JCBA & JVCEA submit tax reform proposal

At the end of July, the Japan Virtual and Crypto assets Exchange Association (JVCEA) and the Japan Cryptoasset Business Association (JCBA) submitted a comprehensive document outlining their 2025 tax reform proposal.

Key Arguments for Tax Reform

The overarching message is the urgency to reform the current Japanese crypto asset taxation system to stimulate growth and innovation in the Web3 industry. The document argues that the current system hinders user adoption and industry development, putting Japan at a significant disadvantage compared to other nations leading in the Web3 space.

Current State of the Crypto Industry in Japan

• Early Leadership, Current Challenges: Japan was an early leader in recognizing crypto assets, establishing a regulatory framework in 2017. However, strict tax regulations and stringent regulations following past incidents have hampered industry growth, leading to companies and talent relocating overseas.
• Government Recognition and Initiatives: Recognizing the need to regain leadership in the Web3 sphere, the Japanese government has started taking proactive measures. Initiatives include establishing a Web3 policy office, promoting NFT utilization, and exploring regulatory sandboxes for crypto businesses.
• Market Trends: The document highlights positive market trends, such as the growing adoption of crypto assets by institutional investors globally and the increasing use cases of crypto assets in Japan, demonstrating the potential for growth within the sector.

Major Challenges of the Current Crypto Tax System in Japan

• Tax Filing Burden: The complex nature of crypto transactions across multiple platforms makes calculating taxable income difficult for users, discouraging tax filing compliance.
• Lack of Tax Incentives for Donations: Unlike donations of real estate or securities, crypto asset donations are taxed on unrealized gains, discouraging charitable giving in this form.
• Discrepancies with Other Financial Instruments: While crypto assets are considered financial products under revised financial instruments laws, their tax treatment differs significantly, creating inconsistencies and potential loopholes.
• Disadvantage Compared to Global Tax Systems: Compared to countries like the US, UK, and Germany with favorable crypto tax systems, Japan’s system is seen as a deterrent to investors and businesses, potentially hindering the growth of the domestic Web3 industry.

Specific Tax Reform Proposals

1. Income Tax: Reclassification of Income and Separate Taxation

• Reclassifying Crypto Income: Currently, profits from crypto asset trading are generally categorized as miscellaneous income, subject to progressive tax rates. The proposal calls for reclassifying crypto income, considering factors like holding period and purpose, potentially recognizing it as capital gains.
• Implementing Separate Taxation: The proposal advocates for a separate 20% tax rate on crypto gains, similar to other financial instruments, and allowing for the carry-forward of losses for up to three years.

2. Income Tax: Donations

• Removing Tax Barriers to Crypto Donations: The proposal recommends aligning the tax treatment of crypto donations with other asset classes, such as real estate and securities, by exempting them from taxation on unrealized gains. This would encourage charitable giving in the form of crypto assets.

3. Inheritance Tax

• Addressing the Cost Basis Issue: Currently, inheriting crypto assets can lead to a significant tax burden for heirs due to the lack of a step-up in cost basis. The proposal suggests allowing heirs to inherit the cost basis of the deceased, mitigating potential double taxation.
• Evaluating Fair Market Value: The proposal calls for aligning the valuation method for inherited crypto assets with listed securities, considering the average closing price for a specific period, potentially reducing the tax burden.

4. Exchange of Crypto Assets

• Deferring Taxation Until Conversion to Fiat: The current system taxes crypto-to-crypto exchanges as taxable events, creating administrative burdens and discouraging trading. The proposal suggests deferring taxation until crypto assets are converted to fiat currency, simplifying tax reporting and potentially boosting trading activity. However, this recommendation requires further research due to potential complexities in implementation and potential for tax avoidance.

Conclusion and Call to Action

The document emphasizes the need for immediate action on these proposals to create a fair and competitive playing field for the Japanese crypto asset industry. The JVCEA and JCBA urge the government to prioritize these reforms to encourage innovation, attract investment, and position Japan as a global leader in the Web3 era. They believe that aligning the Japanese crypto tax system with global best practices will not only benefit the industry but also contribute to Japan’s economic growth and competitiveness on the global stage.

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