The Japanese government has proposed in its tax reform outline for the fiscal year 2024 that companies holding encrypted assets issued by third parties, rather than trading them, 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 the Komeito Party) proposed an important tax reform. The proposal aims to exempt companies that hold encrypted assets 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 tax treatment of encrypted assets. If companies continue to hold encrypted assets issued by third parties, they will no longer be taxed based on the market value at the end of the fiscal year. This change means that companies only need to pay taxes on the profits generated from the sale of encrypted assets, similar to the tax system for individual investors.
In past tax reforms, only self-issued virtual currencies by companies were exempt from unrealized profit tax, but there have been increasing calls to implement the same policy for virtual currencies issued by third parties.
This tax reform reflects the suggestions made by the Japan Cryptocurrency Business Association (JCBA) to the government, and is expected to promote the development of the Japanese Web3 industry 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 reduction, 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, reaching the third largest decline since the 1989 fiscal year.
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 corporate tax systems, discussions on individual taxation of encrypted assets and other tax reforms will become more active. The JCBA has made suggestions on the calculation of gains and losses in cryptocurrency transactions, such as exempting the exchange of cryptocurrency from taxation, imposing a one-time tax on the conversion into fiat currency, and proposing a three-year loss carryforward deduction starting from next year. These suggestions are still under discussion.
Note: “Loss carryforward deduction” refers to the deduction of losses incurred by companies or individuals in one fiscal year from taxable profits in future years, thereby reducing future tax liabilities.
High inheritance tax issue
In Japan, there is an increasing demand for tax reform regarding encrypted assets. In addition to the issue of unrealized profit tax faced by companies, the particularly noteworthy issue is the tax rate imposed on high-value encrypted assets. Currently, Japan imposes an inheritance tax of up to 55% on such assets, along with an income tax of the same proportion, resulting in a total tax burden of a staggering 110%.
In addition, if the transfer of encrypted assets is made through pre-death gifting instead of inheritance, the recipient of the gift also faces a gift tax of 55% and an equivalent proportion of income tax, resulting in a total tax burden of 110%.
Analysts point out that under this tax system, heirs are required to pay taxes exceeding the value of the inherited assets, which is obviously unreasonable, and it should be reflected 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 a portion of the encrypted assets.
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unrealized profit tax
tax reform