Back in March 2018, I presented an overview of the regulations on cryptocurrency in Japan, mainly focusing on crypto exchanges in my previous article, Cryptocurrency in Japan. This update includes recent developments and covers taxation and succession for individual investors.
From currencies to assets
Cryptocurrencies such as Bitcoin have been called ‘virtual currencies (kaso tsuka)’ under the relevant law[1] in Japan. However, it was renamed ‘crypto assets (ango shisan)’ by revising the law that came into force in May 2020. This revision mainly made the regulations on crypto exchanges stricter to protect investors further.
Cryptocurrency emerged as an alternative to the fiat currency system (i.e., JPY, USD, EUR…). In fact, some businesses accept Bitcoin and other cryptocurrencies as means of payment. For example, an electronics retailer, Bic Camera, accepts payments by Bitcoin.
However, cryptocurrency hasn’t become popular as a means of payment. The value of Bitcoin and other cryptocurrencies fluctuates a lot. Instead, due to its volatility, it has become popular as the subject of speculative transactions. This is why the terminology in the law was changed from currencies to assets.
Legal status
Cryptocurrencies are legal in Japan. They are defined under the name of ‘crypto assets’ under the law[2], which have the following characteristics.
• It can be used as a means of payment in transactions with unspecified persons and can be exchanged with fiat currencies (e.g., Japanese Yen, United States Dollars).
• It is electronically recorded and can be transferred.
• It is not a fiat currency or a fiat currency-denominated asset (e.g., pre-paid card).
Bitcoin, Ethereum, and other major cryptocurrencies fall within this definition. Although the naming was changed from currencies to assets, there is no material change in its legal status before and after the change.
Taxation for individuals
As long as you keep cryptocurrencies as it is, no matter how much their value increases, no tax is accrued. A tax is accrued only when any profit has become permanent by selling, exchanging, or using it.
For instance, if you bought BTC1 for JPY1 million and sold BTC1 for JPY3 million, a profit of JPY2 million has become permanent. Or, if you purchased BTC0.1 for JPY100,000 and purchased a MacBook, which is sold for JPY110,000, for BTC0.1, a profit for JPY10,000 has become permanent. This applies to transactions outside of Japan (e.g., at a foreign crypto exchange), as long as you are a tax resident in Japan.
If an income tax is accrued on the profit made by cryptocurrencies, it is categorized as miscellaneous income and becomes part of aggregate income in the tax year. Then a certain percentage under the Japanese progressive taxation, ranging from 5% to 45% depending on the amount of income in the tax year, will apply to the aggregated income. Resident tax is also calculated on the aggregated income.
However, there are several exceptions. For instance, if you are a salaried employee and the profit made by cryptocurrencies is JPY200,000 or less in a tax year, no income tax will be accrued. Taxation can be changed according to the taxpayer’s circumstances. If you are worried about it, you’d better seek advice from a tax office or a tax accountant.
Succession
Although no clear rule is established in this field yet, crypto assets will be treated the same as traditional assets (e.g., cash, real estate) when it comes to succession. Crypto assets will consist of part of the inheritance to be succeeded. Then, inheritance tax can be imposed according to the value of the inheritance.[3]
However, their volatility could cause a problem for successors. Inheritance tax is calculated based on the value of the estate of a deceased on the date of his or her death. Even if the value of, say, Bitcoin owned by the deceased dropped sharply after his or her death, successors would have to pay inheritance tax calculated based on the value of Bitcoin before the crash.
Proposals for reform
The regulations on cryptocurrencies are under development. For instance, domestic crypto-related organizations request the authority to improve the taxation by applying separate self-assessment taxation rather than a tax on aggregate income.
It might be advisable to keep crypto-assets until the current system has further developed.
Note:
[1] Payment Services Act (Act No. 59 of 2009) (‘the Act’)
[2] Article 2(5) of the Act
[3] JPY30 million + (JPY6 million*the numbers of successors) or less are subject to the basic deduction.
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Disclaimer: While every effort has been made to ensure that the information on this article is accurate at the time of posting, it is not intended to provide legal advice as individual situations will differ. If you do require advice or wish to find out more about the information provided and related topics, please contact the author.
Text by: Atty. Atsushi Miyake of Miyake Law, June 2021.
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