permanent employee in Japan earning an income of 15 million yen. In this case, the upper part of your income (9 to 15 million yen) is taxed at 33% (plus 10% per capita tax, therefore a total of 43%).

You own some bitcoins that you bought a few years ago and have made considerable profits. Now you want to sell some of your bitcoins to secure profits. You decide to sell two bitcoins, which you bought for 1 million yen and are now worth 7 million yen. This means you have a taxable profit of 12 million yen.

Well, the first 3 million yen of profits will be taxed at 43%, and the next 3 million yen will be taxed at 50% (ouch!). That’s right, Japan will take almost half of the profits through taxes.

Example 2
You might say, “well, I don’t make that high of a salary, so it’s not that big of a problem.”
Let’s imagine you earn 3 million yen a year and want to sell two bitcoins. But again, you bought them for 1 million yen and now you sell them for 7 million yen, so your taxable income from the sale is 6 million yen.

Then, you will pay a tax of 20% (plus 10% per capita, therefore a total of 30%) on approximately the first 4 million yen and 23% (plus 10% per capita, therefore, a total of 33%) on the remaining 2 million yen.

Paying about a third of the gains in taxes is undoubtedly better than 55%, but it’s still nowhere near as good as it would be if it were treated as capital gains: 20%. In our opinion, most investors would be quite happy to pay the 20% tax, which seems fair and in line with the way other assets are taxed in Japan, such as property and shares. However, up to 55% seems excessive and unfair.

Another problem: losses cannot be deducted from your income
Being heavily taxed in Japan on your crypto profits as income is bad enough. What makes this problem worse is that you also won’t be able to deduct cryptocurrency losses from your income or other assets, like you can with real estate.

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

Bitcoin and cryptocurrencies in general are a fairly new and therefore very volatile asset class, meaning 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 fallen dramatically.

In case you were wondering, the inheritance tax in Japan is also up to 55%. Surprise, surprise.

What can you do about it?
You can do some things to minimize the damage, but in general, if you buy the cryptocurrency yourself, there will be taxes to pay. Some simple steps you can take are:

Spread your cryptocurrency sales over multiple fiscal years. Instead of selling two bitcoins at once, as in the previous examples, you sell one this fiscal year and the other in the next fiscal year.
If you have a spouse with a lower income than you or no income at all, you could have them buy and hold cryptocurrencies instead of you (although this comes with other issues to consider, such as gift tax limits and the fact that the cryptocurrency will be legally in your spouse’s name).
Leave the country if you have massive profits you want to make. Yes, in extreme situations, it’s something people will probably do, especially when the numbers are large enough.
Keep your realized crypto profits below 200,000 yen per year, in which case no income taxes are due.