The Tax Wave on Inherited Assets: Unforeseen Burdens and Pitfalls of Inheritance Tax

Cryptocurrencies not only carry the risk of disappearing but also the risk of being taxed. The issue of double taxation due to valuation at the time of inheritance and price fluctuations significantly increases the burden on the remaining family members. Tax preparedness is essential in the new era of asset defense.

Imagine one day, the head of a family passes away, and the remaining family members realize that the Bitcoin left behind holds immense value.

The heirs face hefty inheritance taxes, but by the 10-month deadline for paying these taxes, the price of the cryptocurrency has plummeted, leaving them unable to cover the tax with the assets on hand.

In the inheritance of cryptocurrencies, there is a realistic risk of tax burdens exceeding the valuation due to price fluctuations.

There are over 5 million cryptocurrency holders in Japan, and by July 2025, the number of accounts has surpassed approximately 12.74 million.

Despite this, many are not adequately prepared for these risks. Here, we will explain the tax risks and strategies for cryptocurrency inheritance in Japan in a straightforward manner while maintaining expertise.

Under Japanese inheritance tax law, not only cash, stocks, and real estate but anything of economic value is considered inheritable property, thus cryptocurrencies are legitimate subjects of taxation.

Valuation is based on the market value at the time of the deceased's death, and even if the price surges on the day of death and crashes the next day, the taxable valuation remains at the peak price.

While there is a special provision for listed stocks that allows choosing the lowest average stock price within the past three months including the date of death, this does not currently apply to cryptocurrencies.

Therefore, in volatile price conditions, there is a risk that the inheritance tax valuation may significantly deviate from the actual market conditions.

Another critical issue is the '110% taxation' problem. When the inherited cryptocurrency is sold, income tax and resident tax (up to a combined maximum of 55%) are levied on the capital gains (appreciation).

However, for cryptocurrencies, the heir inherits the acquisition cost (original purchase amount), and if the deceased acquired it at a very low price, the heir inherits a substantial unrealized gain.

As a result, with inheritance tax (up to 55%) and capital gains tax (up to 55%) being imposed twice, the combined tax rate can exceed 100% of the valuation, which is a real possibility.

In fact, as pointed out by the Nikkei newspaper, in cases where the valuation at the time of death is in the hundreds of millions, combining inheritance tax and income tax can result in a tax burden of 110%, making it impossible to pay off the taxes even by selling all the cryptocurrency assets.

To avoid such situations, it is necessary to consider a tax payment plan based on the trends in valuation and acquisition costs during one's lifetime.

Another critical aspect to be wary of in cryptocurrency inheritance is non-disclosure. With the recent surge in ownership, tax authorities are strengthening their investigation systems against non-disclosure and underreporting of cryptocurrency assets.

Intentionally excluding cryptocurrency from the inherited assets can lead to substantial additional taxes, including penalties for non-disclosure and severe additional taxes, if discovered later.

In cases of deliberate concealment, penalties could reach up to 40% of the original tax amount.

Even if not intentional, failing to report cryptocurrency assets because one was unaware of their existence does not exempt one from penalties.

Tax offices are increasingly able to detect non-disclosures through blockchain transaction histories and information provided by exchanges.

From 2026, the OECD-led Crypto Asset Reporting Framework (CARF) will be implemented, making non-resident foreign transactions reportable to tax authorities worldwide, making it difficult to hide assets overseas.

Additionally, the unique issue of private keys in cryptocurrency poses practical challenges. Unlike tangible assets like bankbooks or real estate, cryptocurrencies are intangible digital data.

Therefore, there is a high chance that families may not even realize the existence of the deceased's cryptocurrency assets. This includes irregular acquisitions such as airdrops.

If assets are distributed across multiple exchanges, it becomes even harder to grasp the complete picture, and access is impossible without knowing the exchange's login ID, password, or two-factor authentication codes.

Furthermore, if stored in a personal wallet, the private key itself is necessary, and if the only person who knew the key passes away, the assets are permanently frozen.

Indeed, there have been reports of cases where a prominent businessman passed away suddenly, leaving billions in cryptocurrency inaccessible, and instances where the death of a major exchange's founder left customer assets unrecoverable.

In the inheritance of cryptocurrency assets, these technical characteristics significantly increase the risk of assets floating in limbo and being omitted from the estate.

The complexity of inheritance procedures is significantly influenced by where the deceased managed their cryptocurrency assets.

For assets held with registered domestic cryptocurrency exchanges, many have established inheritance protocols, allowing for straightforward name changes and withdrawal procedures upon submission of necessary documents such as death certificates and family registry copies.

For instance, by submitting these documents in the prescribed forms, exchanges can transfer the deceased's cryptocurrency assets as part of the estate.

However, the process becomes considerably more complex if the assets were held in unregistered foreign exchange accounts or self-custody wallets, where the individual managed their own private keys.

In foreign exchanges, inquiries about inheritance procedures often face hurdles due to language and legal differences, sometimes necessitating court-involved procedures.

For assets on DeFi platforms or NFTs, the absence of a central administrator means that if the private keys are not passed on, the assets themselves could vanish.

DeFi tokens and NFTs managed in wallets like MetaMask by the deceased cannot be transferred without access means.

Cryptocurrency inheritance introduces a new 'social blind spot' intertwined with technological, systemic, and literacy discrepancies, presenting barriers not found in traditional asset inheritance.

Tax expert Shin Sakamoto from Tamalan Sakamoto Tax Corporation warns, 'If cryptocurrency assets are omitted from the estate and flagged during tax audits, filing an amended return will be necessary, leading to penalties including additional taxes and interest.'

Cryptocurrency inheritance is a complex area fraught with unique tax risks and technical challenges.

Yet, it is increasingly becoming a real issue for everyone. Recognizing the risks and preparing now is crucial.

Practical measures include organizing information about owned cryptocurrency assets and consulting with experts.

Listing the types, quantities, and storage details of owned cryptocurrency assets, and sharing login information or private key storage methods with trusted family members or professionals is advisable.

Consider using multi-signature solutions or trusts, and integrating aforementioned technical services as needed.

However, due to the unclear legal status of many technical solutions, consulting with tax advisors or lawyers before implementation is recommended for peace of mind.

In terms of taxation, combining traditional methods like lifetime gifts or testamentary trusts can also help control tax liabilities and prevent disputes.

Most importantly, treating cryptocurrency inheritance as a personal issue and taking early action is essential.

To avoid unexpected 110% taxation or asset disappearance, start preparing now.

Cryptocurrency inheritance involves not only the risk of 'vanishing assets' but also 'taxation on digital assets,' posing significant fiscal risks.

While over five million people in Japan already own digital assets, few have taken measures considering inheritance taxes.

Considering digital asset inheritance as a personal matter and sharing information with heirs, along with tax simulations, will be the first step in protecting these assets.

Inheritance of cryptocurrency assets, if overlooked and flagged during tax audits, would necessitate filing an amended return, incurring penalties such as additional taxes and interest.

Sharing information about cryptocurrency assets with family members and consulting with experts from the outset is the best preparation.

Written by Noriaki Yagi

Supervised by Tax Advisor Shin Sakamoto | Shin Sakamoto
Representative tax advisor at Tamalan Sakamoto Tax Corporation, passed the National Tax Specialist Examination, joined the Tokyo National Tax Bureau. Worked in various capacities at tax offices and the Tokyo National Tax Bureau, including the Collection, General Affairs, and Inspection Departments, and served as a tax litigation representative for the government at the Ministry of Justice.

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