Maximum Tax Rate 55%! The Day is Nearing for a Change for this Too High Tax System for Cryptos!?
The tax rate on crypto assets is up to 55%, and if losses occur, they cannot be netted against gains nor carried forward to the next year. Tax is also imposed on crypto asset settlements at the cash register, making the system inconvenient for users. Compared to equity investments and FX, the burden on investors is higher, which is also a factor that hinders the expansion of the market.
However, from here at the Japan Restoration Society, Mr. Fujimaki has advocated tax reform for crypto assets towards the government. In this article, I will talk about the purpose and the difference between the tax systems for traditional investments and current crypto tax system.
- Excessive Crypto Assets Stunt Growth | Fujimaki’s Complaint
- The purpose of the cryptocurrency tax system reform from Representative Fujimaki
- Comparison with the current crypto asset tax system
Excessive Crypto Assets Stunt Growth | Fujimaki’s Complaint
【Source from official Twitter】
Ken Fujimaki, a member of the Japan Restoration Society, is a politician working as an economic critic and a member of the House of Councilors. On March 22, 2019, Mr. Fujimaki suggested that “crypto assets and blockchain are greatly hampered by the current tax system.” The starting point is that the Financial Supervisory Authority was asked to explain the crypto asset related bill.
Crypto assets typified by cryptocurrency and the blockchain industry are closely related to the “Fintech” field, which has recently become a hot topic. The development of this field is hampered, and the overall competitiveness of FinTech cannot be fostered. Fujimaki has made a request to the FSA and is trying to fundamentally change the tax system for crypto assets.
(Reference: https://coinpost.jp/coinpost, 2019/3/23, Fujimaki, requests tax authority for the FSA virtual currency related bill)
The purpose of the cryptocurrency tax system reform from Representative Fujimaki
The following four points are proposed for the reform of the crypto asset tax system, which Mr. Fujimaki notified the FSA on:
Reduce the maximum tax rate from 55% to 20% (a separate taxation)
Enable the loss carryforward deduction
Do not impose tax on trading between crypto assets
Do not tax small sum payments
Among these, the most noticeable point is the change in the maximum tax rate. Today’s crypto assets are subject to taxes of up to 55%, including income tax and residence tax, if the investment or payment results in a profit. Of course, the tax rate varies depending on the amount of income, but because tax is too high compared to stock investments and FX, investors can only hesitate when investing.
In the next item, while introducing the purpose of the proposal from Representative Fujimaki, I will inform you about the difference with the present crypto asset tax system.
Revision of the 55% maximum tax rate | To 20% by separate taxation
In general, income tax, such as salary, the more you earn the more you pay in taxes. The maximum tax rate is 45%, and when combined with 10% of the residence tax, those with high income need to pay more than half of their income. The tax system for crypto assets is the same as the income tax calculation for salaries.
Taxable income, income tax rate, and tax amount are as follows:
1,950,000 Yen or less 5% 0 Yen
More than 1,950,000 Yen, less than 3,300,000 Yen 10% 97,500 Yen
More than 3,300,000 Yen, less than 6,950,000 Yen 20% 427,500 Yen
More than 6.95 million Yen, less than 9 million Yen 23% 636,000 Yen
Over 9 million Yen, under 18 million Yen 33% 1,536,000 Yen
Over 18 million Yen, under 40 million Yen 40% 2,796,000 Yen
Over 40 million Yen 45% 4,796,000 Yen
(※ as of March 27, 2019)
For example, suppose you buy Bitcoin for investment purposes. Then, due to a large rise in price, when you sell it, you get a profit of 20 million Yen. However, the profit does not necessarily remain in the hands of investors.
When applied to the above table, the income tax rate is 40% if the profit is 20 million Yen. In addition, 10% of the resident tax will be added, and a total of 50%, half of the profit, will need to be relegated to the country as a tax.
The tax system of cryptocurrency is set much higher than common investments such as with stocks, FX, and mutual funds. Equity investments have a total tax of 20.315%, comprised of “gain on sale (15%),” “dividends tax (5%),” and “restoration special tax (0.315%).”
This tax is called “separate taxation” (capitals gains tax in the U.S.) because it is taxed separately from income such as from salaries (crypto assets are taxed as “miscellaneous income” and are combined with salaries). In addition, the 20.315% tax for stock investments are uniform no matter how much the profit.
Enable the loss carryforward deduction to carryover to the following year
The loss carryforward deduction is a deduction that offsets the amount of income by carrying over losses to the next year if there are more losses than profit generated in one year. The current crypto asset tax law does not allow this loss carryforward deduction. Therefore, even if a large loss was recorded this year, if a crypto profit is generated the following year, a tax will be incurred on the entire profit. In the case of equity investments and FX, carryforward deductions corresponding to the amount of loss are netted with this profit with the amount of tax paid being reduced with the prior year loss carryforward.
A system where small-amount settlements are free from tax to expand the market size
Crypto assets were originally developed for settlement, not investment. Already, some home appliance stores and supermarkets are compatible with Bitcoin payments. However, tax payments follow when making settlements with crypto assets, which is one of the reasons why the tax system is less convenient and burdensome.
In the future, there will be more cases of paying for daily necessities with crypto assets. It will be necessary to further expand the cashless society by making it tax-free for small-scale crypto asset settlements.
Comparison with the current crypto asset tax system
The current tax system for crypto assets is extremely inconvenient for users, with a maximum tax rate of 55%, where losses cannot be carried forward to the next year, and crypto asset settlements (payment at cash register) are taxed.
However, as in the case of Mitsubishi UFJ Bank (UFJ Coin) and JP Morgan (JPM Coin), in the future there will be more cases in which cryptocurrencies are issued mainly by large companies, and the wave of digital settlement will further increase. Therefore, it is necessary to reform the current inconvenient tax system and to create an environment where users want to spend them. There is no doubt that the whole cryptocurrency market will grow even if the tax system is remodeled.
In the cryptocurrency market last two years ago, the word “Crypto Millionaire” was born. It points to the people who rode the wave and made profits of over 100 million Yen through cryptocurrency investment. However, it should be remembered that about half of their profits are taxed in the country. As long as the current tax system continues, there will be more and more people withholding their investment stagnating the growth of the market.
Japan is considered to be a country that is well-equipped with cryptocurrency legislation. They say there is a high possibility of changing the tax system to make it more advantageous for investors, such as with equity investments and FX. Let’s keep an eye on future government trends.