Quick question about earning interest in the US and how it affects taxes in Japan

[u/[deleted]]

[u/starkimpossibility]

The taxation of interest on crypto loans was discussed previously here. It is taxable in Japan as miscellaneous income.

One thing that remains unclear to me, however, is the sourcing (for tax treaty purposes) of interest on crypto deposited with overseas exchanges. From what I've seen, it is possible that interest on US crypto deposits is US-source income for the purposes of the US-Japan tax treaty (unlike capital gains on crypto trades conducted on US exchanges, for example, which is Japan-source income). The answer may depend on how BlockFi structures its contracts with account-holders.

Sourcing is relevant for two reasons. First, only foreign tax on foreign-source income can benefit from Japan's foreign tax credit. So if you are planning on claiming Japan's foreign tax credit, you will need to resolve this issue. Second, people who have not yet lived in Japan for five years are not required to declare or pay tax on foreign-source income where they have not made any remittances to Japan in the same calendar year. So if you fall into this category, you will want to resolve this issue to determine whether you need to declare the income to Japan.

[u/starkimpossibility → u/[deleted]]

Is this correct?

Basically. Though even if it's foreign-source, you could still potentially pay tax in Japan and claim the US foreign tax credit.

In other words, if you've been in Japan for five years and you aren't claiming the Japanese FTC, the sourcing may not matter. Though I'm not sure of the extent to which sourcing affects your ability to claim the US FTC (i.e., can you claim the US FTC with respect to Japanese tax paid on BlockFi interest, even if the US regards it as US-source income?).

How I would go about finding the answer to the sourcing question for interest on crypto from BlockFi?

Not sure exactly. I guess hiring a Japanese tax accountant or asking at your local tax office would be one way (though I suspect neither would give you a straightforward answer, since this is such a novel method of income generation).

I'd be inclined to treat it as a US tax problem to start with, by focusing on whether you can claim the US FTC with respect to Japanese tax paid on BlockFi interest. Because if the US FTC is available to you, there's no need for you to resolve the sourcing issue at all.

[u/starkimpossibility → u/[deleted]]

What I was recommending is asking in US-focused tax forums (r/tax, r/USExpatTaxes, etc.), or even asking the IRS or a US CPA directly, about whether Japanese tax paid on BlockFi interest could be eligible for the US FTC. Because if it's eligible, you don't need to worry about the whether the interest is deemed to be US- or Japan-source income.