Japanese Blockchain Association’s opinion on proposed changes to cryptocurrency taxation

According to reports by Wu-talk, the Japan Blockchain Association, represented by Yuzo Kano, submitted a request to the government on the 28th of July to modify the taxation system for cryptocurrency assets. This article will provide some perspectives for reference.

Cryptocurrency Taxation System in Japan

Japan considers cryptocurrency as property, and according to the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA), profits from cryptocurrency are subject to taxation as miscellaneous income.

Individuals who purchase or sell cryptocurrency in the previous fiscal year and earn over 200,000 Japanese yen are required to report the total amount of cryptocurrency and pay taxes. Japan employs a progressive tax rate system for income, including miscellaneous income. Depending on an individual's income tax bracket, the tax rate ranges from 5% to 45%. Additionally, a mandatory resident tax of 10% is applied to all rates. Therefore, the effective tax rate in Japan ranges from 15% to 55% (including residential tax). Individuals may pay up to 55% of their income in taxes, indicating a very high personal income tax rate on cryptocurrency assets.

For corporations, the tax rate generally includes national and local taxes. As of 2022, the comprehensive tax rate typically ranges from 23% to 29.74%.

Tax Reform Proposal Discussions

Excerpts from the Tax Reform Proposal

2.1.1 Abolish the year-end unrealized gain tax on tokens issued by third parties

The National Tax Agency of Japan has revised part of the corporate tax rules in June 2023, allowing companies to exempt unrealized end-of-term income from their own issued cryptocurrency assets from taxation. However, unrealized end-of-term income from third-party token issuance is still subject to taxation .

2.1.2 Individual cryptocurrency asset transactions are taxed separately, with a tax rate of 20%

Through separate taxation, losses generated in the current year can be carried forward and deducted within the following 3 years, which can alleviate the tax burden. According to a survey by JBA, 43.9% of respondents stated that if the taxation were changed to separate filing, the investment amount would increase by more than twice.

2.1.3 Abolish income tax on profits each time cryptocurrencies are exchanged

This makes it easier to apply for use cases suitable for Web3 such as DeFi and NFT markets, and is expected to improve the convenience of cryptocurrency assets.

Comparison of Capital Gains Taxes across Countries

United States

For individual taxpayers, the lowest two tax rate brackets (10% and 15%) have a long-term capital gains tax rate of 0%; individuals taxed at the tax rate brackets of 25%, 28%, 33%, or 35% have a long-term capital gains tax rate of 15%; individuals in the highest tax rate bracket (currently 37%) have a long-term capital gains tax rate of 20%.

Germany

Germany considers cryptocurrencies as private currency or assets and they are subject to capital gains tax. If an individual holds cryptocurrencies for more than a year, any profits from selling them are tax-exempt. However, if an individual holds cryptocurrencies for less than a year, capital gains tax must be paid, calculated based on their income tax rate.

France

France classifies cryptocurrencies as movable property and they are subject to capital gains tax. Profits from cryptocurrency sales are taxed at a unified rate of 30%, which includes 17.2% social contributions. Long-term holding of cryptocurrencies is not tax-exempt.

Malaysia

Most cryptocurrency taxes in Malaysia are tax-exempt due to the absence of capital gains tax.

United Kingdom

There are no separate short-term and long-term capital gains tax rates in the UK. All capital gains are taxed at the same rate, and cryptocurrency gains are subject to a 10% or 20% capital gains tax.

TaxDAO’s opinion

Based on the motivation behind the tax system modifications submitted by the Japanese industry association, they mainly include strengthening industry competitiveness, protecting industry interests from excessive tax burdens, and promoting Web 3.0 as part of Japan's growth strategy and cultivating the market. The expectations for the tax system modifications are high, although it is unknown whether they can be realized. Here, we provide some perspectives from a tax perspective.

[if !supportLists]a) [endif]The demand to cancel the taxation of unrealized end-of-term income from third-party token issuance is relatively reasonable. It is not logical to impose tax based on unrealized gains on the balance sheet. If the unrealized gains turn into losses upon actual sale in the future, it would create significant financial pressure for taxpayers. Taxing based on realized gains upon disposal would be more reasonable.

[if !supportLists]b) [endif]Individual cryptocurrency asset transactions are taxed separately, with a tax rate of 20%. Based on the comparison of the mentioned countries in section 2.2, most of them either exempt capital gains on cryptocurrencies or tax them at a rate of 20% or below. Therefore, this demand has certain basis in cross-country comparison. Moreover, Japan already has separate taxation for individual capital gains, such as for real estate, land, and stocks. The industry association can actively seek this provision. Apart from tax rates, there are many legal, customary, and management issues related to taxation. Prior to this, the Japanese tax authorities may have classified the income from cryptocurrency assets as high-rate income to prevent excessive speculation.

[if !supportLists]c) [endif]For “Abolish income tax on profits each time cryptocurrencies are exchanged”, if this means whether profits from cryptocurrency-to-cryptocurrency trading can be exempt from tax, such a practice exists in France, where tax obligations only arise when exchanging cryptocurrencies into fiat currency. If this goal is achieved, using cryptocurrency for various daily business settlements without converting into fiat currency would make tax avoidance easy. It is speculated that the Japanese government may not readily agree to this.

A reasonable cryptocurrency tax framework

The characteristics of cryptocurrency assets bring about complexities in tax regulation beyond the traditional framework. The lack of transparency, significant value fluctuations, high-frequency trading, and decentralized nature of many transactions (such as in DeFi) pose challenges to tax enforcement. To address these issues, a tax framework that suits the characteristics of cryptocurrency assets, such as the "Pillar One" of the digital economy problem in the CARF framework, is needed.

Currently, countries still adopt relatively outdated domestic tax laws for regulation, which is increasingly inadequate. We believe that an ideal tax system should have the following characteristics:

[if !supportLists]a) [endif]The CARF framework can be applied to more countries and regions, enabling transparent tax regulation;

[if !supportLists]b) [endif]Capital gains tax should be the main tax, not transaction tax, with a tax burden no higher than that of the TMT and financial sectors;

[if !supportLists]c) [endif]Small-scale entities should be exempt or provided preferential treatment, following the reference of traditional tax systems;

The tax administration process should be simple and efficient, considering the characteristics of cryptocurrency assets. Effective tools and data analysis should be utilized to automate and simplify the calculation process, minimizing the consumption of social resources.