Are you a Japanese Crypto Investor struggling with crypto taxes? Don’t worry you’re not alone. A majority of crypto investors in Japan struggle with crypto taxes given the complexity of the guidelines governing the taxation of such assets and the inherent complexity of crypto as an asset. Japan is among the strictest nations in the world when it comes to crypto taxes having one of the highest tax rates on crypto transactions which may go up to 55% in some instances.
We realise that navigating crypto taxes can be an intimidating task for most investors, that’s why we have curated a detailed tax guide covering all the aspects of crypto taxation in Japan. In this guide, we will cover everything from crypto gains and income to DeFi and NFT taxes. We will also answer pivotal questions like “How is crypto taxed in Japan?”, “How to file crypto taxes?”, “Can the tax authority track crypto?”, “How to calculate crypto gains and losses?” and more.
So let’s hop in.
How is Crypto Taxed in Japan
The Japanese National Tax Authority views crypto as property and any gains incurred from their sale attract income tax. Moreover, crypto received through airdrops, staking, and mining is also subject to income tax. So if the total gain or income from crypto assets exceeds 2,00,000 JPY in a tax year, you need to report your gains/income to the NTA and pay taxes on them in compliance with the Payment Services Act (PSA) and the Financial Instruments and Exchanges Act (FIEA). You can access the detailed guidelines here.
Any income/gain reported by an individual or business is categorized as “Miscellaneous Income” and the tax rates may go up to 55%, that’s pretty steep because gains from securities are taxed at a flat rate of 20% in Japan.
Japan has a progressive tax on miscellaneous income, ranging from 5% to 45% on profits. Moreover, Japanese taxpayers are obligated to pay an inhabitant tax of 10% on their profits, which includes a prefectural rate of 4% and a municipal rate of 6%. Consequently, the effective crypto tax rate varies between 15% and 55%. For non-permanent residents of Japan, a flat 20% tax applies to all income earned within the country.
How to Calculate Crypto Gains and Losses
Even though there is no capital gains tax in Japan, you still need to calculate the gains incurred from disposing of crypto assets to be able to report them alongside your income and pay taxes on them.
Calculating crypto gains is a pretty straightforward process. All you need to do is to deduct your cost basis from the disposal amount. You can use the following formula to calculate your capital gains:
However, most investors find cost basis intimidating as a concept. The cost basis is simply the amount your pay to acquire a particular asset inclusive of any additional fees paid in the process.
Here’s an example:
Let’s say Toshiro san acquired 1 $ETH for 2,00,000 JPY
And he paid 2,500 JPY in transaction fees in the process.
Then the cost basis would simply be (2,00,000 + 2,500) JPY
Let’s say Toshiro san finally decides to dispose of the #Ethereum(ETH) token for 2,50,000 JPY
In that case,
Capital Gain/Loss = Disposal Amount - Cost Basis = 2,50,000 - 2,02,500 = 47,500 JPY
derstanding of how lost or stolen crypto is treated by the tax authorities.
Crypto Tax Breaks Japan
The way Japan taxes crypto transactions, there’s not much you can do to lower your tax bill. As mentioned earlier, you cannot offset your losses against gains in Japan and beyond there’s barely any way to lower your taxes strategically.
One thing you can consciously decide to do is to dispose of your assets in a low-income year to keep the overall gains under 200,000 JPY, which is the regular income tax exemption limit in Japan. Japan also has an employment income deduction that allows employees from a corporate background to deduct a certain amount from their taxable income. Given below are the income brackets and the deductions allowed in each bracket.
Although it’s not clear whether these deductions are permissible for income from crypto transactions. We suggest seeking guidance from an experienced tax professional to gain clarity on the subject.
Crypto Cost Basis Method Japan
Japan allows two accounting methods, the total average accounting method and the moving average accounting method or the ACB (Average Cost Basis Method).
The total average accounting method is what the investors/traders are supposed to use by default. However, if you choose to use the moving average accounting method, make sure you use it for all your cost-basis calculations to avoid discrepancies in your tax report.
The moving average method also known as the Average Cost Base (ACB) method, assumes the average cost of the assets of the same kind you currently possess as the cost basis for a subsequent disposal. The total average method is quite similar with just one exception, it considers the average cost of all the assets (of a particular kind let’s say ETH) that you’ve bought in a financial year.
In simpler terms, the cost basis might change for every disposal depending upon the disposal. However, when you use the total average accounting method, you have a constant cost basis regardless of time, place, or the sequence of your disposal.
Here’s an example to understand how the Moving average accounting method works:
2022/02/21 - Ishida san bought 1 ETH for 2,00,000 JPY
2022/03/17 - Ishida san bought 3 ETH for 1,90,000 JPY each
2022/05/23 - Ishida san sold 1 ETH for 2,10,000 JPY
2022/06/04 - Ishida san bought 2 ETH for 1,70,000 JPY each
2022/08/27 - Ishisa san sold 1 ETH for 2,40,000 JPY
As evident from the above ledger of transactions, Ishida san made two disposals.
Let’s use the Moving Average Accounting Method to calculate the cost basis for both disposals.
Now, before the first disposal was made, ETH tokens were acquired on two separate occasions. So we have to calculate the average acquisition price:
Average Acquisition Price = (1*2,00,000 + 3*1,90,000)/4 = 1,92,500 JPY
So the cost basis now becomes 1,92,500 JPY for the disposal
Capital Gain on the first disposal = Disposal Amount - Cost Basis = 2,10,000 - 1,92,500 JPY = 17,500 JPY
But now since 1 ETH token is disposed, the total number of ETH tokens in possession goes down to three. And on top of that Ishida san bought 2 more ETH tokens at an average price of 1,70,000 JPY each.
So now the average acquisition price changes.
Value of 3 ETH tokens in possession = 1,92,500 * 3 = 5,77,500 JPY
Value of 2 ETH tokens acquired after 1st disposal = 1,70,000 * 2 = 3,40,000 JPY
Average Acquisition Price = (5,77,500 + 3,40,000)/5 = 9,17,500/5 = 1,83,500 JPY
Now the cost basis changes to 1,83,500 JPY
So, for the second disposal
Capital Gain = Disposal Amount - Cost Basis = 2,40,000 - 1,83,500 = 56,500 JPY
Total Gain from both Disposals = 74,000 JPY
Let’s now consider the same ledger of transactions and use the total average method for calculating the capital gains for both disposals.
Using the total average method is a lot simpler as it considers the average cost of all acquisitions made in a financial year divided by the total number of assets.
So, the average acquisition price = (1*2,00,000 + 3*1,90,000 + 2*1,70,000)/6 = 1,85,000 JPY
Which imputes a cost basis of 1,85,000 JPY
Now for the 1st Disposal
Capital Gain = Disposal Amount - Cost Basis = 2,10,000 - 1,85,000 = 25,000 JPY
And for the 2nd Disposal
Capital Gain = Disposal Amount - Cost Basis = 2,40,000 - 1,85,000 = 55,000 JPY
Total Gain from both disposals = 80,000 JPY
Notice that the capital gain is 6,000 JPY higher when you use the total average accounting method.
Crypto Income Tax Japan
As mentioned earlier, any gains or income from crypto transactions is taxed as miscellaneous income by the NTA. You are viewed to be making miscellaneous income in Japan if you participate in the following transactions:
Disposing of crypto for fiat
Swapping one crypto asset for another
Buying goods or services with crypto
Receiving compensation in crypto
Rewards from mining, staking and liquidity pools
Rewards from DeFi transactions
Converting NFTs to crypto or fiat
Ardops or interest income
Any income or gain incurred from such transactions is to be added and reported in your tax return. The tax rate on such income can go up to 55% depending on the nature of transactions and where you reside in Japan.
Crypto Income Tax Rate
The crypto tax rate in Japan can go up to 45% depending on which tax bracket you fall into. You will also have to pay a local inhabitant tax of 10% on top of the income tax. The following are the income tax rates in Japan:
How to Calculate Crypto Income
Calculating your crypto income is pretty straightforward. You just need to add the gains/income from all transactions. We’ve discussed in the above sections how you can calculate your gains from crypto transactions, any tokens that you’ve received from airdrops, staking, mining, or liquidity pools shall be perceived as income and you must track the fair market value of the tokens on receipt, to later add it to your gains and report your actual taxable income base.
Tax-Free Crypto Transactions
Following are some tax-free crypto transactions in Crypto:
Buying crypto with fiat
Transferring crypto between wallets
Taxed Crypto Transactions
Following are some taxed crypto transactions in Crypto:
Selling crypto for fiat
Swapping crypto
Staking crypto
Mining crypto
Liquidity Mining
Yield Farming
Spending crypto
Receiving crypto as compensation
When to Report Crypto Taxes in Japan
The Japanese tax year runs from January 1st to December 31st, and you can file your taxes between February 16 and March 15 every year.
How to File Crypto Taxes in Japan
There are two ways you can file your tax return in Japan.
Using Paper Forms
Using NTA’s Online Portal
If you wish to file your crypto taxes using paper forms, you should use Form A to declare your employment and miscellaneous income. However, note that if the miscellaneous income from other sources does not exceed 2,00,000 JPY, you’re not eligible to file a tax return.
Here’s a stepwise tutorial on how you can file your crypto taxes using NTA’s online portal:
The first step is to log in on the NTA’s website using your registered credentials. If you’re not registered with the NTA, you can do that here.
Once you’ve done that, navigate the options and go to “Salary” under “Relevant Income”.
From here, go to “Miscellaneous Income”
Once you do this, you will be asked the following question “Do you wish to receive deductions for your home?”. Answer with a Yes/No and move ahead
In this step, you need to enter your e-tax number or connect your account to the My Number Portal Website
Now you need to enter the total miscellaneous income you’ve earned during a tax year and the profit or loss
Now select “Crypto” from the drop-down list to specify the category
Now enter the name of the exchanges you’ve used and their legal addresses
What Records Will the NTA Want
There is no official guidance on crypto record keeping by the NTA. However, it would be prudent to maintain detailed records for all your transactions dating back to at least 3 years to ensure a hassle-free tax filing experience. Following is the list of documents you should maintain:
Date and time of transactions
Nature of transactions and intent of the parties involved
A detailed record of FMV of assets received through staking, mining, airdrops, or as compensation
Wallet addresses that you have private keys to
Details of the type of assets owned
Receipts of purchase and disposals
How to File Crypto Taxes Using Kryptos?
Now that you’re aware of how your crypto transactions are taxed and what forms you need to fill out to complete your tax report, here’s a step-wise breakdown of how Kryptos can make this task easier for you:
Visit Kryptos and sign up using your email or Google/Apple Account
Choose your country, currency, time zone, and accounting method
Import all your transactions from wallets and crypto exchanges
Choose your preferred report and click on generate report option on the left side of your screen and let Kryptos do all the accounting.
Once your Tax report is ready, you can download it in PDF format.