Japanese Tax System Not Equipped to Handle Cryptocurrencies

Japan is planning to enforce new cryptocurrency regulations in the country in May but its existing tax system may not be properly equipped to handle digital currency transactions. According to a top government official, the system still needs some tweaks before it can manage crypto taxes.

Japanese taxation regime needs a change

Representative Shun Otokita of the Japan Innovation Party held a Q& A session at the Financial Statements Committee on April 6. Therefore, he talked about the value of market research before introducing a separate tax regime for digital currencies. He is particularly worried about the high-tax rates of Japan and said that it would be difficult to quickly make changes to the tax code to accommodate digital assets. He said that market research will play a crucial role in determining which changes are necessary.

Japanese Tax System Not Equipped to Handle Cryptocurrencies

Japan has a relatively liberal crypto outlook. Here, an individual cannot be identified by the blockchain addresses alone, whether they make or receive payments that are taxable or not. According to Taro Aso, Minister of Finance, there is no oversight over these transactions because of which their investigation was barely moving ahead. The country has allowed crypto transactions but hasn’t created any laws to regulate the industry yet.

What is Japan planning now?

Japan needs to amend its existing regulation to make space for cryptocurrencies. The Japanese Financial Services Agency (FSA) will enforce the Financial Instruments and Exchange Act and the Payment Services Act in the country on May 1. Both acts were supposed to come into force in April but have been delayed by a month because of the ongoing COVID-19 pandemic. Interestingly, the FSA is only considering transactions that come via registered crypto exchanges for tax purposes.

Aso wants the committee to investigate how transactions related to cryptocurrencies can be taxed in the country. On the other hand, Otokita suggested that the Japan Cryptocurrency Business Association (JCBA) was already conducting an investigation into this matter.

Meanwhile, the new legislation emphasizes that crypto exchanges manage the funds of their users separately and avoid clubbing of assets and cash flows. They are also advised to use reliable methods of digital asset storage like cold wallets. If the users want to use hot wallets, the platform must always hold the same crypto assets with them. This will help the exchange pay the users back in case it suffers a hack or a theft.