How to Save Taxes for Crypto Assets

In recent years, the trading volume of crypto assets (virtual currencies) has been rapidly increasing, while the treatment of crypto assets under Japanese tax law has been frequently revised and the contents are complicated. For example, Japan’s 2023 tax reform revised the year-end valuation of crypto assets held by corporations. Corporation which handle crypto assets must promptly catch up with the revisions.

In this article, we will provide an overview of the Japanese tax system as it pertains to crypto assets, including the timing of taxation, the distinction between corporate and income tax, tax reduction strategies, and important considerations to keep in mind.

Taxation system for crypto assets in Japan

What is the taxation policy for crypto assets (virtual currencies)? In this article, we will outline the tax treatment for crypto assets across different scenarios.

Selling of Crypto Assets (Virtual Currency) 

Firstly, how is the profit attained from the sale of crypto assets (virtual currency) managed?

If an individual purchases 1 bitcoin for 1,000,000 yen and subsequently sells it for 1,500,000 yen, the resulting profit is calculated as the sales income minus the acquisition cost. In this case, the profit would be 500,000 yen (1,500,000 yen minus 1,000,000 yen). Income tax is levied on this profit, and according to Article 35 of the Japanese Income Tax Act, it is typically classified as “miscellaneous income.”

Reference: National Tax Agency | Tax treatment and statements regarding crypto assets (December 2022)

This miscellaneous income incurred is subject to comeprehensive taxation, which means that taxes are imposed according to the amount of income. The tax rate for the Japanese general taxation system is super-progressive. As the amount of income increases, so does the tax rate. If one’s income exceeds 40 million yen, the maximum tax rate is 45%, to which is added a 10% inhabitant tax, resulting in a considerable increase in tax burden.

If your taxable income amounts to 500,000 yen, it is required to report and settle an income tax of 25,000 yen (500,000 yen x 5%) in your final tax return.

According to the Japanese corporate tax law, the profit or loss is calculated by including the difference between the sales proceeds and acquisition cost. In this case, the profit will include the difference of 500,000 yen.

According to the Japanese Consumption Tax Law, the transfer of payment instruments and similar items is exempt from taxation. This includes transfers made through domestic crypto asset exchanges, which fall under the category of payment methods and are therefore also tax exempt. Additionally, if you file a final tax return for consumption tax using general taxation, you do not need to include tax-exempt sales in your calculation of the amount of deductible tax on purchases.

Commissions paid to crypto asset exchange service providers for trading crypto assets (virtual currencies) are subject to consumption tax. However, if the individual response method is adopted for the consumption tax return, the fee falls under taxable purchases required only for the transfer of assets other than the transfer of taxable assets (taxable purchases corresponding to so-called non-taxable sales).

Exchange of Crypto Assets for Other Crypto Assets 

If you sell the virtual currency assets mentioned above, it is likely that taxes will be imposed on any profits made. Furthermore, when exchanging these assets for other virtual currencies, income tax will be imposed on any income gained as per the following formula: (market price of obtained virtual currency – acquisition cost of exchanged virtual currency = profit). Please take note of this.

For instance, suppose an individual purchases 1 bitcoin for 1,000,000 yen and its value rises, and they exchange it for 10 ethereum worth 1,500,000 yen. In that case, they would have earned a profit of 500,000 yen simply by making the exchange, and this amount is subject to income tax.

Please note that since you only traded, you did not actually receive any cash winnings. However, please be aware that you will be obligated to pay income tax on your final tax return. Therefore, it is recommended that you have the necessary funds available in preparation for the tax payment.

Regarding Japanese corporate tax, the profit of 500,000 yen mentioned in the previous example is considered when calculating taxable income.

Holding and Evaluating Crypto Assets at the End of Term

At the end of the term, the balance sheet value of crypto assets (virtual currency) will be based on their market price (end value) if an active accounting market exists. Any difference from the book value will be considered as profit or loss for the current period, as per Practical Solution Report No. 38. However, if there is no active market, the balance sheet value will be based on the acquisition price.

If the disposal value (including zero or memorandum value) at the end of the estimated period is lower than the acquisition cost, the estimated disposal price shall be utilized as the balance sheet value, and the difference between the acquisition cost and the estimated disposal value shall be the loss for the current period. This process is similar to the treatment of inventory valuation losses under Japan’s Corporate Accounting Standard No. 9.

The Japanese corporate tax is calculated based on the accounting treatment used for crypto assets. When an active market is present, the value of the assets is determined using the market value method. Any resulting valuation gains or losses are recorded in the profit or loss statement, respectively. Conversely, if there is no active market, the assets are valued using the cost method, resulting in a valuation price with no profit or loss recorded.

Under the Japanese Income Tax Law, unlike the Japanese Corporate Tax Law, mark-to-market valuation is not conducted at the end of the period. This means that individuals who possess crypto assets will not be subject to taxation, and only the profit obtained from trading crypto assets in the fiscal year will be classified as miscellaneous income and taxed accordingly.

Acquisition of Other Assets with Virtual Currency (Crypto Assets)

When you use cryptocurrency to purchase a product, it is regarded as a transfer of your cryptocurrency assets. As a result, the difference between the cost of the product and the cost of acquiring the transferred crypto assets is deemed as income and subject to both corporate and income tax.

When filing a general consumption tax return, the amount paid for a product’s purchase is considered as part of the taxable sales when computing the deductible amount of purchase tax.

Saving Taxes on Cryptocurrency Assets

Under the Income Tax Law, income generated from crypto assets (virtual currency) is considered miscellaneous income and is subject to taxation. As a result, the taxable income must include this amount and the corresponding income tax must be paid accordingly. Are there any strategies available to reduce the tax burden in this scenario?

Differences in Tax Rates for Income and Corporate Taxes

To reduce tax obligations, individuals may establish a corporation, which is subject to corporation tax instead of income tax. Corporations with a capital of 100 million yen or more are subject to a flat income tax rate of 23.2% on their taxable revenue. Conversely, small and medium-sized corporations with a capital of 100 million yen or less are subject to a corporate tax of 15% on their taxable revenue of 8 million yen or less, and 23.2% on any revenue exceeding that amount.

Example calculation: Assuming a total taxable income of 7 million yen with no income deductions, a tax rate of 23% and a deduction of 636,000 yen will be applied in accordance with Article 89, Paragraph 1 of the Income Tax Act of Japan. As a result, the amount of tax to be paid can be calculated as follows.

The calculation for the amount is as follows: 7,000,000 yen multiplied by 23% equals 1,610,000 yen. Subtracting 636,000 yen from this amount results in 974,000 yen.

Regarding income tax, if one’s income exceeds 40 million yen, the highest tax rate of 45% is applied. Therefore, depending on the income level, it may be advantageous to establish a corporation in order to reduce tax payments.

Moreover, the corporate resident tax, corporate enterprise tax, special corporate enterprise tax, and consumption tax (for both product sales and cryptocurrency transactions) are levied.

Becoming a corporation is seen as advantageous if your income from virtual currency reaches 5 million to 6 million yen or more. Nowadays, it is easier to establish a company as the capital required is only 1 yen. Although there are several costs involved in setting up a corporation, it may be a viable option if your income from virtual currency is substantial.

According to the Japanese Income Tax Law, any losses incurred in crypto asset (virtual currency) transactions can only be included in miscellaneous income and cannot be included in any other income categories.

Corporate tax is levied on the taxable income that results from subtracting losses from profits during the tax year. This allows for the total of profits and losses. Hence, in the event of operational losses incurred due to crypto assets (virtual currency), the taxable income can be reduced.

Furthermore, any excess losses over profits can be carried forward for up to 10 years, allowing for the offsetting of future taxable income. This provision enables a reduction in corporate tax liabilities.

Investing in and Holding Crypto Assets (Virtual Currency)

When incorporating, crypto assets (virtual currency) can be transferred to the newly established corporation or contributed as in-kind assets. However, it should be noted that income tax is generally calculated based on the market price of the transferred assets. If the market value exceeds the book value, capital gains will occur, resulting in income tax. Therefore, caution should be exercised.

If a company possesses crypto assets (virtual currency), it is important to note that gains or losses from holding them are included in the calculation of profits or losses, even if they are not sold or exchanged. It is particularly crucial to monitor the market regularly, as crypto asset values can fluctuate rapidly in the period immediately following trading.

In January of the year following its launch, Adacoin, a cryptocurrency introduced in 2017, skyrocketed by a staggering 470 times. If a corporation possesses this digital asset and chooses to hold onto it, they may face a significant burden in corporate taxes.

To mitigate the impact of sudden price fluctuations in crypto assets, it is crucial to hedge risks by investing in a suitable portfolio that includes other financial assets. This will prevent the occurrence of excessive profits or losses.

Considerations for Tax Savings

We have explored various tax saving methods, but we must exercise caution to avoid crossing the line into tax evasion. While the internet is rife with “tax saving plans,” some may be deemed illegal, making it risky to blindly follow them. As the example cited below illustrates, failure to declare due to misunderstanding can result in subsequent taxation.

It is advisable to seek advice from an expert on taxes related to cryptocurrencies.

Cases of Tax Evasion and Omissions 

Enhanced Monitoring

In the past few years, there has been increased scrutiny by the Japanese National Tax Agency and tax offices on income generated from crypto assets (virtual currencies). Starting in 2018, the National Tax Agency has intensified its monitoring of cryptocurrency transactions. Moreover, the revised Act on General Rules for National Taxes has come into effect in 2020, granting the Japanese National Taxation Bureau the authority to request information from providers of crypto asset exchange services.

By implementing this amendment, the National Tax Agency will have the ability to monitor crypto asset transactions made by individuals, thereby strengthening tax return oversight for both individuals and corporations, regardless of whether the non-compliance was intentional or not.

In 2021, the Kanto-Shinetsu Regional Taxation Bureau conducted an extensive tax investigation on individuals who had made profits from trading Adacoin cryptocurrency. This investigation identified dozens of individuals who had failed to declare a total of 1.4 billion yen, resulting in the imposition of approximately 670 million yen in additional taxes, including taxes for underreporting.

Tax Evasion Case

A male executive from Ishikawa Prefecture reportedly earned a profit of around 190 million yen through bitcoin, but declared only 1.2 million yen in his tax returns. As a result, the Kanazawa District Court found him guilty of tax evasion and sentenced him to a year in prison, three years of probation, and a fine of ¥18 million.

In this case, the failure to declare significant profits in good faith was deemed problematic, and it marked the first instance in Japan of tax evasion concerning crypto assets (virtual currency).

Omission of Declaration

A Tokyo resident purchased the Ripple cryptocurrency, which later experienced a significant increase in value. The individual then exchanged the appreciated Ripple for other virtual currencies, resulting in miscellaneous income.

Despite having limited knowledge of the taxation system for crypto assets, this individual erroneously believed that a transfer of assets would not result in a tax obligation. Consequently, I was required to pay an additional 200 million yen in taxes due to a failure to declare.

There has been a growing misconception circulating on social media that cryptocurrency transactions are exempt from taxes. It’s crucial to note that taxable income generated from crypto-assets, including transactions between them, are subject to income tax or corporate tax.

Tax System for Crypto Assets Consultation with an Expert

The legal framework surrounding crypto assets (virtual currency) is still in its early stages and will continue to evolve alongside practical applications. To navigate these uncertain circumstances, seeking the guidance of a professional with extensive practical experience in handling a range of cases is advisable.

Other regulations are currently being developed alongside the tax system for virtual currencies. For legal issues pertaining to blockchain and crypto assets, we suggest seeking counsel from a seasoned lawyer in this area of expertise.

Guidance of Countermeasures by Our Office

Monolith Law Office is a highly specialized law firm in the fields of IT, particularly the Internet, and law. Our team conducts extensive research on the legality of schemes in Japan by analyzing overseas white papers, and provides full support for crypto asset and blockchain-related businesses through the creation of white papers and contracts.