This article is an English translation of this article in Japanese for those who need to follow the Japanese taxation.
The number of people investing in cryptocurrencies has multiplied manyfold in the past few years. You may be one of those people who started investing in cryptocurrencies but don't know much about how profit/loss or taxes for this instrument work.
This article, written under the supervision of a tax accountant specialized in cryptocurrencies, explains in very simple terms about taxes and tax return filings for cryptocurrencies.
- Profit from cryptocurrency trading is subject to taxes!
- What is the tax rate for cryptocurrencies?
- What is a tax return?
- When does cryptocurrency generate taxable profits?
- Let’s calculate PNL for cryptocurrency trading!
- Profit calculation for cryptocurrency - made easy
1．Profit from cryptocurrency trading is subject to taxes!
Do you know exactly when your cryptocurrency trading is subject to taxes?
Obviously when you make profits, but many people mistakenly believe that if the profits are not converted into JPY, there is no profit made in JPY hence they are not subject to taxes. This perception is incorrect.
Indeed, you don’t get taxed for buying and holding cryptocurrency. However, it generates profits when you sell it, exchange it for other cryptocurrencies, or use it to pay for something. This is when it is considered taxable income.
Even if you are a corporate employee, if profits from cryptocurrency trading exceed a certain amount, you need to file a tax return.
In this article, we will explain about taxes and tax return filings for cryptocurrencies.
2．What is the tax rate for cryptocurrencies?
2.1 Income classification for cryptocurrency is “Miscellaneous Income”
Income tax is classified into 10 specific groups according to the nature of the income. For example, salaries and bonuses are classified as “employment income”, profits from stock investments as “capital gain” or “dividend income”, profits from real estate as “real estate income”, and so on.
Profits from cryptocurrency trading are generally classified as “miscellaneous income”.
However, if you make a living from cryptocurrency trading or if you hold cryptocurrencies as business assets, you may also consider classifying these profits as “business income”.
2.2 Tax rate for cryptocurrencies
There are two different ways to calculate income tax: aggregate taxation and separate taxation.
Aggregate taxation is where the income is taxed together with other taxable income. Separate taxation is where the income is taxed separately from other taxable income.
Miscellaneous income from cryptocurrency trading is subject to aggregate taxation. This means higher income is subject to a higher tax rate (progressive taxation). The maximum rate is 45%, and 55% if combined with resident tax and special reconstruction tax.
＜Income Tax Rate Brackets＞
|Taxable Income Amount||Rate||Deductible Amount|
|1,000 to 1,949,000 JPY||5％||0 JPY|
|1,950,000 to 3,299,000 JPY||10％||97,500 JPY|
|3,300,000 to 6,949,000 JPY||20％||427,500 JPY|
|6,950,000 to 8,999,000 JPY||23％||636,000 JPY|
|9,000,000 to 17,999,000 JPY||33％||1,536,000 JPY|
|18,000,000 to 39,999,000 JPY||40％||2,796,000 JPY|
|40,000,000 JPY or more||45％||4,796,000 JPY|
Reference: National Tax Agency "No. 2260 Income Tax Rate (Japanese only)"
Profits from FX and stock investments are also classified as miscellaneous income, but they are subject to separate taxation. A uniform tax rate of 20.315% is applied.
3. What is a tax return (Kakutei Shinkoku)?
3.1 What is a tax return?
The tax return (確定申告:Kakutei Shinkoku in Japanese) is a process where a taxpayer calculates the amount of income earned during a year from January 1st to December 31st and the amount of income tax, declares the result to the tax office, and pays the tax. Generally, this is done by submitting a tax return form to the tax office between February 16th to March 15th of the following year.
3.2 Who needs to file a tax return?
Most company employees do not need to file a tax return because their employers calculate and pay the income taxes through the year-end adjustment (年末調整: Nenmatsu Chosei in Japanese). However, you must file a tax return if you make 200,000 JPY or more from cryptocurrency trading. In addition, if you are a dependent (e.g housewife, student, etc), you are also required to file a tax return if you earn more than 480,000 JPY.
Other cases where company employees are required to file a tax return are as follows.
If you fall under one of the above but fail to file a tax return, it may be considered tax evasion.
In this case, you may be liable to pay further tax due to a fine (additional tax).
You should not be fooled into thinking “the tax office will never know because cryptocurrencies are highly anonymous”.
Recently, the relevant laws and regulations have been revised to allow the National Tax Agency to inquire about a user’s transaction history with the exchange. If the tax office finds out you did not file a tax return when you should have done, in addition to a fine, you may also be subject to retrospective tax collection, so make sure you file your tax return correctly.
3.3 How to file a tax return
The problem may be that you know you are required to file a tax return but you don’t know how.
The following article explains in detail how to file a tax return.
If you fail to file a tax return by the due date, you may be subject to penalties such as additional tax and delinquent tax. You should plan for it well in advance.
4. When does cryptocurrency generate taxable profits?
So far, we have explained that a tax return is required if the profit generated from cryptocurrency trading exceeds 200,000 JPY.
Now, let’s look at how the profits are calculated and understand “when profits are generated”. This should give you a feel for profit amounts in cryptocurrency trading. You should compare/contrast with your own transaction history.
4.1 When you sell cryptocurrency
The difference between the selling price and the acquisition price (how much you paid to get it) of your cryptocurrency position is the profit.
* acquisition price includes the expenses (e.g. commissions) you paid to acquire the positions.
This is probably the easiest scenario to relate to in terms of when profits are generated.
|Example: You bought 1 BTC for 3,000,000 JPY and sold it when 1 BTC is 3,500,000 JPY |
→500,000 JPY profit is generated
4.2 When you exchange it with another cryptocurrency
In the previous scenario, exchanging “cryptocurrency (BTC) with “reporting currency (JPY)” generated a profit. Similarly, exchanging cryptocurrency with another cryptocurrency also generates profits.
|Example: You bought ETH using your BTC position |
①Jan-1st Bought 1 BTC for 3,000,000 JPY
②Jul-1st Exchanged all BTC with ETH
* the market price of 1 BTC is 4,000,000 JPY
In the 6 months between January 1st and July 1st, the market price of 1 BTC has increased by 1,000,000 JPY
1 BTC you own was originally acquired for 3,000,000 JPY. But it was worth 4,000,000 JPY when you exchanged it with ETH. You can think of this scenario as first selling it for 4,000,000 JPY and then using that JPY to buy ETH. You can see that you have gained 1,000,000 JPY.
If the market price at the time of the exchange is higher than the acquisition price, the difference is the profit.
4.3 When you use it to pay for something
Paying for goods and services with cryptocurrency also generates profits. The same concept as the above applies. You can think of it as first selling the cryptocurrency for JPY and then using that JPY to buy goods and services.
If the market price at the time of purchasing goods and services is higher than the acquisition price, the difference is the profit.
4.4 When you earn staking rewards or lending interests
Earning staking rewards or lending interests also generates profits.
In addition to these, rewards earned from mining or gaming may also be considered profits. There are some complexities in how these are calculated, so please check how the National Tax Agency views these cases （National Tax Agency "Calculation Methods for Income Related to Cryptocurrency (Japanese only)").
We also have a separate article that explains the taxes on STEPN, a transaction type that was extremely popular this year.
|Related article: |
How is STEPN tax calculated? A tax adviser explains how to file a tax return (Japanese only)
In addition, if you receive cryptocurrency for free as a gift or through inheritance, you also need to report it as it is subject to gift tax or inheritance tax respectively.
The cryptocurrency industry is undergoing huge changes. New services are being introduced one after another and many of them don’t fit into the existing frameworks and cannot be handled by the conventional calculation methods. This is exactly what makes cryptocurrencies valuable assets, and as the relevant laws and regulations come into place for cryptocurrencies it is important to stay tuned and understand when and how they are taxed.
5. Let’s calculate Profit and Loss (PNL) for cryptocurrency trading!
Now you know you need to file a tax return for cryptocurrency trading and you also know when cryptocurrency trading generates profits. It is time for you to figure out if your profits from cryptocurrency trading exceed 200,000 JPY or not.
First, we will explain the basic knowledge about cryptocurrency PNL calculation that you need to be aware of.
5.1 Two methods of calculation: “Average Cost” and “Periodic Average Cost”
There are two methods for calculating cryptocurrency profits: the “Average Cost” and the “Periodic Average Cost”, and you must select one of them when filing your tax return. Note that there is a rule that once a calculation method is selected, you must stick to the same for the following years.
In the Average Cost, each time you buy cryptocurrency the acquisition price is re-calculated as the weighted average price for the open position. Because cryptocurrencies have large price fluctuations, this is the recommended calculation method. However, this method requires considerable effort as the calculation needs to be performed each time you buy cryptocurrency.
In the Periodic Average Cost, the acquisition price is the weighted average purchase price for the entire year. It simplifies the calculation for those with a large number of transactions, but the more the price fluctuates, the more the calculated acquisition price deviates from the actual acquisition price.
Both methods have their pros and cons, but you need to choose the calculation method that suits you best. There is a separate procedure for changing the calculation method, but if you don’t submit anything, by default, the Periodic Average Cost is applied for income tax and the Average Cost for corporate tax.
|Related article: |
PNL calculation and tax return filing for cryptocurrency: Average Cost vs. Periodic Average Cost (Japanese only)
5.2 Losses from cryptocurrency trading cannot be offset against other income or future income
Losses from cryptocurrency trading, which are classified as miscellaneous income, cannot be offset against other income. It cannot be carried forward to offset future income either.
Depending on the market situation, it may be difficult to continuously make profits year after year. Therefore, it is important to have the know-how on how best to handle losses in terms of tax.
6. "Profit calculation for cryptocurrency" made easy
Choosing the method that suits you between the two calculation methods and actually calculating the profit based on your transaction history is a painstaking task. Many of you may feel that you lack the expertise to do it by yourself.
The National Tax Agency has prepared a form for calculating the pnl for cryptocurrency trading, but you may still feel uneasy about personally calculating something that you need to file as miscellaneous income in your tax return.
* Source: National Tax Agency "Information about Taxes for Cryptocurrency and Income Calculation Form (Japanese only)"
If you are one of these people, then we recommend using "cryptact", a PNL calculation tool for cryptocurrencies. With cryptact, you simply upload your transaction histories downloaded from your exchanges, and the PNL calculation is done automatically. You can also easily choose between the Average Cost and the Periodic Average Cost.
Advantages of using cryptact