How Japan pioneered the field

Photo by Andre Benz on Unsplash

Many exchange firms got hit hardly during worldwide crackdown wave. Some firms disappear forever, some resurface in another jurisdiction — Japan. World’s third largest economy has been a stronghold for cryptocurrency.

The way Japanese government deal with cryptocurrency is just outstanding, most notably it is the first country to regulate exchanges at the national level.

Japan seemed to realized the need for a new medium to take back their glory days after China overtaking Japan to become world’s second-biggest economy in 2010, and the Mt. Gox case in 2014 urged them to jump into the blockchain revolution.

The country already had a powerful weapon: the Japanese Yen (JPY).

Yen has always been an extremely important currency on the global foreign exchange market where $5.1 trillion is traded everyday. It is a key to shape the broken world between fiat money and cryptocurrency. Once Japan open their door, the cryptocurrency market could directly couple with international FX market and Japan could exercise their power as first big gatekeeper.

They took a shot by releasing Japan’s Payment Services Act and re-amendment of the Act on Prevention of Transfer of Criminal Proceeds on May 25, 2016, afterward, a detailed regulations and guidelines entered into force after public consultation period in 2017.

Some people believe the bill confirmed Japan’s intention to become the host country for fiat-crypto exchange firms. They did a smart move by classifying cryptocurrency as payment method rather than currency in the bill and later announced exchanging fiat for virtual money be exempt from 8% consumption tax (known as VAT or GST in some countries).

A bit of Tax

According to one JFSA* executive, the regulator seek to foster “sound market development”. Even it’s still unknown how the Japanese government define what is sound to them and what is not but clearly, they don’t want an overexcited crowd to rush selling fiat for cryptocurrency. They came up with new tax directive to discourage an average Satoshi from speculating but still ensure his freedom to speculate what he likes through a well-thought-out tactic.

Here are what they proposed:

1. Cryptocurrency income will be added with other income.

2. You keep your loss, they tax on your profit.

3. Your loss is not tax deductible.

Due to (possible) profit from crypto trading, total taxable income often climb up the tax bracket causing tax obligation from non-crypto sources to increase as well. Maximum tax rate is 55% for total income from $365,000 or more, but most people will enjoy paying somewhere between 20% to 33%.

55% could be considered a high tax rate for people who made a fortune from previous year market boom, but it already happened. And there’s a bad news for all tax dodger: From around summer 2017, Japanese tax authority has asked exchange operators to report their clients asset, they even setup a special team to analyze the data and compare with annual tax reports. It seems they will continue the practice in the future to ensure untruthful reports will not go without being spotted.

JFSA: Japan’s Financial Services Agency (金融庁)

Up next: Quoinex by QUOINE, the case of a Japanese, pro-regulation company.