Japanese individual income tax treatment for cryptocurrency
Hi, I am tax accountant Orito.
The price of bitcoin surged since the start of 2021. A lot of people may have started to think of investing the cryptocurrency. But you may not understand the tax treatment for the cryptocurrency. Preparing for the tax return filing at the year end, I will explain the income tax treatment for cryptocurrency in Japan.
Miscellaneous income
Japanese income tax has 10 categories. Among them, income from trading cryptocurrency is categorized in “Miscellaneous income”. “Miscellaneous income” is defined as income other than 9 other categories like “salary” or “business income”.
Basically, employment income earner who applied year-end tax adjustment in the company does not need tax return filing. If the employee earn income other than salary over 200,000 JPY, tax return filing is necessary. An employee who run side business or has big profit from cryptocurrency has to be careful for the threshold.
Aggregate taxation
Income from trading the cryptocurrency is subject to aggregate taxation. The income amount from the trading is added up to the other salary or business income. If you earn 5 million JPY from salary and 5 million JPY from trading, taxable income amount for the tax is total 10 million JPY.
On the other hand, equity or FX transactions are subject to separate taxation.
Prohibit for aggregation of profit and loss
As mentioned above, taxable income for the cryptocurrency is added up to other income. But in the case the loss occurred from the cryptocurrency transaction, offsetting its loss from the profit from other income is prohibited.
There could be the way of aggregation, if your trade as main business and apply the income as “business income” not “other income”. However, that treatment would not be accepted for full time employee.
Progressive taxation
Progressive taxation is applied for income from cryptocurrency. The bigger the income, the higher the taxation rate for the income. As mentioned above, taxable income is aggregation amount of cryptocurrency and other income. In case the full-time employee earns higher salary, the higher rate will be applied for the income from the cryptocurrency. This treatment has disadvantage from the investment for the stock. The income from stock is calculated separately from other income and tax rate is constant (20%).
Since the cryptocurrency does not have long history, the regulation and the system are not matured as stock. If you trade the cryptocurrency through the exchange company, the company does not withdraw the tax amount on behalf of you. The individual investor has to calculate the income tax amount and apply the tax return for the tax authority.
If you miss the application, the penalty will be imposed in addition to the tax. If the trading profit will be over 200,000 JPY, you should be careful not to miss the tax filing.
No carry forward of the loss
The certain loss occurred from the listed stock or FX transaction can carry forward and offset the profit amount in the next year. However, that favorable carry forward treatment is not permitted for the transaction of cryptocurrency.
Calculation of income
Below is the formula to calculate the profit (income)
Income = Transfer amount – Cost
Income calculation is the difference between the amount sold and the amount bought. If you buy 1 item at 100 and sell 200, profit is 100. It is quite simple when you trade 1 time. In the case with several transactions, the calculation is going to be more complicated. For example, you buy 1 item at 100 and buy again one item at 120. In that case, each cost shall be calculated by average cost and will be 110.
You must calculate the cost of the cryptocurrency corresponds to the amount sold within the year. If you look more closely, you can choose two calculation method for the average cost, (1) Total average method and (2) Moving average method.
“Total average method” is easier way for calculation. But you need all of the transaction among the year to fix the cost and profit. If you recognize the profit amount exceed 200,000 JPY after the end of December, you have no way to avoid paying income tax.
“Moving average method” is more complicated way than “Total average method”. But you can fix the profit amount at the timing of each transactions. Which means you can control the profit amount not to exceed 200,000 JPY within the year and pass the tax return filing.
Two methods are available if you apply to the tax authority. If you do not apply, “Total average method” is automatically chosen. Once you chose the calculation method, you cannot change the method after three years.
Summary
-Profit of cryptocurrency is treated as “other income”
-Calculated as aggregated income and no carry forward of the loss
-Threshold of the tax return for corporate worker is profit over 200,000 JPY
-Missing the tax return leads to the penalty
-Calculation with “Total average method” or “Moving average method” is required
