Japan’s New Crypto Tax Proposal Could Cut Rates to 20% from Current 55%

Japan's Financial Services Agency Weighs Crypto Tax Reform

Japan’s Financial Services Agency (FSA) is contemplating a potential shift in the tax treatment of cryptocurrency holdings.

The FSA's recent document, released on Friday, examines whether crypto assets should be classified as financial assets for investment purposes rather than as income.

The document notes,

“Regarding the tax treatment of crypto asset transactions, it is necessary to consider whether crypto assets should be treated as financial assets that should be the subject of investment for the public.”

This proposed change could significantly alter the tax landscape for cryptocurrency investors in Japan.

Currently, Japan imposes high taxes on crypto profits, treating them as income with rates reaching up to 45% for those earning over 40,000,000 yen ($276,000).

Translation:

The graph shows the tax rate for virtual currency held for more than one year.
Japan is second in the world with 45% 🇯🇵

In contrast, capital gains from securities such as shares are taxed at a flat rate of 20%.

The FSA's document suggests that by reclassifying crypto assets as financial assets, higher-earning crypto holders might benefit from a reduced tax rate, potentially lowering their tax burden.

The FSA report also points out,

“It is expected that crypto assets will contribute to the expansion of wages and the creation of household assets, but their use by individual investors is currently limited.”

Impact of Japan's Interest Rate Hikes on Global Markets

The backdrop to this potential tax reform includes Japan’s recent economic policies.

On September 3, Bank of Japan Governor Kazuo Ueda indicated that the central bank would continue to raise interest rates if the economy performs as expected.

This statement has sparked apprehension within the global cryptocurrency community, fearing another market setback akin to the turmoil experienced in August.

The global market meltdown on August 5 was triggered by a confluence of factors: rising Japanese interest rates, declining tech stocks, and concerns over a slowing US economy.

The Japanese stock market experienced its worst day in 37 years, plummeting 12%.

This collapse was partly due to the "carry trade" strategy, where investors borrow yen at low interest rates to invest in higher-yielding US assets.

Following Japan’s rate hike—its first since 2007—investors rushed to liquidate US assets to repay yen, exacerbating the market downturn.

Tech stocks were hit particularly hard, with Apple’s shares falling 9% and chip makers Nvidia and Intel dropping nearly 7%.

Crypto Market's Severe Reaction

The cryptocurrency market also faced severe repercussions, with its most significant single-day drop since 2023.

Leading cryptocurrencies Bitcoin and Ethereum suffered double-digit declines, while altcoins like Solana and Dogecoin saw their prices fall by up to 30%.

The market witnessed approximately $1.14 billion in liquidations, with $857 million from long positions and $281 million from short positions, resulting in a staggering $600 billion reduction in market capitalisation.

The BOJ’s indication of further interest rate hikes has only heightened fears of additional disruptions in the crypto space.

US Federal Reserve's Potential Mitigation Measures

In response to these global financial strains, the US Federal Reserve, under Chair Jerome Powell, has announced plans to reduce interest rates in September 2024.

Powell stated that “the time has come” for the Fed to cut interest rates, citing a return to "sustainable" price growth levels.

This move aims to narrow the interest rate gap between Japan and the US, potentially mitigating the risk of further yen carry trade unwinding.

The Fed's decision is expected to address some of the downside risks facing the US labour market, which saw the unemployment rate rise to 4.3% in July 2024 from 4.1% the previous month, marking its highest level since October 2021.

Japan's Tax Reform Proposal and Industry Reactions

The Japanese government is set to review its tax policy for fiscal year 2025, with a focus on crypto assets.

The FSA has proposed reclassifying these assets as financial investments, potentially leading to a tax rate reduction.

Currently, crypto profits in Japan are taxed as miscellaneous income with rates ranging from 15% to 45%, depending on the income bracket.

With the addition of the 10% Inhabitant Tax, the highest possible tax rate on cryptocurrency gains in Japan reaches 55%.

In contrast, profits from stock trading face a maximum tax rate of 20%. Corporate holders of crypto assets face a flat 30% tax rate on their holdings, irrespective of realised profits.

Crypto advocates, including the Japan Blockchain Association, have long pushed for tax reform.

In 2023, the group requested a lower tax rate on crypto assets and submitted a formal proposal on July 19 for the 2025 fiscal year.

Their proposal included a flat 20% tax rate for crypto and a three-year loss carryover deduction.

Despite these efforts, significant policy changes have yet to materialise, leaving the crypto sector in Japan awaiting a favourable shift in tax policy.