Mr. Fujimaki Raises Questions in the Diet Meeting to Change the Tax System of Cryptocurrencies

Mr. Takefumi Fujimaki, a member of the House of Councilors, asked Prime Minister Shinzo Abe about the crypto assets during a budget committee held with the Parliament in February 2019. I will introduce Mr. Kenji Fujimaki and what he envisions for cryptocurrencies.

About Mr. Kenji Fujimaki

Mr. Fujimaki won the Osaka electoral vote in 2013 and became a representative at the Upper House of Councilors. He will serve his office term until July 2019. As a move supporting cryptocurrencies, he has organized meetings to change the taxation treatment on cryptocurrencies.

About the meeting to change cryptocurrency taxation

It is an organization that seeks for revision of the cryptocurrency asset taxation method so that crypto assets are not infiltrated, growth is not hindered, and safe operation is possible. The changes recommended by the organization are as follows:

1. From general taxation to separate taxation

As of February 2019, profits earned by crypto assets are regarded as miscellaneous income. For that reason, it is subject to comprehensive taxation and is taxed at 55% with the calculation of 45% of income tax + 10% inhabitant tax. This tax rate will not change even for regular company staff or part-time job workers. However, unlike regular paying jobs, profits from crypto assets are unstable year to year.
Therefore, at the meeting to change the cryptocurrency taxation system, they propose that tax profits should be set to 20%, while at the same time taxing crypto profits separately. In the case of total taxation, profits from crypto assets are calculated as aggregated with the same tax rate together with the income earned as a normal company employee or part-time job worker. However, if it is calculated and taxed in a separate category, you can calculate in its own crypto asset category regardless of the income you earn as a normal employee or a part-time job worker. With stocks, mutual funds, FX, etc., it is already taxed at 20% uniformly by separate taxation (as capital gains are taxed separately from normal income).

2. Loss carryforward deduction

Losses on current crypto assets cannot be carried forward to the following year or later. Suppose for example, a person has a loss of 1 million Yen in 2018 and then has a 1 million Yen profit in 2019. With the current tax treatment, the crypto asset loss in 2018 will not be applicable to the person’s tax return in 2018, but in 2019 the person will be taxed for their 1 million Yen profit.
If a carryover deduction ever becomes possible, the loss of 1 million Yen in 2018 and the profit of 1 million yen in 2019 can be offset. Therefore, it would not be necessary to pay taxes in 2018 and 2019. The loss carryforward deduction is possible with stocks, mutual funds and FX.

3. Tax exemption for trading between crypto assets

Among what is considered a taxable event with crypto assets, simply trading a crypto asset for another crypto asset is regarded as such. For example, suppose you buy 1 Bitcoin when 1 BTC = 500,000 Yen, and you trade this Bitcoin on an exchange for Ethereum when the price of 1 BTC = 600,000 Yen. The difference of 100,000 Yen is considered profit.
The problem here is that we have not actually acquired Japanese Yen. You can get Japanese Yen if you further sell your Ethereum for Japanese Yen, but then you are triggering two taxable events. Also it takes time and effort to calculate profits and losses of each transaction. Some people avoid transactions between crypto assets to avoid this kind of trouble.
The most important thing in trading is liquidity. If many investors do not participate, it will be difficult to establish a trade. If trading between crypto assets can be exempted from taxation, there is a possibility that liquidity may further increase even in transactions including Japanese Yen.

4. Tax exemption for small payments

Some crypto assets are often used for payments. Bitcoin in particular can be used for payments even in nationwide chain stores such as BIC Camera and Megane Super. However, the price difference is regarded as profit in a manner similar to trading between crypto assets even at the time of settlement. For this reason, it has the problem that it takes time and effort to calculate profits and losses as well as sales between these crypto assets. In order to promote payments with crypto assets, it is necessary to have a cap on what amount gets taxed when paying with cryptocurrencies.

Movement other than taxation

Fujimaki points out the two advantages of crypto assets: the role as a hedging currency and the ability to involve those who do not have bank accounts.

1. As a hedging currency

The purpose of a hedging currency is to act as a countermeasure when the legal currency issued by a country or region heavily inflates. For those who feel the Japanese Yen is dangerous, the US dollar can act as a hedging currency.
Crypto assets are expected to function as a hedging currency similar to the US dollar. Also, some of the crypto assets are decentralized systems that are developing and managing regardless of the situation of a country or region. Bitcoin and Ethereum are decentralized cryptocurrencies. Especially with these decentralized cryptocurrencies, there is a possibility that it can be used more reliably than legal currencies.

2. Involving a person without a bank account

To open a bank account, you need to be familiar with the local language ​​to a certain extent. Representative Fujimaki explains that there are 2 billion people in the world who do not have bank accounts. If you do not have a bank account, inconveniences will arise in many ways, such as being paid a salary or paying a utility bill. However, if you use crypto assets you can trade or settle without a bank account. Payroll transfers by crypto assets and payment of utility fees in the future may become popular in general.

Expecting new investors to enter as a future possibility

Separate taxation and carryforward deductions may be accepted early, among the four changes that the association that is trying to change taxation for cryptocurrency is seeking. Stocks, investments, and FX that already has a separate taxation method and includes carryforward deductions were previously not allowed to be taxed separately and were not allowed carry forward deductions. If crypto assets are considered to be of the same type as stocks, mutual funds, and FX, separation taxation and carryforward deductions must be allowed. This would then spark new investors to enter the cryptocurrency market, so it would seem to make a big contribution to the market prices. I would like to expect that change will be made soon.
However, tax exemption of selling and buying between two crypto assets and tax exemption of small payments are specific to crypto assets. Acceptance of this may take some time regarding these two items.