Taxation system that is useful to know when trading crypto assets | Specific profit and loss calculation methods and more

Basics of cryptocurrency tax

In the previous section, tax accountant Gohei Fujimoto explained the current situation and issues of the cryptocurrency tax system, as well as future revisions, but from here on, we will explain it with specific examples. Before that, we will explain the basic premise of the current cryptocurrency tax system again.

First, profits earned by individuals from buying and selling cryptocurrencies and mining are treated as "miscellaneous income" out of the 10 types of income classification. Miscellaneous income is subject to comprehensive taxation, and the tax rate is determined by the amount combined with other income such as salary income and real estate income.

It is a common misconception that 55% of profits generated from cryptocurrencies are not subject to taxation. In addition, the figure of 55% is the sum of the maximum income tax rate of 45% in the excess progressive tax rate and the resident tax of 10%. The income amount at which the tax rate changes is posted on the National Tax Agency's website, so please check the latest information from time to time.

In addition, if the income of miscellaneous income exceeds 200,000 yen after deducting expenses, etc., a tax return is required. Therefore, for example, if you buy Bitcoin for 1 million yen per BTC and sell it for 1.2 million yen, the difference of 200,000 yen will be taxable and you will need to file a tax return.

This is just a simple pattern, and in reality, you will make several, dozens, or even hundreds of transactions, so in order to accurately understand, you should record and store your transaction history carefully. In addition, individuals are not subject to taxation on unrealized gains from crypto assets.

Even if you buy Bitcoin for 1 million yen per BTC and the price rises to 1.3 million yen, you will not be taxed as long as you do not sell it. Furthermore, if you have losses from other crypto asset transactions and do not make a profit of more than 200,000 yen when you add up your profits and losses, you will not need to file a tax return.

For example, suppose you made a profit of 300,000 yen from trading Bitcoin, but lost 150,000 yen from buying and selling Ethereum. In that case, the difference is 150,000 yen, so you are not required to file a tax return.

These are just the basics of crypto asset taxes. From here on, we will summarize the current discussions taking into account this situation.

Point 1. Profits from cryptocurrencies are miscellaneous income, and we expect the application of separate reporting taxation in the future.

▶Excerpt from Daiwa Securities' "Basic knowledge of tax (1)" and created by the editorial department

Crypto assets to be subject to separate taxation and loss carryover deduction

The current cryptocurrency tax system is a major obstacle to the spread of Web 3.0. Therefore, industry groups such as JVCEA (Japan Cryptocurrency Exchange Association) and JCBA (Japan Cryptocurrency Business Association) are calling for the application of 20% separate taxation and three-year loss carryover deduction for profits generated from crypto assets.

If crypto assets are subject to separate taxation, they can be reported separately from other income, and the tax rate will be a flat 20%. Therefore, it is expected that the barrier to exposure to crypto assets will be lowered more than ever before, and that this will lead to the revitalization of cryptocurrency trading in Japan. Crypto assets are subject to drastic price fluctuations, and a sudden increase in price can lead to large profits. In such cases, if it is miscellaneous income, you may be hesitant to sell it because you are thinking about the tax you will have to pay, but the application of 20% separate taxation will make it possible to maximize profits.

In addition, the tax burden will be reduced by applying a three-year loss carryover deduction. In particular, crypto assets can bring about large profits, but on the other hand, they can also cause unimaginable losses. In such cases, under the current tax system, even if you incur a large loss in one year and make a large profit the following year, you will still be subject to taxation.

For example, if you incur a loss of 1 million yen in crypto assets in one year, but make a profit of 200,000 yen the following year, the combined income of this 200,000 yen and other income will be subject to taxation. This still does not fully cover the loss of 800,000 yen.

So, what will happen if a three-year loss carryover deduction is applied? Similarly, let's say you incur a loss of 1 million yen in crypto assets in one year, but make a profit of 200,000 yen the following year. Since loss carryover deductions allow losses to be carried forward to the following year, in this case the profits made in the year following the loss are offset, and the taxable amount will be 0 yen.

Such tax system reforms have been requested by the industry for a long time. There are various other requests, but these reforms are the top priority above all else, and if they are realized, they will have a major impact on the industry.

→ "Everyone should be prepared to file tax returns"

The moment when profits are made from crypto assets is not limited to trading. Specifically, even if you acquire or use crypto assets in the following ways, you may be required to file a tax return as miscellaneous income.

・When exchanging crypto assets with each other・When making profits by using a lending service・When receiving rewards from mining or staking・When purchasing goods with crypto assets

It is not widely known, but you may also be required to file a tax return when exchanging crypto assets with other crypto assets. For example, let's say you buy 1 BTC for 1 million yen and use it all to buy 1.2 million yen worth of Ethereum. In this case, for tax purposes, you sell the Bitcoin once and use the funds remaining after the sale to purchase Ethereum.

Therefore, if you try to buy 1.2 million yen worth of Ethereum with 1 BTC acquired for 1 million yen, the difference of 200,000 yen will be considered profit and you will need to file a tax return.

The good thing about Web 3.0 is that it allows you to seamlessly exchange any value without necessarily relying on legal tender. Exchanging crypto assets for other crypto assets is one of the benefits of Web 3.0, but in Japan, the current tax system is a major barrier.

In addition, crypto assets obtained through lending services where you deposit crypto assets and have them managed on your behalf, mining in Bitcoin, and staking in Ethereum are also subject to tax if the amount acquired is large.

It is important to note that if you do not record the amount acquired and the current value of the crypto assets at that time, your profit and loss calculations will become complicated later on. In addition, even if you purchase goods with crypto assets, you may be subject to tax.

This is the same as when exchanging crypto assets with each other, and if the value of the crypto assets used for payment has increased compared to the time of acquisition, and the difference between the value of the goods purchased with the funds obtained from this exceeds 200,000 yen, you will be subject to tax. There are still few situations in Japan where crypto assets can be used as a means of payment, but unless these tax barriers are revised, it is unlikely that they will become widespread.

→ "Record and store your transaction history diligently to prepare for profit and loss calculations"

Point 2. How to calculate profit and loss from crypto asset trading and management

As mentioned above, crypto assets may be subject to tax not only for trading but also for use in payments. In addition, crypto assets have drastic price fluctuations, and calculating the market value at the time of trading is time-consuming. Therefore, the more transactions you make, the more complicated the profit and loss calculation becomes.

This is where a profit and loss calculation tool comes in handy. By uploading the transaction history obtained from the crypto asset exchange or connecting with the API, the complicated profit and loss calculation of crypto assets can be done automatically. In recent years, the number of users trading crypto assets has increased, and the number of tools specialized for calculating profit and loss of crypto assets has increased.

It also supports DeFi, overseas crypto asset exchanges, and crypto asset-related services, so it can be said to be a great help when dealing with crypto assets. Although it varies depending on the service, it also supports more than 20,000 crypto assets and various blockchains.

On the other hand, it is important to note that it may not support minor crypto assets or blockchains. Crypto assets are issued every day all over the world, and it is difficult to accurately grasp all of them. If you are trading newly issued crypto assets, you will need to refer to the transaction history and calculate your profit and loss yourself.

Also, since there is no guarantee that the figures calculated by the profit and loss calculation tool are correct, be sure to download the transaction history of each exchange.

→ “Recommended to use if you trade a lot of crypto assets”

Point 3. Recommended profit and loss calculation tools that are also compatible with domestic exchanges

①cryptact

②Gtax

③CryptoLinC

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One of the tips to easily calculate profit and loss for crypto assets is to narrow down the stocks you trade. If you trade a small number of times, you don't need to worry about it, but if you trade too many, the profit and loss calculation becomes very complicated. Therefore, it is better to limit it to about 2 to 5 stocks until you get used to it.

In addition, we recommend that you do not use a wide range of crypto asset exchanges unless there is a special reason. If you choose an exchange according to your purpose and limit the crypto assets you hold at each exchange, asset management should be easier.

Point

If you set rules for yourself such as "at the end of the year, convert all crypto assets into Japanese yen" or "when I make a profit of a certain amount of yen, I will sell them," it will be easier to keep track of your profits and losses.

Crypto assets are classified as miscellaneous income, so there are not many, but here we will introduce some tax measures. First, it is possible to reduce taxable income by recording expenses related to crypto asset transactions as expenses.

Specifically, "transaction fees," "withdrawal fees," "accounting software usage fees and tax return expenses," "information gathering expenses such as the purchase of related books and seminar participation fees," "communication expenses such as internet connection necessary for trading," and "expenses for purchasing a computer or smartphone dedicated to trading."

By carefully recording these expenses and reporting them as expenses when filing tax returns, it is possible to reduce taxable income. In addition, you can adjust your tax burden by understanding the unrealized profit and loss of your crypto assets and buying and selling them at the appropriate time.

You can reduce taxable income by selling crypto assets that are making a profit and crypto assets that are making a loss in the same year and offsetting the profits and losses. As I have said many times before, crypto assets do not qualify for loss carryover deductions, so you should be careful about the timing of buying and selling.

In addition, there is also a way to trade crypto assets through a corporation. Cryptocurrency trading by an individual is considered miscellaneous income and may be taxed at up to 55%, but by incorporating, the corporate tax rate (23.2% in principle) will apply, which may reduce the tax burden.

The benefits of incorporating include the ability to offset losses and carry forward losses, and the scope of expenses that can be recorded is expanded. By starting a business as a sole proprietor rather than a corporation and filing a blue return, you can receive a special deduction of up to 650,000 yen. Since the actual business is required, the scale of transactions and continuity are prerequisites before starting a business.

Finally, since cryptocurrency profits are subject to comprehensive taxation as miscellaneous income, you can reduce your overall taxable income by taking advantage of other income deductions. By taking advantage of systems such as "Furusato Nozei" (Hometown Tax Payment), which allows you to receive income tax and resident tax deductions depending on the amount of donations, and iDeCo (Individual-type Defined Contribution Pension Plan), where the entire amount of contributions is tax deductible, you can indirectly reduce the tax burden on cryptocurrency profits.

→ "If you are worried about taxes, consult a tax accountant without hesitation"

Point 4. Introducing tax measures you can take to maximize the profits you make from cryptocurrencies!

You may have a family member who has held crypto assets for a long time and made a large profit. However, please be careful, if you inherit without thinking, you may have to pay a huge amount of tax.

For example, let's say the deceased purchased 1 BTC for 1 million yen before his death. Then, let's say that 1 BTC was valued at 1 billion yen when he died. In that case, since he inherited more than 600 million yen, he will be subject to inheritance tax of 55%.

If he had a lot of assets, it would be fine if he only had to pay inheritance tax, but in reality, it will be difficult in many cases to pay such a large amount of money. So, you may think about selling the inherited 1 BTC to pay the inheritance tax, but there are some points to be careful of here.

Since crypto assets are classified as miscellaneous income, if it is combined with other income and exceeds 40 million yen, the maximum tax rate of 55% will be applied in addition to the resident tax. In other words, if you sell the inherited 1 BTC in this case, an additional 55% will be taxed.

If you add up the 55% inheritance tax and the 55% gross income tax, you will be taxed at 110%, meaning that even if you inherit 1 billion yen worth of Bitcoin, you will end up short 100 million yen.

If that happens, you may be forced to reluctantly renounce your inheritance, so if you hold a large amount of cryptocurrency, it would be a good idea to talk to your relatives in advance to avoid any trouble.

→ "If any of your relatives own crypto assets, ask them for information in advance."

Point 5. Be careful with inheritance or gifts if you have a large unrealized gain on your crypto assets!

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Gifts of over 1.1 million yen per year, not just crypto assets, are subject to gift tax. The gift tax rate is progressive and depends on the relationship between the donor and recipient and the amount of the gift.

In addition, if you give crypto assets to a friend for less than their market value, depending on the circumstances, both the transferor and the recipient may be subject to income tax and gift tax. Given this, you should think about what will happen next rather than just transferring crypto assets to others indiscriminately.

Point

Particular care must be taken when transferring crypto assets acquired at low prices. It may be difficult for individuals to handle this, so if you are in trouble, we recommend consulting a tax accountant.

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Learn about the taxes required for cryptocurrency trading! Learn the basics and techniques you can use right now —— Kohei Fujimoto, CEO of Kaoria Accounting Office