In a noteworthy update, the National Tax Agency of Japan has clarified that profits earned by Japanese residents from the sale of US Bitcoin ETFs on the US market are subject to separate taxation.
Background of the Inquiry
Our firm recently acted on behalf of a client, a Japanese resident, to seek clarification from the National Tax Agency regarding the tax treatment of income from the sale of a US Bitcoin ETF. The primary question was whether such profits and losses would be treated as aggregate income (combined with other income streams) or qualify for separate taxation.
On December 5, 2024, the National Tax Agency, through the Regional Taxation Bureau, provided an oral response confirming that income from US Bitcoin ETFs will be subject to separate taxation.
Understanding Japan’s Taxation Framework
Japan’s income tax system primarily follows an aggregate income taxation model, where different sources of income are combined and taxed progressively. This approach also applies to cryptocurrency profits, which can be taxed at rates of up to 55% (inclusive of local tax).
However, Japan’s tax system also provides for separate taxation for certain types of income. Under this system, the income is taxed independently at a flat rate of 20% (including local tax), often resulting in a significantly lower tax burden. Additionally, under the separate taxation system, losses can be carried forward for up to three years, offering further tax advantages.
Why This Matters
The distinction between aggregate taxation and separate taxation is critical for individuals navigating Japan’s tax obligations. For residents involved with cryptocurrency-related assets like Bitcoin ETFs, this clarification offers a potentially more favorable tax pathway, reducing their overall tax liability.
Written vs. Oral Responses
Our inquiry was initially submitted through the “Written Response Procedure for Advance Inquiries” to obtain a formal written determination. However, the National Tax Agency explained that the request did not meet the criteria for a written response. Instead, they provided an oral response clarifying their position.
Limitations of Oral Responses
- Evidentiary Disadvantage:
Without an official written document, taxpayers may face challenges if disputes arise. Verbal responses are inherently less concrete, potentially leading to “he said, she said” disagreements between the taxpayer and the National Tax Agency. - Preservation of Verbal Responses:
Despite these concerns, both the National Tax Agency and our firm have thoroughly documented the verbal response. As long as the underlying facts remain unchanged, it is reasonable to assume that the National Tax Agency will be bound by the substance of their oral statement.
Key Takeaway
The National Tax Agency’s response confirms that income from the sale of US Bitcoin ETFs by Japanese residents will be subject to separate taxation. While this clarification came in the form of an oral response, it represents an important step in understanding how such income is treated under Japan’s tax laws.
Key Points of the National Tax Agency’s Response
1. Assumption: The Bitcoin ETF Represents an Equity Interest in a Trust
The National Tax Agency assumed that the shares of the US Bitcoin ETF represent equity interests in a trust, thereby applying tax provisions relevant to trusts.
It is a misconception to simplify the issue by saying, “It’s an ETF, so separate taxation is obvious,” or “ETFs are investment trusts, so they naturally qualify for trust equity treatment.” The reality is far more nuanced.
The tax classification depends on two critical factors:
- Specific Provisions in Tax Law:
Determining the appropriate tax treatment involves a detailed review of Japan’s tax laws and related regulations, such as the Act on Investment Trusts and Investment Corporations and the Trust Act. - Factual and Legal Analysis:
This includes examining materials like the ETF’s prospectus and applicable legal frameworks (e.g., Delaware state law) to compare the roles, rights, and obligations of the parties involved with Japanese tax and trust laws.
Notably, the term “trust” in US law does not automatically align with shintaku (信託) under Japanese law. In other words, this cannot rely solely on the assumption that the English word “trust” is simply translated into Japanese as shintaku (信託) .The National Tax Agency based its response on the assumption that the Bitcoin ETF qualifies as a trust under Japanese tax law. If this premise is later invalidated, the conclusion may also change.
2. Classification as Corporate Taxation Subject
If the trust is classified as one subject to corporate taxation under Japanese tax law, the equity, as a beneficiary right, is treated similarly to stocks or capital contributions in a corporation.
3. Listing on a US Stock Exchange
Since the ETF is listed on a US stock exchange, income from its sale qualifies for separate taxation under Japan’s tax rules.
Points to Note
1. Non-Binding Nature of the Response
Responses—whether written or oral—are not legally binding. Taxpayers should not assume that the National Tax Agency’s position guarantees acceptance of their tax filings or declarations.
2. Dependence on Assumed Facts
The response was based on the facts and materials submitted. If these assumptions change (e.g., if the Bitcoin ETF is determined not to qualify as a trust under Japanese law), the conclusion may also change. Nonetheless, even if the premise shifts, the outcome of separate taxation may still apply under a revised theoretical framework.
3. Avoid Oversimplification
It is crucial to avoid generalizing this issue with statements like, “Profits from the sale of cryptocurrency ETFs by Japanese residents are always subject to separate taxation.” Each case requires expert consultation and careful verification to avoid errors.
4. No Approval or Recommendation
The National Tax Agency’s response does not endorse or encourage Japanese residents to engage in buying or selling Bitcoin-targeting ETFs on US markets.
For inquiries to the National Tax Agency or for advice on tax implications in Japan, please feel free to contact us using the contact form.
