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

Currently, the prices of crypto assets, including Bitcoin, are soaring, and the market is booming. When the market is booming, profits are generated, and you will probably want to lock in your profits. However, please be careful. Profits earned from crypto asset trading are subject to taxation, and in some cases you may need to file a tax return.

It is extremely important to have knowledge about taxes when trading crypto assets in the future. So this time, we spoke to Gohei Fujimoto, who is knowledgeable about tax in the crypto asset field, about how to calculate profits from crypto asset trading, as well as asset management and specific methods for calculating profits and losses.

First, please tell us the basics of how profits generated by individuals from cryptocurrency trading are taxed.

Fujimoto: First, profits generated from cryptocurrency trading are classified as miscellaneous income. There are 10 types of income classifications, and the tax calculation method varies depending on each type. Among them, miscellaneous income is the simplest income classification with almost no preferential treatment.

As an exception, if you get cryptocurrency in a lottery-like way, it is considered temporary income, and if you make a profit from cryptocurrency trading as a business, it is considered business income, but in principle, about 80 to 90% of people can be considered as miscellaneous income.

It feels strange that there are preferential treatments for other types of income, but there are no preferential treatments for profits generated from cryptocurrency trading because it is miscellaneous income. Also, I think many people are allergic to the number "55%" when it comes to taxes on cryptocurrency.

Fujimoto: Many people seem to think that cryptocurrency profits are always taxed at 55%, but this is a big misunderstanding. First of all, this 55% is the sum of the maximum income tax rate of 45% in the excess progressive tax rate and the flat 10% local resident tax.

Also, it is not 55% just because it is miscellaneous income, but even if you earn a lot of salary income, you will be taxed at 55% including local resident tax. In other words, cryptocurrencies are not the only ones that are being treated poorly, and the basic rule is that if you make a large profit, you will be taxed, with some exceptions.

▶Income tax rate: Quoted from the National Tax Agency

I see. So, please tell us about the lack of knowledge about taxes that cryptocurrency traders tend to have.

Fujimoto: It is common that even when exchanging cryptocurrencies with other cryptocurrencies, profits and losses occur. However, I feel that the vast majority of people are unaware that profits generated through cryptocurrency trading are subject to taxation and that profit and loss calculations are necessary.

When calculating profit and loss, it is necessary to obtain trading history from the cryptocurrency exchange. However, according to a domestic exchange, only about 10% of all users who traded downloaded their trading history. This percentage is too low, even considering that many people did not make a profit.

It is very surprising that 90% of users may not know the need to calculate profit and loss... Are there any cases where this happens if you do not pay your taxes properly?

Fujimoto: This is not a case of one of my clients, but there was a case where someone made a considerable profit from cryptocurrency trading in 2017, but the following year in 2018, the cryptocurrency crashed and they lost the funds to pay taxes. Apparently, a tax audit was conducted at the time when the value of the cryptocurrency fell, and they were unable to pay the taxes that they should have declared.

What happened to the tax payment after that?

Fujimoto: In the end, someone else paid it for him, but he ended up continuing to work for that person's company instead. He lost a lot of freedom in the sense that he couldn't quit even if it was hard. I wasn't a tax accountant when I heard this story, but it's still etched in my mind as an episode that shows some of the fear of taxes.

First of all, no matter how much profit you make, can a tax investigation be conducted so quickly for an individual?

Fujimoto: I get the impression that the National Tax Agency keeps a pretty good grasp of your profits, regardless of how big they are. They also keep a close eye on blockchain transactions, and I feel a certain tenacity in them.

On the Internet, there are those who take the tax office lightly and those who take it seriously, but I think the "lightly" ones are looking at tax investigations because they are not yet very familiar with cryptocurrencies. However, when specialized teams come, they will investigate you thoroughly and logically, so talking nonsense or giving casual answers will not work at all.

*Resident tax returns are required

▶︎Flow of determining whether or not a tax return is necessary: ​​Excerpt from Kaorlia Accounting Office seminar materials

Apart from intentional ones, are there any points or techniques to be careful of to avoid unintentionally falling into such a situation?

Fujimoto: In terms of points to be careful of, everyone should be prepared to file tax returns and keep detailed records of transactions.

Also, although it's not a technique, there is one thing I would like everyone to do. That is to "keep screenshots of the crypto assets you own as of December 31st."

Why is that?

Fujimoto: If you can count the number of transactions, that's fine, but if you trade frequently, some people may use profit and loss calculation software. However, there is no guarantee that the profit and loss calculation is necessarily correct due to a lack of trading history.

So, if you keep screenshots, it is a great help in confirming and proving the accuracy of the profit and loss calculation results.

Keeping evidence is important in everything. By the way, from the perspective of a tax accountant, is there a method you recommend for calculating profit and loss?

Fujimoto: Rather than recommending it, I think it is unavoidable to use profit and loss calculation software unless you are trading very small amounts. Or, you can convert all your crypto assets to fiat currency at the end of the year, which is a method that is assumed to be done every year.

It's a good idea to convert it to fiat currency at the end of the year and consider the difference between the amount you deposited and the amount converted as profit and loss. By the way, even if you hold onto crypto assets after trading them and only have unrealized gains, in the case of individuals, the unrealized gains will not be taxed unless you sell them, so that's something to remember.

Also, I think you should be careful when handling crypto assets that are too minor or issued on minor blockchains.

You said that you need to be careful about how you handle them when using minor blockchains, but why is that?

Fujimoto: Because the profit and loss calculation software may not be compatible. Some overseas products are compatible with minor blockchains, but they may have low analytical capabilities for those chains.

Even among profit and loss calculation software that claims to be compatible with XXX chains, there are some that "specify the purpose and attributes of the token acquisition money" and others that "only manage the token acquisition money," and the analysis level varies.

In the latter case, taxpayers have to do a lot of work to remember what the transactions were when calculating profits and losses, which places a considerable burden on them.

So if minor cryptocurrencies are traded frequently, it becomes complicated to properly calculate the profits gained from those transactions.

Fujimoto: There is no "right" way to calculate taxes on cryptocurrencies. However, one tip to make calculating profits and losses a little easier is to limit the number of cryptocurrencies you hold to two or three, or at most ten, at the end of the year, which will make it easier to understand the cause of discrepancies in the profit and loss calculation results.

▶How to calculate income and profit and loss from cryptocurrencies and NFTs: Excerpt from seminar materials at Kaorlia Accounting Office

I learned a lot. From here, please tell us about the current tax reforms for crypto assets. First of all, I would like you to explain the details of the taxation of crypto assets for corporations, which has been revised for two consecutive years, as a matter of interest.

Fujimoto: The purpose of this system is that, although previously unrealized gains on crypto assets held by companies were also subject to tax (taxation at end-of-period market value), unrealized gains will be exempt from taxation if certain conditions are met. Roughly speaking, the conditions are that the company must prove that the tokens are clearly "unfreely movable" from an external perspective. In this case, it is not only specific crypto assets that are subject to this, but basically, almost any token that meets certain conditions, such as the trading price being published outside the company, can be applied. This includes tokens issued by the company.

Regarding the "unfreely movable state," there are two main ways to prove this. The first is to use a program that makes the tokens immobile to prove that they are truly immobile. The second is to deposit the tokens in a crypto asset exchange and report it to the JVCEA (Japan Crypto Asset Exchange Association). One of these two patterns will be the basis.

So you're not going to do all of your requests at once, but you're going to start with the ones that are most likely to be realized. Specifically, where do you think the changes will come from?

Fujimoto: First of all, I think there is a "relatively" high possibility of implementing separate taxation. That's because in the past, there was one financial transaction that was changed from comprehensive taxation to a 20% separate taxation. That's foreign exchange FX.

There are two types of foreign exchange FX: domestic FX and overseas FX. Only domestic FX is subject to separate taxation and three-year loss carryover deduction, while overseas FX is subject to progressive taxation. The reason why domestic and overseas are differentiated even though the actual thing is the same is the difference in the level of leverage.

Naturally, the higher the leverage, the more bankrupt people will go, so the government would want to prevent trouble before it happens. Another reason is that the government cannot grasp how much profit has been made with overseas FX. I think this is where the difference in preferential treatment between domestic FX and overseas FX comes in.

Similarly, I personally think that in exchange for the introduction of a 20% separate self-reporting tax on crypto assets, the government should create an environment that makes it easier for the government to understand how much profit has been made.

So you're saying that interests need to be aligned. For example, it's not impossible that transactions completed domestically will be subject to separate self-reporting tax, but transactions overseas will be treated as miscellaneous income as before.

Fujimoto: This is just my personal prediction, but looking back at the past, it's possible that this could happen. The current problem is that many citizens do not or cannot properly report profits made from crypto assets, and tax investigations are very difficult for the government.

Considering these things, measures such as setting up something like a separate taxation account and only subjecting transactions in accounts that the national tax office can constantly monitor to separate self-reporting taxation could be considered.

If that were to happen, the benefits of Web 3.0 would be somewhat overshadowed. By the way, there are also requests to make crypto-currency exchanges tax-free and to tax only when they are converted into legal tender. What is your view on this?

Fujimoto: This is closer to the foundation of the tax law that I mentioned earlier, so I think it will be more difficult to realize than separate reporting taxation. If we start to work on this, it will overturn the basic concept of tax law, and it will have a huge impact on areas other than crypto assets, both domestically and internationally.

Therefore, it will probably be first to make it subject to separate reporting taxation in a way that matches the interests and responses of the country and the industry. In addition, tax reform is also influenced by political movements, so it is impossible to predict the timing.

Finally, is there anything you would like to convey to our readers in terms of enlightenment?

Fujimoto: First of all, profits generated from transactions with crypto assets are subject to taxation, so be prepared to declare them properly.

Of course, I am aware that the hurdles for filing are high. I myself am currently developing a profit and loss calculation software that can directly collect and analyze blockchain transactions and also supports accounting output in order to address these issues.

The accuracy of data analysis is also very high at the moment, so I think it will also reduce the burden on the general public when checking. We plan to support more than 40 types of blockchain by the end of the year. I plan to open beta users later this year, so be sure to check out my X!

Key points for calculating profit and loss on crypto assets

1. Anyone should be prepared to file a tax return and keep detailed records of transactions. In particular, be sure to keep screenshots of the crypto assets you own as of December 31st.
2. You should be careful when handling crypto assets that are too minor or issued on minor blockchains, as some profit and loss calculation software may not be compatible.
3. To make profit and loss calculations a little easier, try to limit the number of crypto assets you own to just two or three at the end of the year, or at most ten.

Profile

◉Kouhei Fujimoto

Representative of Kaorlia Accounting Office

Tax accountant. Special mentor for "SUITCH," a Web3-focused acceleration program run by the Osaka Industrial Development Bureau (public interest foundation). As a cryptocurrency/NFT tax accountant, he has experience handling a wide range of tax and profit and loss calculations for individuals and large corporations. He has published numerous special interviews and tax articles in the tax accountant magazine "Tax News."

He has written tax law papers for "Accord Tax Review." He is also active as a lecturer at seminars for tax accountants run by the Kinki Certified Public Tax Accountants Association, and tax seminars for VIP customers run by bitbank and Zaif. He cooperated in the development of "Cryptorch," a cryptocurrency/NFT profit and loss calculation service. He co-authored "Learn with Case Studies! Taxation of NFTs and Crypto Assets" (Chuokeizai-sha)

▶Learn with examples! Taxation of NFTs and crypto assets (2nd edition)

Detailed explanation of special provisions on crypto assets in each tax law, such as income tax, corporate tax, and inheritance tax. With an eye on tax return practice, it also explains how to calculate profit and loss using specific trading examples. A standard book for understanding Web 3.0 taxes. A must-read for those who have made a profit but don't really understand taxes.

https:/x.com/suika3111