Crypto Tax Rules Revamped in Japan

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By A D

Japan’s National Tax Agency has recently revised its corporate tax guidelines, introducing new tax rules for token issuers. As of June 20, 2023, token issuers in Japan are no longer required to pay corporate taxes on unrealised crypto gains. Previously, Japanese companies that issued cryptocurrencies had to pay a fixed 30% corporate tax rate on their holdings, regardless of whether they had realised profits through sales.

The Japanese government approved the proposal to eliminate taxes on paper gains from tokens issued and held by crypto companies nearly six months ago. The Liberal Democratic Party’s (LDP) tax committee held a meeting on December 15, where the proposal, initially presented in August, was endorsed. This decision aims to facilitate token issuance and create a more favorable environment for companies involved in token-related business activities.

The discussion on new crypto tax regulations in Japan has been ongoing since August as part of broader tax reform efforts for 2023. However, the final approval from the National Tax Agency was only granted recently. Under the revised rules, Japanese companies issuing tokens are exempted from the previous 30% corporate tax rate on their holdings. Previously, even unrealised gains from token holdings were subject to taxation.

Japan has also implemented stricter Anti-Money Laundering (AML) measures for cryptocurrency transactions since June 1, 2023. These measures align Japan’s legal framework with global crypto rules and enhance the traceability of cryptocurrency transactions. The AML legislation was revised in December after the Financial Action Task Force identified its insufficiency.

Furthermore, Japan passed legislation in June of the previous year to prohibit non-banking institutions from issuing stablecoins. This legislation, which came into effect recently, limits stablecoin issuance in the country to licensed banks, registered money transfer agents, and trust companies. The aim is to regulate stablecoin issuance and ensure stability within Japan. In October, the Japan Virtual and Crypto Assets Exchange Association announced plans to ease the stringent screening process for listing new tokens on exchanges.

Global Crypto Tax Landscape

The division among nations extends beyond tax rates and includes varying regulatory frameworks that either embrace or hinder digital assets. The low crypto tax index ranks countries based on their favorable tax environments for cryptocurrencies. At the top of the list are classic havens such as the UAE, Bahamas, Bermuda, Cayman Islands, and Seychelles. Crypto businesses and individuals are drawn to the UAE due to its zero taxation on crypto gains and positive regulatory outlook. These countries attract companies operating in the crypto and blockchain sectors seeking tax advantages.

Read: New Developments in Crypto Taxation Wordwide

In Europe, Monaco stands out as a jurisdiction with no direct taxation, although residency requirements make it accessible only to the wealthiest investors. Panama ranks seventh on the index, offering zero capital gains tax on cryptocurrencies and relatively easier access compared to Monaco.

While relocating to Caribbean countries for zero taxation requires specialised accounting and taxation guidance, many countries in the region provide significant tax advantages within their tax environments. El Salvador, as the world’s first adopter of Bitcoin as legal tender, has embraced cryptocurrencies as a key component of its economy, and is identifies as crypto-positive with zero taxes rates.

a small shop in el salvador with crypto btc payment available
El Salvador has been identified as crypto positive, being the world’s first adopter of Bitcoin as legal tender. Image Source

Indonesia, placed ninth on the index, presents a more nuanced situation with a 0.1% tax on transaction costs for purchasing crypto. The country also offers a zero percent tax rate for foreign investors with a “double taxation avoidance agreement,” although this is not readily accessible for casual investors.

Famous European crypto hubs, including Malta (known as “Crypto-Island”), Gibraltar, and Liechtenstein, aspire to become leading centers for digital asset investments. Liechtenstein grants waivers on crypto taxes for entities permanently based in the country, while Malta and Gibraltar offer generous low-tax concessions for crypto-based entities.

Moving on to traditional tax-based economies, Germany ranks 13th and surprised the world with its decision to promote zero tax on crypto gains if held for at least twelve months before being sold. Switzerland, known for its crypto-friendly environment, does not impose direct taxes on crypto gains but applies proportional wealth tax based on the value of crypto holdings. Switzerland also hosts numerous leading blockchain and crypto-related companies.

Among the top twenty countries, low-tax jurisdictions include Romania and Bulgaria, imposing only a 10% tax on crypto income, followed by Hungary and Greece at 15% on income derived from crypto investments.

The Crypto Tax Ranking 2023 also provides an overview of the varied crypto tax landscape across different states in the United States. Tax rates can range from as high as 37% for short-term income tax on crypto gains to a still substantial 20% for long-term gains held over a year. However, the overall sentiment toward crypto taxation varies greatly among states. States like California, Colorado, Florida, Puerto Rico, Texas, and Wyoming aim to attract the crypto industry by adopting specific approaches such as accepting crypto payments and implementing friendly regulations.

How U.S. Crypto Taxation Could Affect the Space

The proposal to impose a 30% tax rate on cryptocurrencies by the US government caused a domino effect, resulting in a significant drop in the crypto market on Friday. Bitcoin, the leading cryptocurrency, faced intense selling pressure and experienced a decline of over 9%. Other cryptocurrencies, including Ethereum, also nosedived, extending their losses for the week. Investors are in a state of panic due to the potential impact of the proposed tax rate on mining and trading digital assets.

According to a supplementary budget explainer paper released by the Department of the Treasury on Thursday, any firm involved in mining digital assets using computing resources, whether owned or leased, would be subjected to an excise tax equal to 30% of the electricity costs associated with the mining process. The paper explains that digital asset mining involves validating transactions among holders of digital assets, recording and transferring cryptographically secured assets on a distributed ledger, and using high-powered computers to perform calculations for selecting validators.

As per the paper, the existing tax law does not specifically address digital assets, except for certain rules regarding broker reporting and reporting of cash transactions. However, the proposed 30% excise tax is scheduled to go into effect after December 31, 2023, for taxable years. The tax will be implemented gradually over three years, starting with 10% in the first year, increasing to 20% in the second year, and finally reaching 30%.

The proposed tax aims to reduce mining activities, along with their environmental impacts and other negative consequences, as part of US President Joe Biden’s agenda. However, the 30% tax on cryptocurrency mining electricity usage could have significant impacts on the mining and trading of Bitcoin and other cryptocurrencies. It could lead to a decline in mining profitability, potentially resulting in slower transaction processing times and increased vulnerability to attacks. This, in turn, could have negative implications for the security and stability of the cryptocurrency network.

Furthermore, the tax could discourage mining activities, reducing the network’s security and transaction processing speeds, which might ultimately lead to decreased demand and lower prices for cryptocurrencies.

Navigating Cryptocurrency Taxation

Despite the perception of some cryptocurrencies being more secretive than others, the IRS has implemented sophisticated methods to monitor cryptocurrency transactions. It is important to understand that the IRS has the capability to eventually identify individuals who fail to accurately record their crypto activity.

When selling or trading cryptocurrency, it is crucial to calculate the cost basis correctly in order to determine capital gains or losses. Your cost basis consists of the price you paid for the cryptocurrency, including any associated fees or costs. Estimating the cost basis or using an average amount for all transactions is a common mistake that can result in inaccurate reporting and potential penalties imposed by the IRS. It is essential to diligently track your cryptocurrency transactions and determine the precise cost basis.

Investing in cryptocurrencies may offer the exciting possibility of receiving free tokens or coins through airdrops. However, it is important to be aware that airdrops can also give rise to tax obligations and complexities for investors. Here are three common issues to be mindful of:

  1. The taxable income from airdrops is determined based on the fair market value of the coins at the time of receipt. Consequently, even if the value of the coins subsequently decreases, you may still have a substantial tax liability.
  2. Tax software systems can detect airdrops, including those that may be fraudulent or have no value, which can artificially inflate your taxable income. Resolving this issue may require manual review of numerous airdrops.
  3. It is crucial to review your records thoroughly, as you may have received airdrops without even realising it. Failure to report airdrops can result in fines and interest charges imposed by the IRS.

It is important to note that, similar to losses from other assets, losses from cryptocurrency investments can be used to offset capital gains. If you sell your cryptocurrency for a lower amount than your initial purchase price, you can report a capital loss on your tax return. This can help reduce your tax liability and potentially save you money. For more detailed information, you can refer to our article on crypto tax loss harvesting.

Some individuals mistakenly choose not to file their tax returns due to an inability to pay their tax debt. This is a serious error that can lead to additional fines and interest charges from the IRS. It is advisable to file your tax return on time or request an extension before the deadline and then work out a payment arrangement with the IRS. Taking proactive steps to address your tax obligations is preferable to disregarding them entirely.

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