Laws and Taxation of Crypto Assets in Japan

1. Legal Framework and Recognition

• Definition of Virtual Currency: In 2017, the Japanese government legally defined “virtual currency” as “something possessing asset value.” Under this definition, virtual currencies such as Bitcoin are not considered “currency” and are treated as assets.
• Registration System for Cryptocurrency Exchanges: Cryptocurrency exchanges must be registered with the Financial Services Agency. As a result, exchanges are required to meet specific standards, such as ensuring the safety of customer funds and preventing money laundering.

2. Exemption from Consumption Tax

Starting in 2017, Japan’s Consumption Tax Act was amended so that consumption tax is no longer levied on the purchase of cryptocurrency. This has created an environment conducive to promoting cryptocurrency trading.

3. Tax System

• Income Tax: Profits from buying and selling cryptocurrency are subject to income tax. Specifically, gains and losses from such transactions must be reported as “miscellaneous income.”
• Tax Rate: Income from cryptocurrency trading is subject to income tax based on total income. A tax rate of up to 55% may apply.
• Carryover of Losses: Losses from cryptocurrency trading can be carried forward and deducted for up to three years, including the following year.

4. The Financial Instruments and Exchange Act and Cryptocurrency

• ICO (Initial Coin Offering) and STO (Security Token Offering): ICOs and STOs are increasingly being used as methods to raise funds for new projects. Depending on their specific terms, these public offerings of cryptocurrency may be subject to regulations under the Financial Instruments and Exchange Act.For example, STOs may be treated as security tokens and required to be handled as securities.

5. Prevention of Money Laundering

• Customer Due Diligence (CDD): Cryptocurrency exchange operators are required to verify the identity of new customers and collect information such as the purpose of the transaction and the source of funds when accepting them. This is implemented as a measure to prevent money laundering and counter terrorist financing.
• Reporting of Suspicious Transactions: Cryptocurrency exchange operators are obligated to report any irregularities or suspicious activity detected in customer transactions to the relevant authorities.

6. Other Legal Considerations

• Contractual Relationships: Contracts with services or platforms that handle cryptocurrency may contain many provisions that differ from standard contracts. For example, they often include clauses specific to cryptocurrency, such as provisions regarding transaction cancellation, refunds, and dispute resolution.
• Inheritance of Digital Assets: In many areas, a clear legal framework for the inheritance of cryptocurrency has yet to be established. Advance planning is required regarding wills, estate distribution agreements, and methods for accessing digital wallets.

7. Security Measures

• Strengthening Security Standards: Cryptocurrency exchanges must maintain security standards to safely safeguard customer assets. In particular, in response to past large-scale hacking incidents, the Financial Services Agency (FSA) has been strengthening security audits and inspections.

8. Compliance Framework

• Establishment of Internal Controls: Cryptocurrency exchange operators are required to have appropriate compliance systems and internal controls in place. This helps prevent fraudulent transactions and protect customer assets.

9. Supervision by the Financial Stability Board

• Audits and Investigations: The Financial Stability Commission oversees the business operations of cryptocurrency exchange operators and has the authority to conduct audits and investigations as necessary. In cases of misconduct or regulatory violations, it may impose penalties on operators.

10. Reporting Obligations

• Large Holdings Report: If a party holds a certain percentage or more of a cryptocurrency, they are required to report this to the Financial Services Agency. This is a measure designed to maintain market transparency.

11. Insurance Coverage

• Insurance for Customer Assets: Some cryptocurrency exchange operators insure customer assets against risks such as hacking. However, not all exchanges offer this coverage, so it is important to check each exchange’s policies for details.

12. User Rights and Obligations

• User Rights: Cryptocurrency exchange operators are required to provide users with clear information regarding service details, fees, risks, and other relevant matters. Additionally, users have the right to seek remedies if they have a grievance.
• User Obligations: Users are obligated to accurately manage their account and transaction information. Users are also responsible for filing tax returns related to their trades and transfers.

13. Relationship with the Payment Services Act

• Virtual Currency and Prepaid Payment Instruments: Virtual currency is recognized as a “prepaid payment instrument” under the Payment Services Act. Therefore, it must meet certain requirements stipulated by the Payment Services Act.

14. Intellectual Property Issues

• Technology Patents: Issues regarding patent rights related to blockchain and cryptographic technologies are also emerging. In particular, companies and research institutions advancing technological development are required to take measures to secure their rights regarding their technologies.

15. International Initiatives

• Compliance with International Standards: International organizations such as the Financial Action Task Force (FATF) have established agreements and guidelines regarding cryptocurrencies. Japan is also required to comply with these international standards, and domestic laws are being revised accordingly.
• International Cooperation: Since cryptocurrencies are often traded across national borders, international cooperation and coordination are being strengthened. Regulatory authorities in various countries are increasingly sharing information and working together to prevent fraud and money laundering.

16. Privacy and Data Protection

• Handling of Personal Information: Cryptocurrency exchange operators must comply with the Act on the Protection of Personal Information when handling customers’ personal information. This includes ensuring the accuracy of information, preventing unauthorized access and leaks, and establishing appropriate information management systems.

17. Capital Requirements

• Minimum Capital Requirements: To register as a cryptocurrency exchange operator, a certain minimum amount of capital is required. This measure is intended to maintain the financial soundness of the business and protect customer assets.

18. Advertising and Marketing

• Prohibition of Misleading Content: Advertising and promotional activities related to cryptocurrencies and ICOs (Initial Coin Offerings) must not contain content that could mislead consumers. The Financial Services Agency and the Consumer Affairs Agency may issue guidance or warnings regarding advertisements that could be misleading.

19. Lending Activities

• Lending Using Cryptocurrency: Some platforms offer loans secured by cryptocurrency. These activities are also subject to appropriate regulations and guidelines under laws such as the Financial Instruments and Exchange Act and the Payment Services Act.

20. Classification of Cryptocurrencies

• Utility Tokens and Security Tokens: Among cryptocurrencies, there are “utility tokens,” which are used to access specific services or goods, and “security tokens,” which are invested in with the expectation of capital gains. The applicable laws and regulations may differ depending on this classification.