Author | TaxDAO
According to Wu’s report, the Japan Blockchain Association, represented by Yuzo Kano, submitted a request to the government on the 28th to modify the system of taxing encrypted assets. This article will provide some opinions for reference.
1. Current tax rates on encrypted assets in Japan
Japan treats cryptocurrencies as property and taxes cryptocurrency gains as miscellaneous income based on the Payment Services Act (PSA) and the Financial Instruments and Exchange Act (FIEA).
If an individual buys or sells cryptocurrencies in the previous fiscal year and the income exceeds 200,000 yen, they need to declare the total amount of cryptocurrencies and pay taxes. Japan implements a progressive tax rate system for all income, including miscellaneous income. The tax rate ranges from 5% to 45% depending on the individual’s income tax bracket. In addition, a mandatory resident tax of 10% is applied to all tax rates. Therefore, the effective tax rate in Japan ranges from 15% to 55% (including residential tax), and individuals can pay up to 55% of their income in taxes, indicating a very high personal income tax rate on their cryptocurrency assets.
For companies, the tax rate generally includes national and local taxes, with a comprehensive tax rate ranging from 23% to 29.74% in 2022.
2. Discussion on the demand for tax system modifications
2.1 Excerpt from the press release of the tax system modification proposal
2.1.1 Elimination of taxation on unrealized gains of third-party issued tokens at the end of the period.
The National Tax Agency of Japan modified part of the corporate tax rules in June 2023, allowing companies to exempt themselves from taxing the unrealized gains of their own issued cryptocurrencies at the end of the period. However, taxation on the unrealized gains of third-party issued tokens remains.
2.1.2 Separate taxation of individual cryptocurrency transactions at a rate of 20%.
By separately taxing individual transactions, it is possible to carry forward and deduct losses within 3 years after the year in which the losses are incurred, which can reduce taxes. According to a survey by the Japan Blockchain Association (JBA), 43.9% of respondents stated that if the tax system is changed to separate reporting and taxation, the investment amount would increase by more than double.
2.1.3 Abolition of income tax on profits from exchanging cryptocurrencies.
It is expected to facilitate the use of applications suitable for Web3, such as DeFi and NFT markets, and improve the convenience of cryptocurrency assets.
2.2 Comparison of capital gains taxes in different countries
United States
For individual income taxpayers, the lowest two tax rate brackets (10% and 15%) have a long-term capital gains tax rate of 0%; for individual income tax brackets of 25%, 28%, 33%, or 35%, the long-term capital gain tax rate is 15%; for the highest tax rate bracket (currently 37%) for individual taxpayers, the long-term capital gains tax rate is 20%.
Germany
Germany considers cryptocurrency as private currency or asset, subject to capital gains tax. If a person holds cryptocurrency for more than a year, any profits from selling it are tax-free. However, if an individual holds cryptocurrency for less than a year, they are required to pay capital gains tax, which is calculated based on their income tax rate.
France
France classifies cryptocurrency as movable property, subject to capital gains tax. Profits from the sale of cryptocurrency are taxed at a unified rate of 30%, which includes a 17.2% social contribution. Long-term holding of cryptocurrency is not tax-free.
Malaysia
Due to the absence of capital gains tax, most cryptocurrency transactions in Malaysia are tax-exempt.
United Kingdom
The UK does not have separate short-term and long-term capital gains tax rates. All capital gains are taxed at the same rate, and cryptocurrency gains are subject to a capital gains tax of 10% or 20%.
2.3 Perspective of TaxDAO
From the motivation behind the proposed tax system modifications by the Japanese industry association, the main goals include strengthening industry competitiveness, protecting industry interests from excessive tax burdens, and promoting Web 3.0 as a growth strategy for Japan and nurturing the market. The expectations for tax system modifications are high, but whether they can be realized remains unknown. We only provide some perspectives from a tax system standpoint.
1. Cancelling the taxation of unrealized gains on third-party token issuance is relatively reasonable in our opinion. The logic is straightforward: taxing unrealized gains based on the account’s paper profit is less reasonable. If the paper profit is entirely offset by future losses when actually sold, it would create significant financial pressure for taxpayers. Unless carried forward for tax refund, the entire process would result in excessive losses. Taxing gains based on actual proceeds upon disposal is more reasonable.
2. Individuals’ cryptocurrency asset transactions should be taxed separately at a rate of 20%. Looking at the countries listed in 2.2 above, most countries either exempt capital gains from cryptocurrency or tax them at a rate of 20% or below. Therefore, this demand has certain basis for horizontal comparison. Additionally, Japan has separate taxation rules for individual capital gains, such as real estate, land, and stocks, which the industry association can actively strive for. Apart from tax rates, there are also various legal, customary, and regulatory game issues. Prior to this, the classification of cryptocurrency gains as high-tax income by the Japanese tax authorities may also have regulatory considerations, such as avoiding excessive speculation.
3. Abolishing income tax on profits from each cryptocurrency exchange. This statement may not be very accurate due to translation issues. If it intends to express whether profits from cryptocurrency-to-cryptocurrency exchanges can be exempted from taxation, such practice exists in France, where taxation obligations only arise when exchanging for 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 easily agree to this.
III. Reasonable Crypto Taxation
The characteristics of crypto assets bring unprecedented complexity to tax regulation, including information opacity, significant value fluctuations, high-frequency trading, and many business activities without centralized institutions (such as DeFi) that are subject to regulation. To address these challenges, it is necessary to establish a tax framework that is tailored to the characteristics of crypto assets, such as “Pillar One” in the “Two-Pillar” approach to address digital economy issues.
Currently, many countries still use relatively outdated domestic tax regulations, which are already outdated. We believe that an ideal tax system should have the following characteristics:
1. The CARF framework should be applicable to more countries and regions and be legislatively implemented domestically, facilitating transparent tax regulation;
2. Capital gains tax should be the primary tax imposed on crypto assets, without imposing transaction taxes, and the tax burden should not exceed that of TMT and the financial industry;
3. Tax exemptions or preferential treatment should be provided for smaller-scale entities, taking reference from traditional tax systems;
4. The tax collection and management process should be in line with the characteristics of crypto assets, simple and efficient. By leveraging effective tools and data analysis capabilities, automation and simplification should be maximized to avoid excessive consumption of social resources during the calculation process.
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