Japanese regulator proposes digital asset tax reform

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The Financial Services Agency (FSA), a Japanese government agency and the country’s top banking, securities and exchange, and insurance sector regulator, requested changes to the tax code regarding digital asset corporates.

The proposal outlined several key revisions aimed at promoting a more favorable environment for promoting Web3 technology and encouraging businesses to utilize blockchain technology. One of the key proposals in the 16-page document is the elimination of the year-end “unrealized gains” tax on digital assets for domestic firms.

Under Japan’s current tax law, legal entities are subject to yearly taxes on unrealized gains—increases in their digital assets’ value—whether or not they have been converted into fiat currency. This contrasts with many jurisdictions, where firms only need to pay tax on digital assets they sell or swap for fiat.

However, the FSA proposed to change this by exempting domestic firms from this tax burden. By freeing domestic firms from the year-end unrealized gains tax, the FSA hopes to incentivize more companies to invest in the digital asset and blockchain sectors.

This move will please digital asset advocates in the country, who have been requesting changes to taxation. A notable example is the Japan Blockchain Association (JBA), a non-governmental lobbying group, who in July, filed an official request highlighting three key changes that could ease the fiscal burden on the domestic digital asset industry:

• eliminate the year-end unrealized gains tax on corporations holding digital assets;
• switch the taxation method from the current system of personal digital asset trading profit taxation to self-assessment separate taxation, with a uniform tax rate of 20%;
• and eliminate income tax on the profits generated each time an individual exchanges digital assets.

The FSA’s recent proposal shows it is listening to such voices, or at least moving in the same direction as them in its approach to digital assets.

Eliminating the year-end unrealized gains tax on digital assets for domestic firms will go some way to appeasing those, such as the JBA, calling for reform and the proposal has a strong chance of being accepted, as the FSA stated that the Ministry of Economy, Trade and Industry is in support.

The proposal is also likely to receive support from Japanese Prime Minister Fumio Kishida, who in July reiterated his government’s commitment to supporting the Web3 and blockchain sectors, telling a WebX conference in Tokyo, “Web3 is part of the New Form of Capitalism.”

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