Japan’s financial regulator, the Financial Services Agency (FSA), has proposed a major change in the tax code regarding digital assets. The proposal aims to free domestic firms from the end-of-the-year “unrealized gains” tax on crypto, which is currently set at 30%. This could have a significant impact on the growth and development of the blockchain and crypto industry in Japan.
The “unrealized gains” tax on crypto is a tax that applies to the value of the crypto assets held by a company at the end of the fiscal year, regardless of whether they have been sold or not. This means that if the price of the crypto assets increases during the year, the company has to pay taxes on the paper profits, even if they have not realized them in cash.
This tax regime has been criticized by the crypto industry in Japan, as it creates a heavy tax burden and discourages innovation and investment in the sector. According to the Japan Blockchain Association (JBA), a non-government group that advocates for the crypto industry, the “unrealized gains” tax on crypto is “unreasonable” and “hinders the growth of the industry”.
What is the FSA’s proposal?
The FSA’s proposal, which was submitted on Aug. 31, suggests to eliminate the “unrealized gains” tax on crypto for domestic firms that issue tokens. This would mean that these firms would only pay taxes on their crypto assets when they sell them to fiat, similar to the tax treatment of stocks and bonds.
The FSA’s proposal is part of a broader tax reform plan for the fiscal year 2024, which will be finalized by the end of this year. The proposal has already received support from the Ministry of Economy, Trade and Industry, which is in charge of promoting the digital economy in Japan.
The FSA stated that the tax reform would “improve the environment for the promotion of Web3 and promote business startups that make use of blockchain technology”. Web3 is a term that refers to the next generation of the internet, which is powered by decentralized applications and protocols that run on blockchain networks.
What are the implications of the tax reform?
The tax reform, if approved, could have positive implications for the blockchain and crypto industry in Japan, as it would reduce the tax burden and incentivize innovation and investment in the sector. It could also attract more domestic and foreign firms to issue tokens in Japan, as they would benefit from a more favorable tax regime.
The tax reform could also boost the adoption and development of stablecoins in Japan, which are digital tokens that are pegged to fiat currencies or other assets. Stablecoins are seen as a key component of Web3, as they enable fast and cheap transactions across different blockchain platforms. However, the issuance of stablecoins in Japan is currently restricted to licensed banks, registered money transfer agents and trust companies, according to a law that was implemented in June last year.
The tax reform could also align Japan’s legal framework with global crypto standards, as it would eliminate the discrepancy between the tax treatment of crypto assets and other financial assets. Japan was one of the first countries to legalize crypto as a form of private asset, and its crypto regulations are among the strictest in the world. However, its tax regime has been considered outdated and unfair by the crypto industry and experts.
The tax reform could also enhance Japan’s competitiveness and leadership in the global blockchain and crypto space, as it would demonstrate its commitment and support to the sector. Japan has been a pioneer and a major player in the blockchain and crypto industry, with several leading exchanges, projects and initiatives based in the country. However, it has also faced some challenges and setbacks, such as the infamous hacks of Mt. Gox and Coincheck, and the emergence of other crypto-friendly jurisdictions, such as Singapore and Switzerland.
