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    Texas Man Faces Historic Charges Over Crypto Capital Gains Tax

    US Historic Crypto Tax charges – Introduction

    In a groundbreaking case that signals the Internal Revenue Service’s (IRS) increasing scrutiny of digital assets, a Texas man has been indicted for filing false tax returns related to unreported cryptocurrency transactions.

    This marks a significant moment in the enforcement of tax laws on digital currency gains, underscoring the federal government’s commitment to upholding tax compliance in the cryptocurrency space.

    Background

    The Department of Justice (DoJ) announced that an Austin resident was charged with filing false tax returns from 2017 to 2019, during which he allegedly failed to report the sale of approximately $3.7 million worth of Bitcoin.

    These unreported sales resulted in substantial capital gains, part of which was used to purchase a residence.

    The indictment also accuses the individual of structuring cash deposits to evade currency transaction reporting requirements, further complicating the case.

    A Historic Prosecution

    This prosecution is notable not just for its focus on cryptocurrency but because it represents what is believed to be the first-ever criminal case concerning the tax implications of legal source crypto transactions in the United States.

    Implications of the Case

    The charges underscore the IRS’s stance: the vast majority of digital asset transactions are taxable and must be reported.

    With the IRS placing the crypto question prominently on tax forms, the message is clear—ignorance or avoidance of reporting digital assets is fraught with legal peril.

    This case serves as a stark reminder of the consequences of failing to comply with tax obligations related to cryptocurrency gains.

    The Importance of Reporting and Compliance

    As digital currencies continue to integrate into the mainstream financial ecosystem, the IRS and the DoJ are signaling their intent to rigorously enforce tax laws in this domain.

    For cryptocurrency investors and users, this case underscores the importance of maintaining meticulous records and ensuring all taxable transactions are accurately reported.

    Presumption of Innocence

    It’s crucial to remember that an indictment is merely an allegation, and the defendant in this case is presumed innocent until proven guilty in a court of law.

    However, if convicted, the charges carry substantial penalties, including potential prison time for each count of structuring and filing false tax returns.

    US Historic Crypto Tax charges – Conclusion

    This landmark case is a wake-up call to all who engage in cryptocurrency transactions to take their tax reporting obligations seriously.

    With the IRS and federal prosecutors now actively pursuing legal actions against tax evasion in the crypto space, ensuring compliance has never been more critical.

    Further, one suggests the rest of the world is likely to follow suit.

    Final thoughts

    If you have any thoughts on this article regarding US Historic Crypto Tax charges, or any US tax matters, then please get in touch.

    Israel’s novel approach to crypto taxes

    Israel crypto tax update – Introduction

    The Israeli Tax Authority is ushering in a new era of cryptocurrency regulation with the introduction of a novel procedure designed to streamline tax payments on digital currency profits.

    This groundbreaking approach is a direct response to the challenges faced by digital currency owners, particularly the reluctance of many Israeli banks to process deposits from cryptocurrency transactions due to concerns about money laundering and terrorism financing.

    Key Features of the New Tax Procedure

    Pilot Program

    Scheduled to commence at the beginning of 2024, this six-month pilot program will enable cryptocurrency holders to pay their taxes directly to the Tax Authority.

    Dealing with Bank Refusals

    Owners will declare their profits and provide proof of a local bank’s refusal to accept their funds.

    This facilitates a solution for those impacted by bank hesitancy.

    Flexible Payment Options

    Payments can be made from foreign bank accounts in low-risk countries or via digital currency trading companies.

    Israeli Supreme Court’s Landmark Decision

    Overview

    In October 2023, the Israeli Supreme Court made a crucial decision impacting digital currency trading.

    This decision, influenced by a petition from Bits of Gold and the Israeli Bitcoin Association, clarified that Israeli banking laws accommodate banks’ engagement in digital currency transactions.

    The Court’s Findings

    Recognition of Digital Assets

    The Court recognized digital currencies as assets within the financial sector, falling under the operational scope of banks.

    Permission for Bank Involvement

    Banks are authorized to engage in digital currency-related activities, aligning with the interpretation of the Banking Law.

    Call for Regulation

    The Bank of Israel and the banking system are urged to concentrate on regulating the integration of digital currencies.

    Implications for the Financial Sector

    This initiative by the Israeli Tax Authority, complemented by the Supreme Court’s ruling, marks a significant shift in the financial and regulatory landscape.

    It not only legitimises digital currencies but also encourages responsible and regulated engagement with them.

    Israel crypto tax update – Conclusion

    Israel’s progressive steps towards integrating digital currencies into its financial and tax systems demonstrate a forward-thinking approach.

    This development is a bellwether for other nations contemplating the incorporation of digital currencies into their economic frameworks.

    Final thoughts

    For further information or assistance regarding this Israel crypto tax update or the taxation of digital currencies in Israel more generally, then feel free to get in touch.

    Italy NFT and Cryptoasset Tax 

    Italy NFT and Cryptoasset Tax  – Introduction

    In a rapidly evolving digital world, Italy’s stance on the taxation of crypto-assets has taken a significant step forward.

    The Italian Revenue Agency’s Circular Letter No. 30/E, dated 27 October 2023, sheds light on this, offering operational guidelines aligned with the 2023 Budget Law.

    This development is relevant for both individual investors and institutions accessing the  world of cryptocurrencies and digital assets.

    Defining Crypto-Assets

    Crypto-assets are digital representations of value or rights, easily transferable and storable via distributed ledger or similar technologies.

    They encompass various types, including payment tokens, security tokens, utility tokens, and non-fungible tokens (NFTs).

    Tax Implications on Capital Gains

    The Circular outlines that capital gains from sales, redemptions, exchanges, or holdings of crypto-assets fall under Article 67, paragraph 1, letter c-sexies, of the Income Tax Consolidation Act (Tuir).

    These gains are subject to a substitute tax rate of 26%. Notably, the exchange between cryptocurrencies with identical economic functions is not tax-relevant.

    However, transactions involving NFTs and cryptocurrencies are considered taxable events.

    Calculation of Capital Gains and Losses

    The taxable base for capital gains is calculated per Article 68, paragraph 9-bis, of the Tuir.

    It’s based on the difference between the sale’s consideration or fair value and the acquisition cost.

    Moreover, the deduction of capital losses is permissible, albeit under specific conditions.

    Extended Regimes for Crypto-Asset Holders

    Crypto-asset holders can now benefit from the Administrated Savings and Managed Savings regimes, broadening the scope of financial planning and investment strategies.

    Tax Monitoring Obligations

    Resident individuals, non-commercial entities, and Simple Partnerships in Italy must report their foreign-held crypto-assets in the RW Box of their Income Tax Return, emphasizing transparency and compliance.

    Redetermination Opportunity for Holders

    For those holding crypto-assets as of 1 January 2023, there’s an option to re-determine their cost or purchase value as of that date.

    This re-determined value is subject to a 14% substitute tax, applicable even if the assets are no longer held at the time of payment.

    VAT and Stamp Duty Considerations

    The Circular aligns with international VAT best practices for cryptocurrencies used exclusively as payment means in VAT-subject transactions.

    Some crypto operations, like virtual currency exchanges or mining, are exempt from VAT.

    Additionally, stamp duty applies to periodic communications concerning crypto-assets.

    Inheritance and Gift Tax

    To ascertain the taxable base for inheritance and gift tax, the fair market value at the time of succession or donation is critical.

    Regularisation Opportunity

    For those who haven’t declared crypto-assets in their tax returns, a regularization window is available until 30 November 2023, with reduced penalties.

    This opportunity extends to undeclared income derived from crypto-assets.

    Determining the Territoriality

    The Circular provides guidelines on the territoriality of crypto-assets, focusing on the location where access keys are held to determine if the income is produced in Italy.

    Italy NFT and Cryptoasset Tax – Conclusion

    Italy’s latest guidelines on crypto-assets taxation reflect a growing trend of regulatory bodies adapting to the digital age.

    These guidelines offer clarity and a framework for individuals and businesses engaging in cryptocurrency transactions, ensuring compliance while navigating this emerging financial landscape.

    Final thoughts

    If you have any queries about this article on Italy NFT and Cryptoasset Tax, or Italian tax or crypto tax in general, then please get in touch.

    Canadian Crypto Tax Insights from CRA’s Recent Roundtable

    Canada Crypto Tax – Introduction

    In the rapidly evolving landscape of cryptocurrencies, clarity on taxation remains a crucial concern for both users and intermediaries.

    In a recent roundtable discussion between the Canada Revenue Agency (CRA) and the Association de planification fiscale et financière (APFF), the CRA offered insights and guidelines on several critical issues related to the taxation of cryptocurrencies.

    Transferring crypto to platform

    A scenario presented to the CRA involved a taxpayer holding bitcoins in a cryptocurrency wallet, transferring these bitcoins to a centralized platform for exchanging and lending crypto assets.

    The platform offered a variable return of approximately 4% per year in bitcoin in exchange for the deposit.

    The platform’s terms included rights to pledge, sell, or lend the bitcoins, with profits from these actions belonging to the platform.

    The depositor had withdrawal rights, and withdrawals were paid from a pooled wallet containing bitcoins from various clients.

    The crucial query posed was whether this transfer constituted a “disposition” for tax purposes, potentially leading to the realization of a gain, loss, capital gain, or capital loss upon the transfer.

    The CRA’s opinion leaned towards considering the taxpayer’s deposit as a disposition, as the platform effectively acquired rights to use, profit from, and dispose of the assets, transferring ownership away from the taxpayer.

    This stance by the CRA highlights the necessity for tax advisors to scrutinize the terms and conditions of platforms for both the platform operators and their customers.

    The determination of whether a disposition has occurred relies on assessing possession and economic risk linked to the property, rather than accepting a platform’s terms stating otherwise.

    The discussion also shed light on the changing landscape of crypto asset lending platforms. Over the past 24 months, these platforms offering returns on cryptocurrency deposits have seen a decline.

    Regulatory bodies such as the U.S. SEC and the Autorité des marchés financiers du Quebec clarified that crypto asset deposit accounts fall under securities, requiring compliance with securities laws. Notably, prominent U.S.-based lending platforms faced insolvency protection in 2022.

    In Canada, custodial crypto asset trading platforms (CTPs) are regulated as dealers under applicable securities law.

    They must explicitly state in their terms that crypto assets are held separately for clients. Unlike the terms of crypto asset lending platforms, transfers to CTPs might not generally constitute a disposition, subject to specific circumstances.

    Other scenarios discussed

    Moreover, the CRA addressed two other cryptocurrency taxation scenarios during the roundtable:

    1. Loss due to exchange fraud or theft: The CRA suggested that losses due to centralized exchange fraud or theft should be eligible for tax realization.
    2. Proving business loss upon platform bankruptcy: The CRA outlined evidence, including documentation of fraud/bankruptcy, account activation, contracts, claims filed, recovery proceedings, and evidence of unsold cryptocurrency.

    Canada Crypto Tax – Conclusion

    The insights from the CRA’s discussion offer valuable guidance, emphasizing the need for a nuanced understanding of terms and conditions within crypto platforms.

    Further, it highlights the need to maintain meticulous records for taxation purposes in the evolving cryptocurrency landscape.

     

    If you have any queries on Canada Crypto Tax, or other Canadian tax matters, then please get in touch.

    South Africa Crypto Tax

    South Africa Crypto Tax: Introduction

     

    Blockchain technology and the intersection with traditional financial systems has given revenue authorities around the world  a digital puzzle to solve.

     

    Tax compliance in this context involves correctly determining taxable amounts, adhering to disclosure requirements, and ensuring timely tax payments.

     

    So, how do we approach this crypto Rubik’s cube?

     

    The approach of SARS

     

    The South African Revenue Service (SARS) has been treating gains and losses from crypto-investments as ordinary transactions under existing tax rules. 

     

    In 2018, cryptocurrencies were included in the definition of ‘financial instrument’ in the Income Tax Act. 

     

    In 2020, this definition was expanded to ‘crypto asset,’ broadening the range of applicable provisions. 

     

    Despite this, applying these tax rules in the crypto-investment space can be complex and requires professional expertise.

     

    Penalties for non-compliance

     

    SARS has the authority to impose understatement penalties ranging from 0% to 200% for incorrect tax determinations. 

     

    To enforce tax compliance, SARS relies on taxpayers to disclose crypto-related gains and losses. 

     

    If a taxpayer refuses to disclose voluntarily, SARS can use its information-gathering powers to compel disclosure from taxpayers, advisors, and third-party service providers.

     

    Transparency and tracking

     

    Clearly, for revenue authorities around the world to apply relevant tax laws, they must first be aware of the transactions. 

     

    This can be challenging as blockchain addresses and wallet IDs are necessary to assess on-chain digital trails. 

     

    Off-chain audits involve leveraging information from digital currency exchanges and peer-to-peer facilitators. 

     

    Revenue authorities are also using information from other authorities through data exchange agreements.

     

    Conclusion

     

    Tax compliance in the crypto space carries significant risks, and tax professionals play a crucial role in safeguarding returns from unnecessary tax costs.

     

    If you have any queries around South Africa Crypto Tax, or South African tax matters in general, then please do get in touch.

     

    Swiss crypto taxes – An update

    Swiss crypto taxes: Introduction

    In the ever-evolving world of cryptocurrency taxation, staying informed is paramount.

    On 19 October 2023, the Swiss Federal Tax Administration made significant updates to its tax information regarding cryptocurrencies.

    Let’s take a peak under the digital bonnet and see what they said…

    Non-Fungible Tokens (“NFTs”)

    General

    At one point, NFTs looked to be taking over the world – one ape at a time.

    However, the wind has been taken out of their sails during the so-called ‘crypto winter’. Even apes suffer from frostbite!

    If it were needed, the Swiss Federal Tax Administration has put forward a comprehensive definition, characterising NFTs as cryptographically unique, indivisible, irreplaceable, and verifiable assets.

    They represent specific objects, whether digital or physical, on a blockchain, and each NFT exists only once, rendering it unshareable or replaceable.

    There is nothing of surprise here.

    However, it’s worth noting that the definition mainly aligns with the traditional notion of NFTs. It perhaps does not address ERC-1155 NFTs, which can represent both fungible and non-fungible tokens in a single smart contract.

    This is symptomatic of the fact that, despite the best will in the world, authorities are always behind the curve.

    Tax position for NFTs

    The purchase and sale of NFTs, according to Swiss tax authorities, are generally treated like traditional asset transactions.

    Income tax implications do not arise from NFT purchases, as these transactions don’t alter the buyer’s assets.

    Transaction costs related to the purchase are not tax-deductible for non-professionals, as they pertain to asset swapping rather than management. Profits or losses incurred during NFT sales are not considered.

    However, royalties paid to NFT creators during various transfers are subject to income tax as intangible asset income..

    For companies, corporate income tax considerations come into play.

    The difference between the purchase and sale prices, along with license fees, is considered taxable income or expenses.

    As for withholding tax, the Swiss Federal Tax Administration emphasizes that NFT transactions are generally not subject to it, as they do not typically constitute income from movable assets.

    Ultimately, it stresses, the tax position must be determined on a case by case basis.

    Airdrops

    Airdrops have become a popular way for blockchain projects to distribute crypto-assets to specific individuals.

    The tax implications of airdrops are addressed in the new update.

    In principle, tokens received via airdrops by individuals taxable in Switzerland are considered taxable.

    The nature of the airdrop, whether it falls under general income, employment relationships, returns on movable assets, or certain exemptions, depends on its structure.

    There are specific considerations for airdrops that resemble promotional games, which could be tax-exempt up to CHF 1,000, provided certain conditions are met.

    Conclusion

    This update from the Swiss Federal Tax Administration represents a positive step in clarifying the tax consequences of the crypto ecosystem.

    However, the complexity of the crypto-tax landscape remains.

    Precise tax planning is essential for crypto-related and FinTech projects, as case-by-case analysis often holds the key to understanding and complying with the evolving tax regulations.

     

    If you have any queries about Swiss crypto taxes, Swiss taxes in general, or any other tax matters then please get in touch.

    South Africa Crypto Tax

    South Africa Crypto Tax – Introduction

     

    Blockchain technology and the intersection with traditional financial systems has given revenue authorities a digital puzzle to solve.

     

    Tax compliance in this context involves correctly determining taxable amounts, adhering to disclosure requirements, and ensuring timely tax payments.

     

    So, how do we approach this crypto Rubik’s cube?

     

    The approach of SARS

     

    The South African Revenue Service (SARS) has been treating gains and losses from crypto-investments as ordinary transactions under existing tax rules. 

     

    In 2018, cryptocurrencies were included in the definition of ‘financial instrument’ in the Income Tax Act. 

     

    In 2020, this definition was expanded to ‘crypto asset,’ broadening the range of applicable provisions. 

     

    Despite this, applying these tax rules in the crypto-investment space can be complex and requires professional expertise.

     

    Penalties for non-compliance

     

    SARS has the authority to impose understatement penalties ranging from 0% to 200% for incorrect tax determinations. 

     

    To enforce tax compliance, SARS relies on taxpayers to disclose crypto-related gains and losses. 

     

    If a taxpayer refuses to disclose voluntarily, SARS can use its information-gathering powers to compel disclosure from taxpayers, advisors, and third-party service providers.

     

    Transparency and tracking

     

    Clearly, for revenue authorities around the world to apply relevant tax laws, they must first be aware of the transactions. 

     

    This can be challenging as blockchain addresses and wallet IDs are necessary to assess on-chain digital trails. 

     

    Off-chain audits involve leveraging information from digital currency exchanges and peer-to-peer facilitators. 

     

    Revenue authorities are also using information from other authorities through data exchange agreements.

     

    South Africa Crypto Tax – Conclusion

     

    Tax compliance in the crypto space carries significant risks, and external tax professionals play a crucial role in safeguarding returns from unnecessary tax costs.

     

    If you have any queries about South Africa Crypto Tax, South Africa taxes, or tax matters in general then please get in touch.

     

    Cryptocurrency to be disclosed for Income Tax

    Introduction

    Cryptocurrency investors in India have long been wondering whether they need to disclose their holdings to the income tax authorities.

    The answer is now clear: yes, you do.

    New Indian tax regime for crypto

    The Indian government has introduced a new tax regime for cryptocurrency, which includes a 30% tax on gains from the sale of VDAs (virtual digital assets).

    The new rules also require investors to disclose their holdings on their income tax returns.

    Crypto flight?

    This change has prompted some investors to consider transferring their holdings to offshore exchanges or wallets in an attempt to avoid taxes.

    However, it is important to note that this could have serious consequences.

    The Foreign Exchange Management Act (FEMA) prohibits the transfer of foreign assets without prior permission from the Reserve Bank of India.

    If you are caught transferring your cryptocurrency holdings to an offshore exchange or wallet without permission, you could face severe penalties.

    Therefore, it is advisable to declare your cryptocurrency holdings on your income tax return, even if they are held in an offshore account. This will help to protect you from any potential legal problems.

    Indian crypto tax – Conclusion

    The new tax rules for cryptocurrency are complex, so it is important to seek professional advice if you are unsure about your obligations.

    However, by following the above guidance, you can ensure that you are compliant with the law and avoid any potential penalties.

    Indian crypto tax: Tips for disclosing your cryptoholdings on your income tax return:

    By following these tips, you can ensure that you are compliant with the new tax rules for cryptocurrency and avoid any potential penalties.

    If you have any queries about Indian crypto tax or Indian tax matters in general, then please do not hesitate to get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article

    Rising Sun: Japan’s Path to Rejuvenate Crypto?

    Japanese crypto tax – Introduction

    Japan’s Liberal Democratic Party and its Web3 project team have recently published a white paper outlining crypto-friendly initiatives, indicating a potential resurgence in the nation’s cryptocurrency landscape.

    The proposals include improved accounting practices and support for decentralized autonomous organizations (DAOs).

    A New Opportunity for Japan?

    In the wake of the global tightening of cryptocurrency regulations due to the collapse of the algorithmic stablecoin UST and the bankruptcy of major crypto exchanges, Japan’s Web3 project team believes that the country has a unique opportunity to lead the way in fostering a secure environment for cryptocurrency innovation.

    The white paper suggests that Japan could be the first to welcome a new era of crypto growth and lead global discussions around digital assets.

    Potential policy Changes for a Web3-Friendly Environment

    To create a more Web3-friendly environment in Japan, the white paper highlights the need for several policy changes, including tax reforms, enhanced accounting practices, and the introduction of new DAO laws.

    These changes aim to encourage investment in tokens and facilitate the growth of blockchain-related businesses in the country.

    Redefining Tokens and Tax Reforms

    The white paper acknowledges that tokens are no longer merely speculative assets. Many Web3 startups now use them for fundraising and governance purposes.

    Therefore, existing accounting and tax regulations should be updated to reflect the current uses of tokens in the ecosystem. The paper calls for tax reforms that favor cryptocurrencies.

    Revamping Accounting Practices for Web3 Companies

    Traditional accounting businesses have found it challenging to audit Web3 companies in Japan, highlighting the need for clear auditing guidelines.

    The Japanese Institute of Certified Public Accountants (JICPA) plans to hold study sessions to share information and discuss crypto-assets with Web3-related companies and industry groups. Representatives from related ministries and agencies will also participate as observers.

    Supporting the Growth of DAOs in Japan

    As the number of decentralized autonomous organizations (DAOs) grows in Japan, the white paper identifies a pressing need for clarity on how they can or should be structured within the country.

    Since there are no legal entities to ensure the limited liability of DAO members, the paper proposes establishing DAO laws similar to those governing limited liability companies (LLCs).

    The white paper emphasizes that the enactment of LLC-type DAO legislation is intended to increase options for establishing DAOs, without denying the establishment and activities of DAOs under other legal forms.

    Conclusion

    Japan’s push for crypto-friendly initiatives, as outlined in the Liberal Democratic Party’s white paper, signals a potential thaw in the global crypto winter.

    By adopting policy changes such as tax reforms, improved accounting practices, and the introduction of new DAO laws, Japan aims to create a Web3-friendly environment that fosters innovation and growth in the cryptocurrency and blockchain industries.

    If you have any queries about Japanese crypto tax / Web 3.0 in Japan or Japanese tax matters in general, then please do get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.

    Taxation of cryptoassets and Web 3.0

    Taxation of cryptoassets and Web 3.0 – Introduction

    Introduction

    The Web 3.0 industry has been expanding in Japan in recent years.

    However, uncertainty around the tax treatment of Web 3.0 transactions and cryptoassets in Japan have been problematic for the businesses in this nascent space.

    What is Web 3.0?

    Web 3.0 refers to the next generation of the World Wide Web, which is characterized by a more decentralized, interconnected, and user-centric internet.

    It is also known as the decentralized web or the semantic web.

    Unlike Web 2.0, which was mainly focused on user-generated content and social networking, Web 3.0 aims to create a more open and decentralized internet using blockchain technology and other distributed systems.

    This would allow for more peer-to-peer transactions and communication, reducing the need for centralized intermediaries and creating more privacy and security for users.

    Web 3.0 also seeks to provide a more intelligent and personalized web experience, by using artificial intelligence, machine learning, and other technologies to make sense of the vast amounts of data available online. This could lead to more intelligent search engines, personalized content recommendations, and more efficient data processing.

    Overall, Web 3.0 represents a significant shift in how we use and interact with the internet, with a greater focus on user control, privacy, and decentralization, as well as more intelligent and personalized web experiences.

    MTM Rules and tax uncertainty

    One example of the difficulties is for those businesses who would like to issue tokens in Japan.

    An illustration of this is that several blockchain companies have avoided issuing tokens in Japan, due to the tax burden derived from the application of the Year-End Mark to Market (MTM) Rules under the Corporation Tax Act (CTA) in Japan.

    According to the Payment Services Act, corporations that hold cryptocurrencies that are traded in “active markets” must adhere to certain rules.

    These rules require the corporations to update the acquisition price/booked price of their cryptocurrencies to reflect their current fair market values, a practice commonly referred to as “Mark to market (MTM).”

    Additionally, any gains or losses resulting from these price updates must be realized at the end of each business year.

    Further, there is also uncertainty more generally over the tax treatment of Web 3.0 related transactions.

    The 2023 reforms

    Starting in 2023, there will be some changes to the tax rules for cryptocurrencies. If a cryptocurrency has been issued but not yet distributed to third parties, it will not be subject to certain tax rules at the end of the year, as long as certain conditions are met. These conditions include technical restrictions on transfer or entrusting the cryptocurrencies to a trustee under specific conditions.

    Additionally, if a corporation borrows cryptocurrencies from a third party and sells them but does not buy back the same amount by the end of the year, they will have to recognize any gains or losses as if they had bought back the same amount.

    These tax reforms will apply to corporations whose business year starts on or after April 1st, 2023. The specific details of the requirements for the first condition mentioned above will be disclosed in April 2023 or later.

    NTA guidelines re NFTs

    General

    In addition, the NTA (National Tax Agency) in Japan has released the first official guidelines on how NFTs (non-fungible tokens) are taxed.

    Scope of guidelines

    These guidelines cover:

    The guidelines use examples of art NFTs, which are backed by copyrights for digital designs, that have been distributed.

    Foreign business operator distributing in Japan

    For a foreign business operator distributing NFTs in Japan, the tax treatment will vary depending on the legal characteristics of the NFTs. Therefore, it is recommended to consult with tax experts to determine the tax treatment for each NFT.

    Income tax and corporate taxes

    Regarding individual income taxes and corporate taxes, the NFT FAQs explain that an person who is UK resident for tax purposes who creates digital art and sells art NFTs related to such digital art through a marketplace in Japan is not subject to Japanese income or corporate taxation.

    This is because a person who is not a tax resident in Japan and has no permanent establishment in Japan is generally not subject to Japanese taxation on the income derived from the issuance (first-sale) of NFTs, unless the NFTs are backed by real assets which trigger Japan-sourced income separately.

    Sales / consumption taxes

    With regard to consumption taxes (Japanese value added taxes), the NTA deems the issuance of art NFTs as “cross-border provisions of electronic services.”

    Therefore, the consideration for the issuance of art NFTs is taxable if the buyer of the art NFTs is an individual located in Japan or a Japanese corporation. A foreign issuer of art NFTs would be subject to consumption taxes in Japan in respect of the primary sale of the issued art NFTs to Japanese purchasers.

    For withholding obligations, payment of the consideration for the issuance of art NFTs would generally be subject to Japanese withholding tax levied on royalties.

    However, withholding obligations would not be triggered if it is difficult for the purchaser of the art NFTs to distinguish the consideration for the grant of copyrights from the total amount of NFT sales.

    Inheritance / gift taxes

    Under Japanese tax laws, an individual recipient of assets located in Japan by way of an inheritance/gift from another individual would be subject to inheritance/gift taxes even if the recipient is located outside of Japan.

    In the NFT FAQs, NFTs are included in the scope of taxable assets so long as they have an economic value.

    Conclusion

    Like most jurisdictions around the globe, relevant authorities have been playing catch up in ensuring regulation and tax rules are fit for purpose in the new world of Web 3.0.

    If you have any queries about Taxation of cryptoassets and Web 3.0 in Japan or Japanese tax matters in general, then please do get in touch.

    The content of this article is provided for educational and information purposes only. It is not intended, and should not be construed, as tax or legal advice. We recommend you seek formal tax and legal advice before taking, or refraining from, any action based on the contents of this article.