Virtual currency is recognized in Japan as a form of payment for goods and services, but how can tax authorities determine if bitcoin investors, who made millions if not billions of yen last year, are evading taxes?

I thought the entire point of bitcoin was that they can't.

I thought the entire point of bitcoin was that they can't.

I don't think that's the entire point, but it's definitely a fundamental part of the bitcoin system. Transactions are anonymous.

That said, many people use wallets that are hosted on bitcoin exchanges, which means they have associated their real person with their wallet, and therefore it's quite easy to see if they have made money on their 'investment'. The government can simply create regulation to force Japanese exchanges to divulge the details of wallets they host. The other thing they can do is create extremely strict penalties for non-disclosure of income made, to scare people into self-divulging.

Taxing rises in a cryptocurrency would in my opinion spell the end of bitcoin.

How? Why would people in America stop buying bitcoin because of a tax in Japan?

Well, I assume Japan is a large market for them 

Who is ‘them’?

And I stil don’t understand how a tax in one country would ‘spell the end of bitcoin’.

The government can simply create regulation to force Japanese exchanges to divulge the details of wallets they host.

Exactly. This is what happens for margin fx brokers.

No good for offshore or peer to peer trading though.

The other thing they can do is create extremely strict penalties for non-disclosure of income made, to scare people into self-divulging.

indeed.

i think that is enough. Is it worth spending loads of resources to try to nail these tax evaders beyond that? If they spend their exhorbitant profits they are going to pay consumption tax on any significant purchases as you need to pay in yen. Unless there are dealers who accept bitcoins for Ferraris, I think we are good.

bitcoin is the biggest rip off in the world. have fun with it

If I trade for a currency and the currency increases in value, I have to pay taxes on it? Does the government pay me if I trade for a currency and lose money?

Is it worth spending loads of resources to try to nail these tax evaders beyond that?

They can spend as much as they want - the anonymity of bitcoin would make that a complete waste of money as there is no way to track who is doing transactions if they are not using hosted wallets.

bitcoin is the biggest rip off in the world. have fun with it

Really? Please provide some examples of where people have been screwed by it. I want to share these with other people so that everyone knows how many people have been ripped off by bitcoin.

If I trade for a currency and the currency increases in value, I have to pay taxes on it?

You are supposed to pay tax, after you "realise" any profit, e.g. after you sell it back.

Does the government pay me if I trade for a currency and lose money?

It depends, sort of. If you are just trading via a plain bank account, and lose money, you could offset that loss against another other "miscellaneous" income you may have earned that year. (If you had none, then you will take the loss with no pay back by the tax agency). If you are trading via a specialised broker, you can carry forward your losses into future years to offset against any profits you might make.

Besides currency trading, I think there is a similar, but different set of rules for stock trading. (You can't net losses from currency trading together with stock trading profits, they are dealt with separately, and miscellaneous income is separate again.)

I believe cryptocurrency is covered under miscellaneous income for now.

Informative post. Thanks.

Thanks for the reply fxgai.

You are supposed to pay tax, after you "realise" any profit, e.g. after you sell it back.

I hear about a lot of people using 'cold wallets.' i.e. They've purchased the crypto coin, and then they have the code for it offline. It seems you could take that code somewhere else and retrieve the fiat (realize the profit) somewhere else without the government knowing about it.

I hear about a lot of people using 'cold wallets.' i.e. They've purchased the crypto coin, and then they have the code for it offline. It seems you could take that code somewhere else and retrieve the fiat (realize the profit) somewhere else without the government knowing about it.

That's essentially correct, though the government may still find out about it, as there will eventually be a record somewhere, if you convert bitcoin to a non-bitcoin currency.

However, over the coming years as bitcoin (or whichever cryptocurrency wins) stabilizes and becomes mainstream, there will be more opportunities to use bitcoin, and therefore more people will keep a larger portion of their finances in bitcoin. If this is done with a self-hosted wallet, it will be very difficult for any government to be able to track what people are spending with bitcoin, and try to take a share of it.

Coconut H2O,

It seems you could take that code somewhere else and retrieve the fiat (realize the profit) somewhere else without the government knowing about it.

Indeed, but I believe they have a similar problem with plain old currency exchanges too.

Say you flip some yen to your home country currency (xxx), send the xxx money overseas, then flip your xxx currency to USD in your overseas bank account. The Japanese tax man would expect any profit on the purchase / sale of the middle currency (xxx) to be assessed in yen terms, using the prevailing xxx/JPY rate at the time that xxx was flipped to USD. Even though your money ended up in USD, not back in JPY. (Otherwise, obviously you could start in yen and make loads of untaxed foreign exchange income just by never reverting it back to yen.)

I believe the same principles would apply to trading between different crypto-currencies, or from JPY to cryptocurrency to USD or whatever.

This is pretty complicated and in practice I suspect there is little enforcement of this, at least for immaterial amounts of money, due to lack of information. There must be a focus on big fish, but on a case-by-case basis.

One thing we can say is that the emergence of a myriad of cryptocurrencies as speculative trading vehicles probably will stretch the tax agencies resources thinner. I'd be all for the tax system being reformed away from income, asset and sin taxes, and more to consumption tax for this reason. People might be able to get richer by evading income tax, but we can catch them if they attempt to enjoy it through consumption!