Bitcoin and cryptocurrency trading in Japan
Japan is taking a positive lead on crypto with regulation and guidance. There are plenty of opportunities to invest and spend, with institutions looking at tapping into crypto but trading carries high taxes and penalties for non-disclosure.
Japan is a steady ship with its continuing adoption of cryptocurrencies and its policies towards digital currencies. Buying selling and purchasing crypto has bloomed in the Japanese economy through its numerous ATMs, the number of leading crypto exchanges and positive regulation. As a world financial and technological hub the country has high ambitions for the increasing possibilities opening up through the use of blockchain technology. In this field, Japan is amongst several countries that are leading the way.
There are high taxes and the taxation of ‘crypto assets’ (the term ‘virtual assets’ has been ditched) is treated as ‘miscellaneous income’. This means that gains or losses from crypto have to stand or fall alone – they cannot be treated as deductible against other income-generating activities. Those lovely crypto gains are also subject to inheritance tax – so if you’re going to die, better wait till the price drops.
There are currently no Japanese crypto-asset regulations specifically governing the activity of mining – although this is being increasingly looked at in terms of its environmental impact. Japan has strong anti-money laundering laws, in line with many countries and exchange services are obligated to maintain stringent KYC (Know-Your-Customer) checks and records of suspicious transactions.
The burgeoning number of crypto service providers that offer custodial services must bear the same level of accountability for the potential risks as do exchanges. All custodial service providers are obliged to register with the Japan Financial Services Agency (FSA). Additionally, exchanges are also obliged to segregate their funds from those of their customers – and hold an equivalent amount of funds as those of their customers if they are held in ‘hot wallets’. This is to ensure exchanges are able to reimburse customers in the case of theft or fraud.
Law and crypto trading in JapanLegal - existing crypto legislation
Bitcoin and other cryptocurrencies are recognised and accepted by the Japanese government as legitimate, but they are recognised as ‘legal property’. The name cryptocurrency may, therefore, be slightly confusing.Legal - forthcoming crypto legislation
New laws are in place to make exchanges less vulnerable to hacking. Whilst there is increased regulatory requirement, there is also much consolidation and reorganisation going on within the crypto industry as large global exchanges enter the marketplace. Japan is seen as a growth area and paradoxically its tighter regulatory framework is seen as offering many attractions, especially to institutional investors.
Taxing cryptocurrencies in Japan
Japan is open to and advanced in crypto trading, but taxes are high and trading, gaining interest or lending them for gain is subject to a hefty tax. The gain from them is designated as miscellaneous income (which pretty much covers anything!) and is subject to the prevailing tax rates which can be up to 55%. Filing your tax returns for crypto is incorporated into your ordinary income tax returns, which come round at the year ending 31st December and are due on the 15th March following year.
Japan cracks down hard on tax evasion but the country is looking at making the tax on crypto trading income less prohibitive, and a little more in line with traditional investment income. It’s always advisable to check the latest tax bands for anything related to crypto as the activity is subject to changing laws and trends. However, for the most part how much tax you pay is related to your earnings from all your activities in the previous year – whether they are from crypto trading or not, so you may not hit that upper tax band of 55% if your overall earnings are low.
Tax when moving residency
If you are a long-term resident of Japan you are probably deemed a permanent resident for tax purposes, if not for visa purposes. If you are not a permanent resident, and your holdings are outside of Japan you may be able to transfer your crypto holdings to a special type of insurance policy which allows you to reduce tax liability in the future. Whether you qualify to be able to do this very much depends on definitions and variables and you’ll need specialist advice.
Tax on mining
Japan’s designation for crypto profits as ‘miscellaneous income’ also covers mining for bitcoin as well, so you’ll have to pay tax on your hard-earned mined coins. You will, of course, be able to claim expenses of mining them if you are in the business of doing so.
Crypto financial services in Japan
Most retirement and pension funds worldwide deem cryptocurrencies to be too volatile to become part of long-term retirement schemes. There is little certainty on this at present.
More than 30 major Japanese firms, including banks, have been trialing a private digital currency service to assess its viability. Three Japanese banks are associated with this trial, namely, MUFG, Sumitomo Mitsui, and Mizuho.
In Japan, it has been publicized and explained by the Japanese financial community on the financial opportunities and services DeFi provides. The Bank of Japan (BoJ) recognizes that there could be some positive aspects to the adoption of DeFi. According to a recent report whilst there are risks, such as how to regulate and audit such services, DeFi could lead to increased competition in the financial sector.
Using crypto in Japan
Spending cryptocurrency is beginning to grow in acceptance and a number of e-commerce organisations enable the transacting of crypto currencies through their apps and credit cards. You can spend your bitcoin and other cryptocurrencies at thousands of outlets in Japan that accept the cards and payment methods of any financial organization providing this transacting service. Outlets that accept crypto range from a major electronic consumer goods retailer to bars, restaurants, cafés, online shops and nightclubs.
You won’t be able to reduce your tax by gifting your cryptocurrency. Whatever gain you have made on it will be taxable up to the point at which you gift it.
Crypto regulation in Japan
Improved security for your crypto assets inevitably means increased legislation and regulation. After a slow start, Japan is embracing crypto trading and passed the Payment Services Act and the Financial Instruments and Exchange Act to address concerns raised by the hacking of two leading exchanges back in 2018. Money laundering is another concern for regulators. While the new regulations attract institutional players, to some wallet service providers they appear to be regulatory overkill due to high compliance costs.
As with many government bodies, the Tokyo Regional Taxation Bureau can request information from crypto exchanges and get it, so your dealings can be made transparent.