Think Japan Is a Crypto Heaven? Try Filing Your Taxes ThereBy Yoriko Beal
If you came to Tokyo, you would think it was the cryptocurrency capital of the world. Bitcoin advertisements are on the trains and on huge billboards in Shibuya. It’s not just Tokyo, either. When I went back to my hometown of Kobe, my parents mentioned that they saw cryptocurrency exchange ads on TV. “Which cryptocurrency should we buy?” they asked me.
It’s true that Japanese financial regulators moved quickly to introduce a legal framework for cryptocurrency and that many merchants accept Bitcoin as payment. Cryptocurrency trading volume in Japan grew from about US $14 billion to around US $120 billion from 2016 to 2017. By March of this year, Japan had at least 3.5 million crypto traders.
I too believed that Japan was leading the way for cryptocurrency. Then I tried to file my taxes.
This year, February 16th to March 15th was the tax filing period in Japan. Profits made in 2017 had to be reported, and taxes on those profits have to be paid. Profit from trading cryptocurrencies is classified as miscellaneous income. Anything over 200,000 yen (around US $1,800) must be reported as a gain and tax must be paid on it. For many people, it was the first time they had to file their taxes separately from their salary, which companies typically do on their behalf.
I decided to file taxes on my own instead of asking an accountant to do it. I did not have much to report since I mostly held my coins. But still, I was completely overwhelmed by Japan’s National Tax Agency website.
In December, the National Tax Agency issued guidelines on how profit from cryptocurrency should be calculated. According to the official document, holding crypto in and of itself meant no income gain, but trading fiat to crypto, crypto to crypto, or crypto to goods were treated as trading. Sounds simple enough, right? Not exactly.
The example provided by the tax office says if you buy 4 Bitcoin for 2 million yen in March and use or sell 1.5 BTC, before buying another two Bitcoin for 1.6 million yen, first you need to know how much you spent to buy one Bitcoin, and then you need to calculate the value of your remaining coins before you buy a new batch. Finally, after you’re finished buying, you need to update the acquisition cost of all of your Bitcoin holdings.
I found myself getting a headache and I closed my laptop. There’s no way I'm doing this on my own, I thought. My friends who traded crypto said the samething. Fortunately, there are some Japanese startups that specialize in crypto tax calculations. I used two or three similar services to make sure that the calculations were correct, and filled in the sheets for tax filing, which was also a hassle for someone doing this for the first time.
Aerial Partners launched a free online profit calculation service just before the tax filing period started. Kento Numasawa, CEO of the company, pointed out in our online interaction that guidance from tax authorities does not cover everything related to crypto and there are still no detailed rules. Furthermore, there are still not enough accountants with knowledge about cryptocurrency. He mentioned several other factors that complicate the process further. “More and more investors use multiple exchanges and each exchange records trading history in a different format,” he said. “Crypto to crypto trading includes trades on non-Japanese exchanges, all of which have to be converted to fiat in order to calculate profit.”
The other problem is that Japanese tax rates can be extremely high. “Japanese crypto income (trading, mining, crypto lending -- anything that consumes or produces crypto) is taxed as “miscellaneous income” which effectively lumps it together with ordinary income. This means that it is progressively taxed up to 45% for federal taxes and 10% for residential for a whopping rate of 55%,” explains Amin Azmoudeh, founder of Cryptact, which provides a service called [email protected] that helps Japanese people calculate their crypto taxes.
"The really detrimental thing though about miscellaneous income in Japan is that losses lumped into this bucket cannot be carried forward into future years (as in stock losses), so if you lose money on crypto one year and have no similar miscellaneous income to offset, you're just out of luck,” he adds. Unlike in the United States, Japan has no long-term capital gains tax rate for cryptocurrency, Azmoudeh notes. “In the US, although cryptocurrency is designated as property, there is also the benefit of long-term capital gains tax rates (about 20%), which means that if you have gains on positions held over a year, you pay a lower long-term rate."
While high rates are certainly a problem, widespread confusion is also a major issue. According to Azmoudeh, Cryptact is the largest service in the Japanese crypto tax field, yet still has less than 30,000 users. “That means that still most people either don't pay taxes, don’t know they need to pay taxes, or something else,” he says.
This kind of confusion is a disincentive for people to enter the crypto market. If Japan truly wants to become the world’s Bitcoin capital, it will have to clear things up.
Yoriko Beal is a Tokyo-based writer.