Since last year, Japan has been actively reassessing its crypto tax regulations, focusing on creating an environment that encourages the growth of blockchain start-ups within the country. The Japanese Financial Service Agency (FSA) has unveiled a ground-breaking proposal to change the tax code regarding digital assets.

On August 31st, 2023, the Japanese FSA submitted a 16-page document suggestion to the government as a bid to domestic firms from the end-of-the-year unrealized gains tax on crypto, with the primary purpose revolving around relieving domestic companies of the annual tax burden linked to unrealized gains on their digital asset holdings. Japanese firms currently face taxes on a regular yearly basis on their digital assets regardless of whether they are converted, unlike some countries where crypto is taxed only upon conversion to fiat currency or sale.

Overview Proposed Crypto Tax Reform

The media outlet wrote, “The rule has long been criticized for placing a burden on companies and hindering innovation in the crypto asset and blockchain sectors”. The amendment, proposed by the FSA last week, stated that the proposal had received support from the country’s Ministry of Economy, Trade and Industry, indicating a promising path towards implementation.

The FSA outlined the broader objectives of this reform in the document by emphasizing its aim to “foster an environment conducive to the growth of Web3 and promote start-ups utilizing blockchain technology”. This tax reform highlights Japan’s ambition to emerge as a global leader in blockchain and digital asset innovation, following in the footsteps of other Asian countries such as Hong Kong. The move comes as advocates of the crypto industry, including non-governmental organizations in Japan, have been demanding a revision of the national tax regime for digital assets.

In July 2023, the Japan Blockchain Association (JBA), a non-government group, called upon the government to make three significant changes to its crypto regulatory framework that prevents citizens from owning and using crypto assets. The first included removing the year-end unrealized gains tax on corporate crypto holdings. The JBA aimed to abolish the taxes on unrealized gains in third-party-issued tokens.

The second request addressed the taxation method for personal crypto asset trading profits. It suggested changing from current comprehensive taxation to self-assessment separate taxation with a uniform tax rate of 20%. JBA proposed a three-year term for deducting the losses from the digital assets value depreciation. Thirdly, the JBA aimed to eliminate income tax on the profits generated each time an individual exchanges crypto assets.

The request emphasized that in the era of Web3 without borders, there is a strong likelihood that crypto asset exchange will become the norm within the economic zone. Given the diverse range of transactions and types of crypto assets involved, calculating taxes will be exceptionally challenging. Sota Watanabe, the CEO of Startale, expressed similar sentiments on X, stressing the importance of implementing these reforms within the current year. So far, we have seen an outflow of start-ups overseas (…).” He added, “I have a feeling that if we do not, Japanese (…) companies will leave one after another next year. I think it will lead to the hollowing out of Japanese industry.”

Japan Exempts Crypto Issuers from Capital Gains Tax

Experts from Bitcoin Decode Official mentioned that since last year, Japan has been actively reassessing its crypto tax regulations, focusing on creating space that encourages the growth of blockchain start-ups in the country. In June 2023, Japan’s National Tax Agency provided clarification concerning crypto issuers operating within the countermand, emphasizing that they would no longer be liable for capital gains taxes on unrealized gains.

Before the tax revision, in Japan, crypto issuers were obliged to pay a substantial capital gains tax of approximately 35% on their tokens and any unrealized gains. Moreover, the tax committee of the ruling Liberal Democratic Party previously approved a proposal to exempt crypto start-ups issuing their tokens from corporate taxes on unrealized gains.

Impact Caused by the Proposed Tax Reform

The proposed tax reform on crypto holdings in Japan could have far-reaching implications for businesses and the broader crypto ecosystem. It could alleviate a significant financial burden on companies holding crypto as part of their business operations.

The move by Japan could lead to increased investment in the digital asset space within the country and stimulate innovation. The fixed 20% tax rate for individual crypto trading profits could simplify the tax process for crypto traders and investors transitioning to a self-assessment separate taxation system. Moreover, the clarity and reduction in complexity may encourage more individuals to participate in the crypto market.

Recent events have seen a resurgence in the industry, particularly with Binance planning to triple the number of crypto assets listed on its platform, forcing its way into a market traditionally dominated by domestic start-ups and Japan’s securities providers.

Byline: Hannah Parker