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Japanese Cabinet Approves Significant Tax Reform for Crypto Assets in Fiscal Year 2024

In a pivotal decision that could reshape the landscape for businesses involved in the crypto sphere, the Japanese Cabinet has given its seal of approval to a comprehensive tax reform outline for the fiscal year 2024. The reform notably exempts companies holding crypto assets from levying market value tax, pivoting towards taxing profits exclusively generated by the sale of cryptocurrencies.

The amendment, approved during the cabinet meeting on the 22nd, marks a strategic shift in the taxation framework applied to corporations that hold crypto assets issued by third parties. Under the reform, the application of period-end mark-to-market valuation tax, previously used to assess profits or losses based on the difference between market and book value at the fiscal year’s end, will cease for assets assumed to be held continuously.

This transformative change means that corporations will only be taxed on profits incurred from the actual sale of virtual currencies and tokens, aligning the taxation model more closely with that applicable to individual investors. The move is projected to significantly alleviate the tax burden on companies engaged in the holding and operation of crypto assets.

The roots of this tax reform can be traced to the Japan Crypto Asset Business Association (JCBA), which submitted a request for the 2024 tax reform to the government. The objectives behind this revision extend beyond tax relief; it’s envisioned to stimulate the growth of Web3, foster domestic startups leveraging blockchain technology, and enhance the allure of international projects.

This amendment reflects an evolution from last year’s tax reform, which exempted only virtual currencies issued by the holding corporation itself from mark-to-market taxation. The extension of this treatment to cryptocurrencies issued by other entities was a growing demand that this reform now addresses.

Japan’s Prime Minister Fumio Kishida

Furthermore, the Fiscal Year 2024 Tax Reform Outline encompasses a broader agenda, including plans to reduce income tax and resident tax by 40,000 yen per person from June 2024 onwards, corporate tax cuts, and the establishment of a new tax system tailored for strategic sectors and innovation. However, it’s crucial to note that these reforms are anticipated to result in a substantial decline in revenue for both national and local governments, marking one of the most significant reductions since fiscal year 1989, amounting to 3,874.3 billion yen (about 27.2 million USD).

The next phase for this reform involves the submission of the bill to the regular session of the Diet in January, necessitating approval from both the House of Representatives and the House of Councillors. The abolition of the year-end unrealized gain tax applied to corporations represents a pivotal step towards the introduction of separate taxation (20%) and loss carryover deductions, a sought-after measure among cryptocurrency investors.

While this reform addresses certain taxation aspects, discussions about profit and loss calculations in crypto asset transactions remain ongoing. The JCBA has proposed concepts like no tax on the exchange of crypto assets, a lump-sum tax upon converting crypto assets into legal tender, and a “carry-over” provision for three years, starting from the subsequent fiscal year. These propositions are poised for future deliberations.

As the corporate tax system undergoes this significant transformation, it’s anticipated that discussions will intensify, particularly concerning the separate taxation of crypto assets and other potential tax reforms on the horizon. The evolving nature of this space emphasizes the need for continued dialogue and adaptation within the tax framework.

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