Japan considers implementing tax reforms to prevent capital flight of crypto startups

Industry experts say that the current scheme is stifling domestic innovation in the virtual currency sector.

According to local news outlet Yomiuri, Japan’s Financial Services Agency is considering amending the virtual currency taxation system for corporate entities ahead of the country’s 2023 tax reform. The proposed change includes removing capital gain liabilities for undisposed corporate crypto assets at the end of each taxation year, as well as changing the classification of virtual assets so the maximum capital gains tax applicable is reduced to 20% from 55%. 

Under Japan’s current taxation laws, unrealized capital gains on virtual currencies are recognized as income at the end of each fiscal year (on March 31), resulting in income tax liabilities. In addition, both individual and corporate crypto earnings of over 200,000 JPY ($1,463) in any given fiscal year are classified as “miscellaneous income,” which is taxed at a rate ranging from 15% to 55%, with the local inhabitant’s tax rate included. In comparison, profits earned from stock and forex trading are only subjected to a tax of 20% at the highest levels.

Foreign permanent residents of Japan are also subjected to the nominal rates of 55% upwards. All crypto-income generating activities, such as decentralized finance lending, Bitcoin mining or plain cryptocurrency trading are taxed according to miscellaneous income. It is also not possible to carry forward any capital losses resulting from crypto operations in the years forward.

Industry experts say that the high tax liabilities faced by Japanese crypto startups play a major role in shifting their corporate domiciles abroad. One such company, Astar Network, a decentralized network hub on Polkadot, decided to issue its tokens overseas earlier this year to avoid stringent tax payments and is currently headquartered in Singapore. Expressing his comments on the proposed tax reform, Astar’s founder Sota Watanabe said that it could be “good momentum for the Web3 industry, although it’s still in the middle of the road.”

もしこれが動けば、まだまだ道半ばですがweb3業界にとって良いモーメンタムになると思います。業界団体の方々など関係者の方々の声がやっと政治に届いた事例になると思います。引き続きみんなで業界盛り上げていきたい。 https://t.co/8DOWSfQqBQ

— 渡辺創太 Astar Network (@Sota_Web3) August 24, 2022