If you are lucky enough to have made gains in your cryptocurrency investments (and haven’t lost them, or had them misappropriated by hackers, like Coinbase) then you will need to understand how to quantify those gains for the purpose of reporting to the Japanese tax office, and quantifying your tax liability. The tax office will not do this for you, but will certainly give you feedback if your methodology and calculations are wrong. It’s better to get it right the first time around if you wish to avoid further scrutiny of your financial affairs. The following calculations are appropriate for all forms of cryptocurrency.
From Crypto To Fiat Currency – Taxable Calculation
If you purchased 1 Bitcoin at 10,000 dollars and it was worth 11,000 dollars when you sold it, that is a profit of 1,000 dollars. This is the same simple method used when calculating stock gains. If for example you only sold 50% of the Bitcoin that you were holding after the increase, you would calculate 50% of the 1,000 gain on 1 BTC (1,000*.05) to arrive at a taxable profit of 500 dollars.
Many people will increase their holdings by adding more money to their accounts and buying more of their chosen currency. This understandably complicates the above.
To calculate gains you will have to choose between using a dynamic moving average or simple moving average method. Once chosen, you cannot change so it makes sense to choose correctly. For those with numerous ‘trades’ the dynamic moving average calculation can become extremely time consuming and complex, so to err on the side of caution, most will choose the simple moving average method. The calculation for this method is:
[ The total cumulative price of all acquired currency during 1 year [ ÷ ] the number of acquired coins/tokens ]
For those with holdings across numerous accounts and trading venues, the only option is to export the year’s transaction history to MS Excel and work your way through all of the data. If this sounds laborious, that’s because it most definitely is, and you should be reminded that as always there is no such thing as ‘easy money’.
From Crypto To Crypto – Taxable Calculation
In a similar fashion to the above, lets say you exchange 1 BTC for 1 ETC- you will note that your purchase price for 1 BTC was 10,000 dollars and the time at conversion/exchange the value of 1 BTC was 11,000 dollars. Accordingly, tax will be payable on 1,000 dollars. This is particularly surprising for a number of investors who have otherwise believed that tax is only payable when currencies are “sold” outright and turned back into fiat currency (e.g JPY). This is not the case as an exchange for another cryptocurrency has the same effect as an outright sale for the purpose of tax.
A number of exchanges are funded exclusively with cryptocurrency and do not permit funding with fiat (JPY). In this scenario the method is still the same and you should look for the market price of the relevant currency at the time of purchase/sale/exchange to calculate your tax liability.
Hard Fork Tax Calculations
For coins like Bitcoin Cash, Bitcoin Gold or other instances where a currency splits into different parts or something is given to coinholders for free then the following applies. The coins are looked upon as having zero face value at acquisition, and as such, the value at time of sale/exchange is looked upon as a 100% profit. The same could arguably be said for certain ICO’s. This may seem highly punitive, but makes sense in the scenario where something has been received ‘for free’. For the potential situations where this is not the case, one can only hope for revisions to this taxation stance in the future.
Mining Tax Calculations
Things get a little murky here as we do not have many points of reference. However, it can be interpreted that the taxable base is the cost of the currency at the time of acquisition, minus any expense incurred in the acquisition of said currency. Whether or not this extends to the electricity involved, or just to expenses in kind (for example the initial cost in NEM of harvesting NEM), remains to be seen. For those heavily involved in mining and lending, or those considering participation in either practice should definitely look to obtain guidance from the tax office directly before making any significant expenditure.
Tax Reduction Methods For Crypto Currency Gains In Japan
As mentioned previously, the tax rates for cryptocurrency in Japan are progressive and cryptocurrency gains are added to the total income base of the taxpayer- without the ability to reduce and offset gains in the same way as ordinary income (e.g via real Japanese estate investment, adding dependents etc. ). For those with a small annual income the tax liability from crypto gains may not be an insurmountable barrier. However, for higher rate taxpayers, or those with significant latent gains in their crypto investments, the potential tax consequences could be of phenomenal proportions.
The easiest way to control your tax liability is to understand that income tax pertains to the money received that past year and is progressive (with bands at 1.95 mln JPY, 3.3 mln JPY, 6.95 mln JPY, 9 mln JPY, 18 mln JPY, 40 mln JPY..). Accordingly, if you are aware that this years income will come to around 4 mln JPY, and you wish to ensure that your crypto gains are not taxed above the 9mln JPY rate, then you know to only realise 5mln JPY’s worth of gains via sale or exchange. Now, this is not as efficacious as “loss harvesting” in stock portfolios, but could certainly inform you portfolio adjustments in a way which is tax efficient.
One way to avoid tax entirely is to not sell, and hold (HODL or ガチホ, depending on your passport) your cryptocurrency indefinitely. This will ensure that you do not realise any profits and will have no tax obligations. The main problem with this strategy being exactly that – you cannot realise any profits, and is often the case with fast profits, “easy come easy go“. You and your financial adviser should consider how to lock-in profits in a way that is tax efficient. Selling everything today is a fantastic way to turn the theoretical money into something that you can spend in the real world, but it will also have worldly implications for the next tax year…
[ Sources ]
– NTA: 仮想通貨に関する所得の計算方法等について（情報）
– NTA: 所得税法（平成29年度版）
– NTA: 仮想通貨の税務上の取扱い－現状と課題－