Japan Embraces Crypto: A New Tax Regime for Long-Term Holdings

Japan, long a leader in the technology sector, is taking a bold step to embrace the digital asset revolution. The government is preparing to implement a new taxation regime specifically tailored for companies holding cryptocurrencies as long-term investments. This move marks a significant shift in Japan’s approach to crypto and reflects its commitment to becoming a major player in the burgeoning global digital economy.

Marking a Shift in Cryptocurrency Tax Policy

Under the current tax code, Japan is one of the few countries that taxes companies based on the market value of their cryptocurrency holdings as of the end of each fiscal year. This mark-to-market valuation approach, however, excludes self-issued coins. While aimed at capturing capital gains, this rule has had unintended consequences.

Exacerbating the Exodus to Tax-Friendly Jurisdictions

The stringent tax rules have driven some companies holding cryptocurrencies as part of their business model to relocate to more tax-friendly jurisdictions like Singapore, Dubai, and Switzerland. This has led to a loss of business and tax revenue for Japan. Now, by proposing to exempt companies from paying tax on unrealized gains from cryptocurrencies held for long-term purposes, the ruling coalition aims to stem this trend and make Japan a more attractive location for businesses involved in the digital asset sector.

Additional Tax Reforms Under Consideration

The coalition’s meeting on Tuesday also discussed other proposed tax changes, including:

• Extending Deductible Entertainment Expenses: Prolonging a measure that allows small and medium-sized enterprises to deduct up to 8 million yen ($54,000) annually for entertainment expenses. This measure is currently set to expire at the end of March 2024.
• Taxing Foreign Visitors on Purchases: Implementing a new tax system for foreign visitors making purchases in Japan, with details to be finalized for implementation starting in fiscal year 2024.

Strategies Ahead

These proposed changes are expected to be included in the coalition’s fiscal 2024 tax reform plan, which is currently being finalized. The plan will then be submitted to the Japanese Parliament for approval.

If implemented, the proposed tax breaks for companies holding cryptocurrencies are likely to attract businesses to Japan and boost the country’s digital asset industry. Additionally, the other proposed tax reforms could provide relief to businesses and stimulate economic activity.

Overall, the proposed changes represent a significant shift in Japan’s approach to cryptocurrency taxation and signal the government’s commitment to fostering a thriving digital asset ecosystem.