Updated Cryptocurrency Tax Guide

[kristhuy]

@dkette1957 Afaik the NTA has never published an explicit answer to this question, but consensus among tax accountants seems to be that cryptocurrency is not a "security" in the context of the exit tax and thus can safely be ignored (just like holdings of JPY and other fiat currencies). See here, here, and here, for example.

 

[godoy3774]

@kristhuy Hi @kristhuy, wondering if you can shed some light on tax on crypto when tax residency changes.

Let's say I bought 1 BTC on an Australian exchange many years ago, while I was an Australian resident for tax purposes.

After that I moved to Japan and became a tax resident of Japan, but not Australia. During this time, I transfer this BTC to a Japan exchange, and sell it making a gain in yen.

When calculating the taxable gain do I take the base cost to be the original purchase price (made when I was not a Japanese resident for tax purposes), or the market value of the BTC at the time I became a Japanese resident for tax purposes? If the latter, what date do I use exactly (is the 1st Jan of that year sufficient)?

 

[kristhuy]

@godoy3774 The simple answer, from everything I've seen, is that your cost basis is the original purchase price in JPY. But the interesting aspect to this question is the fact that Australia has an exit tax for CGT on some types of assets.

Did you (or were you required to) pay Australian capital gains tax on the crypto when you left Australia? If you didn't, then I think it's fairly clear that your cost basis for Japanese tax purposes is the original purchase price. But if you did pay Australian CGT on unrealized gains, then you may want to look into the possibility of claiming a foreign tax credit in Japan with respect to that Australian CGT.

 

[godoy3774]

@kristhuy I was not aware I had to pay an exit tax on unrealized gains for crypto, so I did not include it in my Australian tax return at the time.

Which is why I think I will now need to calculate the gains based on my original purchase price (converted to JPY), as you said. I'm fine with that, just don't want Australia to ask me to pay the exit tax later on, which would mean I would be double taxed on a portion of the gains.

In your experience, did you find the foreign tax credit a lot less than the actual tax paid to the foreign country? The one for mine last year on dividends/interest certainly was.

 

[kristhuy]

@godoy3774

just don't want Australia to ask me to pay the exit tax later on, which would mean I would be double taxed on a portion of the gains.

Understandable. This may be something that you want to check directly with the ATO or an Australian accountant, because as far as I can tell cryptocurrency is subject to Australia's exit tax. Also, apparently if departing residents fail to declare their unrealized gains, the relevant assets remain taxable under Australian law and subsequent gains must be declared to the ATO if the asset is sold while the owner is outside Australia (in other words, you would be taxed by both Australia and Japan on the gains).

did you find the foreign tax credit a lot less than the actual tax paid to the foreign country?

Yes, this will be the case when the total percentage of tax payable on your Japanese income is lower than the total percentage of tax you paid on your foreign income. In practice, this is common because foreign tax is often withheld at high rates (e.g., 10% on US dividends) while the percentage of tax payable on an average Japanese income is quite low (much less than 10%). However, it is possible to carry forward foreign tax credits for up to three years, so if you have one year where you pay a particularly high amount of foreign tax, you may be able to spread out the credits over multiple years.

 

[debthom]

@kristhuy Hi, first of all thank you for this post and discussion. It has been very useful to read. I've got a question about two of the sections on the e-tax form regarding defi activity - how would/did you fill out these questions:

所得の生ずる場所又は法人番号（全角28文字以内）（ビル名等省略可）

報酬などの支払者の氏名・名称（全角28文字以内）

I'd be really grateful for any suggestions. I've had activity on many DAO's with Anon devs and no central address. Can I just put Yearn Finance - 'address unknown' 支払者 unknown?

 

[shawnwesterberg]

@debthom Same here.
I traded on different exchanges and not sure what to enter here. Some people suggest to just write "Online Business" or the name of the exchanges but not sure if that is the right way and space seems limited.

 

[heavenswarrior]

@shawnwesterberg I’m just a hodler but I have seen the steps you need to go through in cefi/Defi. How is it tracked by the govt or the trader? Bot trading, wallet transfers, staking, liquid staking, airdrops, multiple wallets, small time transactions, big transactions, fees … the collection of data seems insurmountable on all sides.
Realistically, how is it all accounted for?

 

[resjudicata]

@kristhuy For mining, some pools keep custody of your share of mining profits until you choose to transfer than to an actual virtual currency address (wallet) of yours.

Based on the NTA document:

いわゆる「マイニング」（採掘）により暗号資産を取得した場合、その取得した暗号資産の取

I read this as until I have the asset, there is no income to be taxed.

 

[resjudicata]

@kristhuy Another potential mining-related thought, if we want to deduct the cost of electricity and a mining GPU, say up front, we have 1 year to try to make it up on the income side.

So the calculation, where X = days mining, is $700 (GPU cost) + $.28 * 200/1000 * 24 (electricity) * x = $5.14 * x (or whatever the daily income is). This has a solution at current prices of 184 days.

 

[joebear24]

@kristhuy Thanks for the post. I'm very new to this and and was wondering how to determine the value for tax purposes of crypto assets received as reward for mining (mining rewards dispensed by mining pools).

 

[kristhuy]

@joebear24 The "income" is the market JPY value of the cryptocurrency when you acquire it (i.e., when it is transferred from the pool to a wallet that you control). If you later exchange that cryptocurrency when its market value is even higher, you will have a further taxable gain (or if you sell it at a loss, you will have a tax-deductible loss). As discussed in the OP, you can also deduct electricity and equipment costs from your taxable income.

 

[jariel]

@kristhuy Amazing info as always!

Now I’ve just gotta figure out how the US views the sell of crypto in Japan and the taxes paid on it. I’ve heard stories of double taxation getting near 50% between the US and Japan.

 

[kristhuy]

@jariel

I’ve just gotta figure out how the US views the sell of crypto in Japan

I'm fairly sure your Japanese residency is irrelevant to the IRS for the purposes of capital gains taxation (i.e., you declare the crypto gains in the same way that you would declare them if you lived in the US). However, you may be able to claim a foreign tax credit with respect to the Japanese tax you pay on the gains, since the US-Japan Tax Treaty contains a re-sourcing rule.

 

[dkette1957]

@kristhuy Japan treats the sale as miscellaneous income though correct? If you have been taxed (for whatever reason) at a rate higher than what you would be taxed in the USA, then the IRS will waive your taxation via the foreign tax credit. Is that the general idea?

In other words the classification of the tax (capital gains vs miscellaneous) does not matter but the tax rate does. Yes?

 

[kristhuy]

@dkette1957

the IRS will waive your taxation via the foreign tax credit.

It's a credit rather than a waiver, and there are some limits on it, but yes, that's the general idea.

the classification of the tax (capital gains vs miscellaneous) does not matter but the tax rate does. Yes?

The classification doesn't matter at all. Though it's more correct to say that it's the amount of tax paid that matters (for foreign tax credit purposes), rather than the tax rate.

 

[ltodesign]

@kristhuy This makes sense if you only have a few transactions, but my situation is a bit more complicated, so I'm wondering if someone might be able to point me in the right direction.

Basically, it goes like this:

• I transfer JPY to BitFlyer
• I purchase 1ETH
• I transfer 1ETH to another exchange
• Trading bot makes thousands of trades (between many different crypto assets), and that 1ETH grows to 5ETH
• I transfer 2ETH back to BitFlyer and convert it to JPY

Edit: I'm not even sure which questions are the right ones to ask, but I'll start with a few things using the example above:

• I assume the 2ETH transferred back to BitFlyer would be reported as miscellaneous income. Minus the initial investment?
• Obviously the remaining 3ETH balance in other exchange would need to be reported. But how? Also as miscellaneous income?
• Because the ETH is "grown" using thousands of trades, surely it's unreasonable to be expected to know the exchange rates for each asset at the time of the transaction. The trade logs show the rates for each pair (ex: XRP/BTC) but not the JPY value of each at that specific point in time.

 

[kristhuy]

@ltodesign

Trading bot makes thousands of trades

Surely you have a log of what the bot is doing, though, right? Making trades without keeping a record of them is a type of tax fraud. Even if you're using a bot, you need to log your trades properly so that you can accurately calculate your tax liability.

 

[ltodesign]

@kristhuy Yes, I can download transaction reports from the exchanges, but there are literally tens of thousands of transactions since the beginning of the year. It will easily exceed 100,000 by years end. The number of crypto assets is also very high, around 100+.

 

[kristhuy]

@ltodesign Well it sounds like doing the calculations manually isn't going to be practical. You would likely need to write some code to do the calculations for you, or else feed the data into a commercial service that will run the calculations for you.