Cryptocurrency Regulations in Japan: Key Features

Japan is an intriguing blend of the old and the new, where deep-seated traditions coexist with advanced technological innovations. Regardless of Satoshi Nakamoto's actual nationality, he opted for a distinctly Japanese pseudonym. Japan quickly emerged as a leading force in embracing cryptocurrencies following their inception. 

The first crypto exchange, Bitcoinmarket.com, was founded by a Japanese individual. This user, known as “dwdollar” on the Bitcointalk forum, revealed in January 2010 that he had crafted the platform's code to facilitate the buying and selling of BTC. However, this exchange's tenure was brief and was soon supplanted by the infamously renowned Mt. Gox, also headquartered in Tokyo.

Japan uniquely marries both a progressive and a traditional stance in its taxation and regulation of digital assets. But let's explore that further.

Back in 2017, Japan was ahead of the curve, acknowledging digital assets as viable payment methods. This placed it among a select few nations with such a stance. The Payment Services Act, established in 2009 and subsequently amended post the advent of blockchain, identifies virtual assets as a payment method that lacks a singular issuer and isn't manifested in physical form. 

Cryptocurrency ownership and investment in Japan come with no restrictions. However, the Japanese yen is the only official currency. You can use cryptocurrencies to purchase goods and services, but they aren't accepted for taxes or other government-related payments.

Yet, there are no limitations for banks in servicing crypto initiatives. The Japanese government actively supports endeavors linked to Web3, including those involving NFTs.

The Payment Services Act identifies exchange service providers as entities that offer, as a business function, the following services:

The primary body overseeing cryptocurrencies in Japan is the Financial Services Agency (FSA). It is responsible for regulating the activities of cryptocurrency exchanges and all businesses operating in the crypto domain. 

This agency registers digital providers and licenses their legitimate operations. This comes with the expectation that these entities comply with standards concerning asset security, anti-money laundering measures, and customer protection.

Renowned for their compliance, Japanese practices led by state regulators like the FSA aren't perceived as punitive, unlike agencies such as the SEC.

Instead, the FSA takes a proactive stance by independently researching blockchain and DeFi, providing guidance to entrepreneurs making their initial forays into the digital realm.

Furthermore, the FSA is a prominent sponsor of various tech forums and also supports metaverse-based symposiums.

While the Japanese government largely recognizes the potential of digital assets and their associated technologies, the nation's tax regulators have taken a more traditional stance regarding cryptocurrency income. 

The National Tax Agency of Japan classifies profits from cryptocurrency trading or mining as “miscellaneous income,” subjecting them to an income tax. This tax rate is progressive, scaling from 10% up to 45%.

On top of this, an additional 10% of these profits are directed to local governments as a “resident tax.” Moreover, corporations have to contend with a 30.6% corporate tax on their earnings.

There's also a “consumption tax” in place, similar to VAT in other countries. An 8% tax is applied to purchases of goods and services when using cryptocurrencies, analogous to transactions made with conventional currencies. This means that not only traders but also those using crypto for everyday transactions, are taxed. In effect, major corporations hand over more than half of their profits as contributions to the Japanese treasury. By these metrics, Japan's cryptocurrency taxation is as rigorous as Israel's.

This rigorous tax structure explains why many Japanese digital platforms opt to register their operations in more tax-friendly jurisdictions like Singapore or Gibraltar.