Updated Cryptocurrency Tax Guide

[kristhuy]

The latest NTA guidelines regarding the taxation of cryptocurrency can be downloaded here. In this post I will try to extract the key points from those guidelines and summarize them. As always, this information is for entertainment and discussion purposes only. There is no substitute for professional advice.

Significant changes since 2017​

1. In line with changes to how Japanese crypto exchanges are regulated, the NTA has started using the term "暗号資産" (cryptographic assets) instead of "仮想通貨" (virtual currency). This change in terminology does not have any obvious tax consequences.
2. As of April 1, 2019, gifted cryptocurrency is treated as if it were sold at market price.
   • Previously, it was assumed that (like many other types of assets) the recipient of the gift acquired the donor's purchase price (and thus the donor's tax liability on any gains).
   • Now the donor will pay tax on all gains occurring prior to the transfer, and the recipient will only pay tax on any subsequent gains.
3. The NTA has changed the default acquisition-price calculation method from moving-average to total-average.
   • When a taxpayer acquires a particular type of cryptocurrency for the first time, and they intend to use the moving-average method to account for their gains, they have until the relevant tax return filing deadline (usually March 15 of the following year) to notify the NTA of their intentions.
   • If the taxpayer does not notify the NTA of their intention to use the moving-average method, they will be deemed to have selected the total-average method. This determination is made on a per-cryptocurrency basis (so even if you have notified the NTA with respect to BTC, you must notify them separately with respect to ETH, etc.).
   • Once an accounting method has been selected with respect to a particular cryptocurrency, it is possible to ask the NTA for permission to change methods, but the NTA will generally refuse such requests if the taxpayer has been using the relevant method for less than three years, or if the taxpayer's trading history would make implementing the change unusually complicated.
   • This system took effect from April 1, 2019, so if you purchased/held cryptocurrency during 2019, and you did not notify the NTA of your intention to use the moving-average method by April 16, 2020 (the deadline for filing 2019 tax returns), you were deemed to have selected the total-average method with respect to those currencies. For gains realized prior to 2019, however, the moving-average method is/was appropriate.
   • The NTA has said that they changed the default accounting method because the moving-average method was too complicated for many taxpayers to understand and implement (even though it is a more accurate method in terms of capturing a taxpayer's real gains and losses).
4. The NTA has instructed all licensed Japanese cryptocurrency exchanges to prepare an annual transaction report ("年間取引報告書") for each active account-holder. These reports should enable account-holders to easily calculate their annual taxable gains using the total-average method.

Basic principles of cryptocurrency taxation​

• The following transactions are taxable events that give rise to taxable gains/losses:
  • Exchange of cryptocurrency for JPY or other fiat currency.
  • Exchange of cryptocurrency for another type of cryptocurrency.
  • Exchange of cryptocurrency for goods/services.
  • Receipt of cryptocurrency due to mining.
  • Gift of cryptocurrency to another person (after April 1, 2019).
• The following types of transactions are not taxable events:
  • Transferring cryptocurrency between wallets that are owned/controlled by the same person, including to and from cryptocurrency exchanges.
  • Transferring JPY or other fiat currency to or from a cryptocurrency exchange.
  • Receipt of cryptocurrency due to a blockchain fork.
  • Receipt of cryptocurrency due to a gift or inheritance (though gift or inheritance tax may apply).
• Tax-deductible expenses associated with crypto trading include:
  • The purchase price of the relevant cryptocurrency (determined using either the total-average method or the moving-average method—see above).
  • Commissions/trading fees.
  • Internet usage fees, cellphone usage fees, devices, office equipment, etc., that were used to conduct the trades, providing that the amount of usage associated with crypto trading can be clearly distinguished from personal usage (e.g., via usage logs).
  • Interest/fees paid on borrowed funds that were used to trade with.
• Tax-deductible expenses associated with crypto mining include:
  • The cost (either upfront or amortized) of equipment used for mining (or a share of the cost where the equipment was also used for non-mining activities and the amount of usage associated within mining can be clearly distinguished); and
  • The electricity consumed by mining, to the extent it can be quantified.
• Declaring taxable gains
  • If a taxpayer is not otherwise required to file an income tax return (e.g., because they are an employee whose employer will do a year-end adjustment for them), and their annual realized crypto gains are less than 200k yen, they may be entitled to avoid paying income tax on their gains by not filing an income tax return. Such people should declare the gains by filing a residence tax return instead.
  • Crypto gains should normally be declared on an income tax return as "miscellaneous income" (雑所得). However, crypto gains may be eligible to be declared as "business income" if cryptocurrency trading/mining is effectively the taxpayer's full-time job or if the crypto transactions were incidental to a business's main activities.
  • Miscellaneous losses (such as crypto trading losses) cannot be used to reduce the tax payable on a taxpayer's other income (e.g., salary income).

Sample profit calculations​

• Assume the following transactions:
  • Start the year holding 5 BTC having a per-unit acquisition price of 700.
  • Sell 2 BTC for a unit price of 800.
  • Buy 1 BTC for a unit price of 850.
  • Sell 3 BTC for a unit price of 900.
  • Buy 1 BTC for a unit price of 950.

Total-average method​

• First calculate the average acquisition price:
  
  (700 x 5 + 850 + 950) ÷ 7 = ~757.14
• Then calculate the average sale price:
  
  (800 x 2 + 900 x 3) ÷ 5 = 860
• Finally, calculate the annual profit:
  
  (860 - 757.14) x 5 = ~514.3 (minus trading fees and other expenses)
• The 2 BTC carried forward into the next year would have a per-unit acquisition price of ~757.14.

Moving-average method​

• The profit generated by the first sale is:
  
  (800 - 700) x 2 = 200
• The profit generated by the second sale is:
  
  {900 - [(700 x 3 + 850) ÷ 4]} x 3 = 487.5
• So the annual profit would be:
  
  200 + 487.5 = 687.5 (minus trading fees and other expenses)
• The 2 BTC carried forward into the next year would have a per-unit acquisition price of 843.75.

 

[chimakwa]

@kristhuy Thank you so much for this post! That's exaclty what I was looking for.

 

[justin55]

@kristhuy Thanks for the post!

Just wondering about the gift tax.." Now the donor will pay tax on all gains occurring prior to the transfer, and the recipient will only pay tax on any subsequent gains. "

How does the recipient of the gift calculate the cost basis of the gift?

For example, I give a gift of 1BTC. 1 BTC is worth 100,000yen at the time of the gift.

Is the cost basis for the recipient 100,000yen? Or is the cost basis 0yen (because they received it for free?)

Let's say that 1 BTC goes to 250,000yen. Is the profit for the recipient 150,000yen? Or is their profit on the gift the full 250,000yen?

Thanks so much to anyone that can point me in the right direction. I've tried finding this detail, but it's not easy.

 

[kristhuy]

@justin55

How does the recipient of the gift calculate the cost basis of the gift?

Market price (in JPY) at the time they received the gift. So in your example, the cost basis for the recipient is 100k yen, and the taxable profit is 150k yen.

 

[iamsuperb]

@kristhuy Thank you for this overview.

I'd also like to recommend Cryptact for keeping a handle on your taxable transactions:

https://grid.cryptact.com/

 

[msmistk0]

@iamsuperb

https://grid.cryptact.com/

Does this support DeFi protocols like Compound, Maker, etc...?

 

[iamsuperb]

@msmistk0 According to their own documentation:

https://support.cryptact.com/hc/en-us/articles/360000039571-A-list-of-Supported-Exchanges

DeFi reporting standards are still pretty primitive compared to that of present CeFi exchanges.

 

[msmistk0]

@iamsuperb I just cannot believe there is not an accounting product that can do this in Japan. I am very close to starting a company to build it. I tried a few other ones, but they all have some issues.

 

[iamsuperb]

@msmistk0 If you possess the wherewithal to engage in a project of that nature, you'd probably do pretty well for yourself.

It's becoming an increasingly necessary service.

Especially one that is bilingual in nature.

Good luck to you if you choose to pursue it.

 

[jva]

@kristhuy If my overall realized gains with crypto trading are negative, should I still report overall losses? To try to answer that question, I just went to my city office in Koto ku (Tokyo). The tax officer told me that in case of negative overall gains, I don't have to do any tax report. Is this correct?

 

[resjudicata]

@jva Did the tax officer tell you that, really?

 

[jva]

@resjudicata Yes, this is what I wrote

 

[resjudicata]

@jva I assume that if an official gives you that answer he can be trusted.
I have the very same question as in how much loss can be deduced from gains and what if losses over the year were outweighing the gains?
I try to get in touch with the NTA on Monday and if I learn something new keep you posted.

 

[lifeabundant]

@resjudicata Since it will be my first year reporting I'm lurking to see others general information as well. Any update on your case dear Rob san? :x

 

[resjudicata]

@lifeabundant Not yet, keeping you posted

 

[rubberrodent]

@resjudicata Update please

 

[justin55]

@kristhuy @kristhuy Thanks a lot.. Appreciate it!

Maybe you can help also clarify for me.. I'm using Koinly to input my data. But they don't have 'Total Average Method' or 'Moving Average Method' in the application. They have FIFO, LIFO, HIFO, and one called 'Average Cost Basis'.

According to Koinly:

"Capital gains using ACB

Average Cost Basis (ACB) is the simplest of all accounting methods. You simply calculate the average price for your holdings in a coin and use that as the cost-basis. The cost-basis for John's two sell transactions can be calculated like this:

• Transaction #3: Sell 0.5 BTC. John has 0.75 BTC and bought it for a total of 600 USD. The average cost for 1 BTC is: 600 / 0.75 = 800 USD
  
  . So, the cost-basis for 0.5 BTC is: 800 x 0.5 = 400 USD
  
  .
• Transaction #4: Sell 0.25 BTC. At this point John only has 0.25 BTC left and bought it for: 600 (total cost) - 400 (already sold) = 200 USD
  
  . However, this sale also had a $10 fee so the actual cost-basis is $210.

Now that we have the cost-basis for all transactions, the capital gains can be easily calculated:

• Capital gains for txn #3: 200 (selling price) - 400 (cost-basis) = -200 USD
• Capital gains for txn #4: 400 - 210 = +190 USD

The final capital gains using ACB are -10 USD which means John made a loss of $10."

I'm finding it difficult to tell if this is the same as the Total Average Method? Or if it's not, do you have any suggestions?

 

[kristhuy]

@justin55

I'm finding it difficult to tell if this is the same as the Total Average Method?

That's understandable, because it's impossible to tell from the example on the page you're quoting whether Koinly is implementing the total-average method properly.

The description they give is broadly compatible with the total-average method, but the key with total-average is that it is the buy/sell prices over one calendar year that must be averaged (so a buy transaction in December determines the taxable profit on a sell transaction in the previous January, for example). The example Koinly is using doesn't include any buy transactions after the sell transactions, so they haven't provided enough information to know whether their "ACB" method is equivalent to total-average.

However, Koinly expressly claim to be compatible with the NTA's rules, so I'm guessing that if you select Japan as your country of residence, Koinly will probably implement the total-average method properly. Then again, on their Japanese homepage, they claim that cryptocurrency received due to a blockchain fork is taxable, which is contrary to the NTA's rules. So I wouldn't be entirely confident that they are doing their profit/loss calculations correctly either. If you have a complex trading history, it may be worth running a test by inputting a simple series of fake transactions first and checking that Koinly is doing the calculations properly.

 

[justin55]

@kristhuy Thank you r/starkimpossibility

I'm really new to understanding all this, and it doesn't help when the information I have doesn't even answer the question! I will experiment a bit and see if I can make sense of it. And yeh., I noticed some inconsistencies with what Koinly are claiming are NTA rules.. It's a good application but it's definitely not specifically made for Japan. I hope there will be an easy way to adjust things so it can give me accurate data.

 

[dkette1957]

@kristhuy How is cryptocurrency treated during the exit tax process that is triggered when leaving Japan?