Virtual currency exchanges in Japan, such as Bitflyer and Coincheck, have been pushing the retailers to accept Bitcoin for over payments at their retails stores.
Currently, major retailers such as Bic Camera, selling various consumer electronics, accept Bitcoin as payment. However, if we use bitcoin for payment to buy goods, any capital gain realized by such payment will be taxable.
The National Tax Agency of Japan ("NTA") issued a set of guidance on how gains from virtual currencies will be taxed. The guidance is titled "Calculation method etc. for gains from virtual currencies" ("Guidance")
The Japanese document is available from the following link. Sorry but it is only in Japanese.
https://www.nta.go.jp/shiraberu/zeiho-kaishaku/joho-zeikaishaku/shotoku/shinkoku/171127/01.pdf
The Guidance contains nine practical examples for calculating gains from virtual currencies. Outline of these questions are as follows.
(1) Sale of virtual currencies
(2) Purchase of goods using virtual currencies
(3) Exchange of virtual currencies with virtual currencies
(4) Acquisition cost of virtual currencies
(5) Acquisition cost of virtual currencies acquired through hard fork
(6) Which income classification to use when filing tax returns for income from virtual currencies
(7) Whether losses from virtual currencies can be deducted from income from other sources
Item (2) becomes an issue here. This Guidance is written in a Question and Answer format.
Question
How do you calculate your gains when purchasing a product using virtual currency?
Example
March 9: Purchased 4 BTC at JPY 2,000,000 (including transaction fees)
September 28: Purchased a product worth JPY 155,000 using 0.3 BTC (including fees)
Answer
If you use your virtual currencies to purchase goods, the difference between the acquisition cost and the price of the goods at the time of the purchase should be recognized as taxable income.
When using the above example the taxable income shall be JPY 5,000.
JPY 155,000 - (JPY 2,000,000 / BTC 4) x BTC 0.3 = JPY 5,000
This taxable income will be subject to a maximum tax rate of 55%. Bitcoin holders tend have high income and this might be the case for people who use bitcoin in their daily lives. Anyways if this high tax rate applies then each team a person buys goods, they need to prepare for payment of taxes in Japanese Yen. For the above example the person needs to reserve JPY 2,750 for his/her tax payment next year on or around March 15. If the person does not hold so much fiat currencies then he/she needs to carefully manage the fiat currency v.s. virtual currency composition in their asset portfolio. This is really cumbersome.
Accordingly, even if the virtual currency exchange operators and venture businesses introduce fast and smooth ways to use BTC for payment unless this issue is resoled people will need to run the risk of failing to fulfill their tax obligations and use virtual currencies.
In order to allow wide acceptance of virtual currency use, the NTA should introduce a safe harbor of some sort to limit the circumstances to apply the above method, such as limiting to payments for goods exceeding JPY 1,000,000 in one instance. Unfortunately, we have not seen any concrete movement towards this direction, yet. However, this issue is commonly understood as a matter that needs to be solved among people holding virtual currencies in Japan.