The Japanese government has proposed in its tax reform outline for the fiscal year 2024 that companies holding, rather than trading, cryptocurrencies issued by third parties will be exempt from unrealized profit tax based on market value calculation at the end of the fiscal year. This move is expected to promote the development of the Japanese Web3 industry, and the proposal will be submitted to the Diet for deliberation in January next year.
On the 5th of this month, the tax investigation committee of the ruling coalition in Japan (composed of the Liberal Democratic Party and Komeito Party) proposed an important tax reform proposal. The proposal aims to exempt companies holding cryptocurrencies for the purpose of holding rather than short-term trading from paying unrealized profit tax based on market value at the end of the fiscal year.
The proposal has made progress recently. According to Coinpost’s report, the Japanese government confirmed the tax reform outline for the fiscal year 2024 at a cabinet meeting on the 22nd. This reform includes the taxation of cryptocurrencies. If companies continue to hold cryptocurrencies issued by third parties, they will no longer be subject to tax based on market value at the end of the fiscal year. This change means that companies only need to pay tax on the profits generated from the sale of cryptocurrencies, similar to the tax system for individual investors.
In the past tax reforms, only cryptocurrencies issued by companies themselves were exempt from unrealized profit tax, but there have been increasing calls for implementing the same policy for cryptocurrencies issued by third parties.
This tax reform proposal reflects the recommendations made by the Japan Cryptocurrency Business Association (JCBA) to the government, and is expected to promote the development of the Japanese Web3 and attract domestic and foreign blockchain startups and projects.
Other tax changes include reducing personal income tax and resident tax by 40,000 yen, corporate tax reductions, and the establishment of new tax systems for strategic sectors and innovation fields. These reforms are expected to lead to a decrease in tax revenue in Japan, marking the third largest decline since fiscal year 1989.
The proposal is expected to be submitted to the Diet for deliberation in January next year and requires approval from both the House of Representatives and the House of Councillors.
With further development of the corporate tax system, discussions on separate taxation of cryptocurrencies and other tax reforms will become more active in the future. The JCBA has made some recommendations on the calculation of gains and losses in cryptocurrency transactions, such as exempting cryptocurrency exchanges from tax and imposing a one-time tax on the conversion into fiat currency. They also suggest allowing loss carry-forwards for three years starting from next year. These recommendations are still under discussion.
Note: “Loss carry-forwards” refers to the losses incurred by companies or individuals in one fiscal year, which can be offset against taxable profits in the future to reduce future tax burdens.
High inheritance tax issue
In Japan, the call for tax reform on cryptocurrencies is increasing. In addition to the issue of unrealized profit tax faced by companies, the particularly noteworthy issue is the tax rate imposed on high-value cryptocurrency inheritances in Japan. Currently, Japan imposes an inheritance tax of up to 55% on such inheritances, along with an income tax at the same rate, resulting in a total tax burden of an astonishing 110%.
Furthermore, if the transfer of cryptocurrencies is made by gift during one’s lifetime instead of through inheritance, the recipient of the gift also faces a gift tax of 55% and an income tax at the same rate, resulting in a total tax burden of 110%.
Analysts point out that under this tax system, heirs are required to pay taxes that exceed the value of the inheritance, which is obviously unreasonable. They suggest reflecting this to the authorities to change the tax policy. There have even been suggestions to consider immigrating to countries with lower tax rates, such as Singapore or Dubai, in order to preserve part of the cryptocurrency inheritance.
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JCBA
Japan
Unrealized Profit Tax
Tax Reform