Crypto Tax Compliance in Japan: NTA Ramps Up Scrutiny, Uncovers Hidden Income

The Japanese National Tax Agency (NTA) has been stepping up its efforts to ensure cryptocurrency tax compliance, resulting in a surge in investigations and uncovered tax violations.

Key Findings:

• The NTA launched 615 investigations into Japanese residents' crypto holdings in the financial year 2022, a significant increase from the previous year's 444 investigations.
• Tax violations were found in 548 cases, representing a 34% rise from the 405 violations detected in FY2021.
• The average value of undeclared income in crypto-related cases decreased from $245,000 in FY2021 to $206,000 in FY2022, possibly reflecting the decline in global crypto prices.
• Despite the drop in average value, the total cumulative value of undeclared income increased from over $110 million to $126.5 million in FY2022.

Factors Contributing to the Rise in Violations:

• Increased NTA Scrutiny: The NTA has significantly expanded its focus on crypto tax compliance, leading to a higher number of investigations and uncovered violations.
• Pandemic-Related Slowdown: The COVID-19 pandemic may have temporarily slowed the NTA's investigative efforts, allowing some violations to go undetected.
• Calls for Tax Reform: The Japanese crypto community has been advocating for a more equitable tax system, arguing that the current treatment of crypto gains as "other income" is unfair.
• Unrealized Income Taxation: Critics argue that taxing unrealized crypto gains discourages firms and individuals from holding crypto, hindering its broader adoption.

The NTA's intensified scrutiny of crypto tax compliance highlights the growing importance of accurate reporting and adherence to tax regulations within the cryptocurrency space.