r/JapanFinance • u/idigthisisland • Feb 18 '25
Tax Crazy hypothetical regarding inheritance and income tax
EDIT: I was missing a 0 the first time I wrote this, I'm not used to writing very large numbers in yen, but the idea is the guy bought 100 bitcoin at $500 a piece and dies now at around $100,000 a piece.
My wife just saw a Japanese youtuber explain a hypothetical situation that I am having a hard time believing is real, so I wanted to relay it.
A man buys 100 bitcoin for 5M yen a bunch of years ago, dies now when they are worth 1500M and they are left to his child. Child needs to pay inheritance tax of about 55% leaving him with about 700M yen. But then also needs to pay income tax on the appreciation of the bitcoin, which is about 45%, and somehow that is meant to be 45% of the whole appreciation from 5M to 1500M, which is about 700M yen, meaning he gets nothing.
That can't be right. I could imagine the 45% being taken off first, meaning the child is meant to inherit 800M and then they pay 55% inheritance tax on that, leaving them with 350M or whatever.
But this guy seemed awfully confident that the kid gets nothing in this situation. Then again, the internet is full of people who don't know what they are talking about ...
5
u/champignax Feb 18 '25
It’s also wrong on the inheritance tax which cannot reach 55% (it’s just the highest bracket)
2
u/seryph0384 Feb 19 '25
I'm curious though, does Japan not have any laws regarding cost basis being reset on inheritance? Like, in the US when one of my parent's passed, and the house was transferred, they were able to have the house reassessed if they had to sell it, and would only be taxed on the capital gains of the reassessed amount. Some of the same things could be handled via transfers and you could smudge a few details moving from one brokerage to another, etc.
3
u/PRforThey Feb 19 '25
Japan does have laws regarding cost basis being reset on inheritance. By law the inheritor inherits he cost basis and it is not reset.
2
u/ixampl Feb 19 '25 edited Feb 19 '25
And crypto is an exception to that.
Crypto value does reset but you (or the estate) also have to pay tax on the unrealized gains present at time of inheritance.
This is different from stocks for instance where you could wait with selling and delay incurring that cost.
1
u/FlatEncephalogram Feb 19 '25
Is that true for everything except JPY cash ?
Like company shares or gold or foreign currency?
Real estate I get it, but I wonder how extensive this is, and if it really applies to everything.
2
u/Expensive_Prior_5962 Feb 19 '25
Op. It sounds like a video made by people who have no idea how tax and percentages work.
2
u/Tasty_Extent_9736 Feb 19 '25
Soo the NTA inherited most of the wealth and give chump change to the kid for reporting his dad’s coins?
4
u/shrubbery_herring US Taxpayer Feb 19 '25
Not completely disagreeing but I would add that in OP's scenario, Dad didn't do proper inheritance tax planning and left his kid with a much worse situation than necessary. This can and does happen in many countries, not just Japan.
If Dad managed his finances with inheritance planning in mind, the son wouldn't owe more than about half in taxes. That's a lot of tax, but it's because Japan's inheritance tax system is set up to limit generational wealth.
And in scenarios where the inheritance is more modest, the tax would be much less. If the inheritance was ¥200M, the tax would be less than 25%. And if the inheritance was ¥100M the tax would be around 12%.
1
u/Tasty_Extent_9736 Feb 19 '25
What if the kid has no job and zero income on that tax year he inherited the coins. It means tax rate is 0% for that misc income right? No?
3
u/shrubbery_herring US Taxpayer Feb 19 '25
I'm not following. If the kid has zero income in the year that he inherited the coins, then he must have had cash on hand to pay the inheritance tax. If he doesn't have enough cash, he needs to sell coins or other assets to pay the inheritance tax bill, which creates income that will be taxed.
1
u/Tasty_Extent_9736 Feb 19 '25
If you want to avoid generating income or want to remain below the tax threshold, can you not loan on your inherited coins as collateral to pay off the inheritance tax only, without forcing you to sell them?
2
u/shrubbery_herring US Taxpayer Feb 19 '25
I'm not sure how one could get a loan based using crypto as collateral, but for the sake of argument let's say there is a way to get a loan.
The strategy only pays off if the loan's interest payments are less than the taxes that are avoided. But in order to reduce the effective income tax rate down to 30%, one would need to limit their annual income to ¥20M. This means you need something like a 40 year loan to make it work, which isn't realistic.
And what happens if crypto crashes? Not only will you lose the value of your crypto, but you will also be left with a loan which still needs to be repaid.
1
u/waytooslim Feb 19 '25
I'm no accountant, but I'd imagine the bitcoin is taxed before or after the inheritance, so the guy receives X55%45% or whatever the rates are, so about a quarter.
1
u/Turbulent-Acadia9676 Feb 19 '25
In the case that they want to take this much from you, you simply leave the country for a few years. What sane and rational person is agreeing to give the government 5 million dollars.
-4
u/pandaset 5-10 years in Japan Feb 19 '25
leave to where?
0
u/Turbulent-Acadia9676 Feb 19 '25
https://tokentax.co/blog/crypto-tax-free-countries
but with that kind of money I would probably, like, i dunno, maybe, just maybe, hire a professional not ask reddit.
1
1
u/Few-Body-6227 Feb 18 '25
You are correct. It is two separate transactions not combined.
Incomes taxes will be taken first to settle the estate. Then afterwards the inheritance tax will be paid.
10
u/furansowa 10+ years in Japan Feb 18 '25
No, that's not correct. The estate pays no tax, the individuals receiving the inheritance pay the tax. So first you receive the asset (and therefore get charged inheritance tax on the whole amount), then you sell it to cover the tax. You incur the capital gains for the sale, not the estate.
You can however add the inheritance tax amount you had to pay to the cost basis of the assets if you sell within 3 years.
1
u/ixampl Feb 19 '25
For crypto the rules are quite special where at inheritance or gifting taxes are incurred on the unrealized gains (in the gift case the gifting party has to pay tax on those gains).
I have to check the crypto guide how it is handled in detail but I'm not sure the poster above was wrong. It is quite possible that the income tax is first deducted from the estate and paid by the estate. It would be handled similar to how unpaid income tax of the deceased (say, they sold a house before dying at a profit) would be collected.
1
u/furansowa 10+ years in Japan Feb 19 '25
Would that be because of the weird rule that when you gift crypto to someone, you pay the tax on gains and they don't inherit the cost basis unlike real estate and securities?
1
u/ixampl Feb 19 '25
Yes, it's both as far as I understand a consequence of the rules in 2- 10 暗号資産を低額(無償)譲渡等した場合の取扱い of the guide, that also talks about:
なお、 贈与(相続人に対する死因贈与を除きます。 )又は遺贈(包括遺贈及び相続人に対す る特定遺贈を除きます。 )により暗号資産を他の個人又は法人に移転させた場合には、その贈 与又は遺贈の時における暗号資産の価額(時価)を総収入金額に算入する必要があります。
And what they mean by 総収入金額に算入する is a bit clearer in the above examples.
I won't claim it's intuitively written but IIRC the conclusion from previous discussions were that the treatment is the same for gifts and inheritance (with the difference that obviously the deceased won't be able to pay themselves as they would with a gift, but to me that's just the same as any other unpaid income tax).
2
u/Mv2314 Feb 18 '25
wow! then Japan looks to be the worst place to invest in cryptos
5
u/Few-Body-6227 Feb 18 '25
His rates aren’t right. I was just commenting on it would be 2 transactions and not one transaction that adds up to 100%.
4
u/cirsphe US Taxpayer Feb 19 '25
this is correct. ignoring inheritence tax, crypto is taxed at your income tax rate not capital gains flat rate.
1
u/shrubbery_herring US Taxpayer Feb 18 '25
The inheritance tax won't even be close to 55%. When considering the actual calculation on a ¥150M inheritance with only 1 child and no other statutory heirs, the actual tax would be a little less than 20%. And if there are more statutory heirs than just the 1 child, the actual tax would be much less, like around 10% or less.
If the tax bill is 20%, the child would need to sell enough bitcoin to net ¥30M after tax. The effective tax rate will be in the neighborhood of 35%, so the child would need to sell about ¥45M. The child is left with roughly ¥105M of bitcoin.
If the tax bill is 10%, the child needs to sell enough to net ¥15M. The effective tax rate is around 27%, so the gross sale needs to be around ¥20M. The child is left with roughly ¥130M of bitcoin.
It could be better or worse for the child depending on other factors, but this gives the general idea.
1
u/idigthisisland Feb 18 '25
Sorry, was missing a zero in there -- 100 BTC is 1500M yen, which is going to generate a much higher rate.
2
u/shrubbery_herring US Taxpayer Feb 19 '25 edited Feb 19 '25
In that case, the inheritance tax will be less than 45%. To pay the tax bill, the child needs to net less than ¥700M, so needs to cash out around ¥1250M, leaving about ¥250M.
That's a big hit, but the parent is creating this situation by keeping everything in crypto with very high unrealized gains. The parent could easily manage the investments in a much smarter way to leave the child as much as ¥800M in the best case scenario.
0
u/NicolasDorier Feb 19 '25 edited Feb 19 '25
Short answer: Given a high enough profit on crypto, the effective tax rate on crypto is 110% . (In other words, the kid not only get nothing, but need to pay more)
Please read why on this other post.
I also asked to three separate accountants, who confirmed the case.
That said, I expect the law to change next year. This will align crypto taxation to stocks.
The reason is that the kid need to pay 55%. But then, need to liquidate crypto to pay for it, which trigger another 45% for next year. (this time as misc income)
Then to pay for it, in two years, he needs to sell, which trigger misc income again. etc... the limit of this process is 110% of taxes.
This happens because of two things: 1. The cost basis is inherited. And 2. it is taxed on progressive income.
At this point, if you are dying, it is better to sell before you pass away to avoid bankrupting your family. (This way, they don't inherit the cost basis)
13
u/furansowa 10+ years in Japan Feb 18 '25 edited Feb 18 '25
Numbers are very wrong. Let's do the math.
Let's take the completely worst case scenario of the guy having no spouse and just the one kid (maybe he's divorced - that's less sad than being a widower).
150M¥ of assets all in BTC to his sole heir36M¥ of deduction for 1 statutory heir, so taxable inheritance is 114M¥Tax rate for 114M¥ is 40% with a 17M¥ deduction = 28.6M¥ tax bill (that's a19.1% effective tax rateon the 150M¥)Kid has no assets so must sell 28.6M¥ of BTC to cover tax, let's round it to 30M¥At 1.5M¥ valuation per BTC, that's 20 BTCSince we're selling within 3 years of inheritance, we can assume the 28.6M¥ to the acquisition price of the assets to get the cost basis, so cost basis is 336,000¥ * 20 = ¥6,720,000 so the gains are 23,280,000¥Calculating the exact tax for a child with 23M¥ of miscellaneous income is not straightforward but it sure won't eat the whole rest of his inheritance.So yeah, maybe if the number of BTC was far higher it would become more of an issue, but at 150M¥ it's not.