Ⅰ.　Introduction
Since the birth of Bitcoin, the world’s first crypto asset1, in 2009, digital assets2 based on distributed ledger technology and cryptography—particularly crypto assets, which are electronic vouchers issued and managed using these technologies—have posed significant issues for policymakers worldwide in areas such as taxation and money laundering.

Their complex nature stems from several key characteristics3:

  • Decentralization – The network operates in a decentralized manner. It has no central-governing body and no intermediaries to facilitate transactions.
  • Anonymity – Users can transact without revealing their real identities.
  • High volatility – Prices can fluctuate dramatically within short periods.
  • Hybridity – They share traits of both payment instruments and financial products, as well as intangible assets.
  • Rapid technological evolution – The underlying technology is rapidly and constantly advancing.

Because of these factors, tax authorities and regulators continue to face significant challenges in adapting existing legal frameworks to keep pace with this fast-moving sector.

The purpose of this article is to clarify the issues and their underlying causes that tax authorities encounter in enforcing tax laws related to crypto assets, particularly in the context of income tax audits. It also emphasizes the necessity of developing a regulatory environment that facilitates proper tax reporting and investigative methods tailored to crypto assets. Specifically, this article addresses two key issues that arise due to the anonymity and decentralization of crypto assets:

  • Difficulty in Identifying Taxpayers
    Even if tax authorities can track transactions on the blockchain, they often cannot identify the individuals or entities involved. This is because blockchain transactions use pseudonymous addresses rather than real-world identities. Unlike traditional financial accounts that are linked to verified personal information, crypto wallets can be created and used without identity verification, making it difficult to trace ownership.
  • Breakdown of Traditional Tax Enforcement Mechanisms
    The existing framework, which relies on tax authorities obtaining user information from financial institutions and other intermediaries, may become ineffective. Many crypto transactions take place on decentralized exchanges (DEXs) and peer-to-peer (P2P) platforms4 that do not follow the same Know Your Customer (KYC) and reporting requirements as traditional financial institutions. As a result, tax authorities may find it challenging to access transaction data that would normally be available through banks and other regulated entities.


On that basis, this article underscores the following points:

Tax Enforcement Difficulties Due to Anonymity and Decentralization
In Japan, the anonymity and decentralized nature of crypto assets create significant enforcement difficulties. Specifically, taxpayers can use centralized crypto asset exchanges (CEXs) located outside Japan without undergoing identity verification, making it difficult for tax authorities to track transactions. Furthermore, the use of decentralized exchanges (DEXs) and private wallets—which do not require a third-party intermediary—further complicates enforcement. These platforms allow users to trade and store crypto assets without oversight from central authorities, reducing the effectiveness of existing regulatory frameworks.

Limitations of Existing Tax Systems
Modern tax systems, including information reporting and withholding mechanisms, function effectively only when there is an identifiable “person” (such as an individual or corporation) within the jurisdiction who is legally obligated to provide information to tax authorities. In the case of decentralized crypto transactions, however, no such entity may exist, preventing tax authorities from effectively tracing user identities through conventional investigative approaches.

After examining these issues, this article argues that to effectively address the tax enforcement challenges posed by the anonymity and decentralization of crypto assets, the Japanese National Tax Agency should actively develop and utilize advanced analytical tools and bolster the capabilities of tax inspectors through targeted training programs. In particular, it should focus on blockchain analysis, an investigative method that leverages the pseudonymity, traceability, and transparency of crypto assets.

Furthermore, even if the National Tax Agency successfully identifies taxpayers’ CEX accounts and private wallet addresses, it may still experience another complication in efficiently selecting subjects for tax investigation or effectively imposing taxation.

Moreover, after recognizing that the above issue arises due to the unique characteristics of crypto assets —specifically, the complexity of calculating profit and loss, this article argues that the National Tax Agency must develop or utilize high-performance profit and loss calculation software and enhance the training of its tax inspectors.

For the purposes of this article, the descriptions of crypto assets and blockchains are based on typical cases such as Bitcoin and Ethereum (Ether), while recognizing that exceptions may apply.

Footnotes

  1. The term “crypto assets”, as used in this article, aligns with the definition set forth in Article 2, Paragraph 14 of the Payment Services Act in Japan. However, in broader contexts, the term may encompass a wider range of digital assets. Below, this article also examines the CARF definition of crypto assets. The Payment Services Act defines crypto assets as follows:

    “The term ‘cryptoasset’ as used in this Act means any of the following; provided, however, that those indicating the rights prescribed in Article 29-2, paragraph (1), item (viii) of the Financial Instruments and Exchange Act are excluded:
    (i)property value (limited to that which is recorded on an electronic device or any other object by electronic means, and excluding the Japanese currency, foreign currencies, currency-denominated assets, and electronic payment instruments (excluding those falling under the category of currency-denominated assets); the same applies in the following item) which can be used in relation to unspecified persons for the purpose of paying consideration for the purchase or leasing of goods, etc. or the receipt of provision of services and can also be purchased from and sold to unspecified persons acting as counterparties, and which can be transferred by using an electronic data processing system; and
    (ii)property value which can be mutually exchanged with what is set forth in the preceding item with unspecified persons acting as counterparties, and which can be transferred by using an electronic data processing system. ” ↩︎
  2. Digital assets are understood to be “any asset that is represented digitally or electronically”, regardless of whether they represent any legal or financial rights. See UK LAW COMMISSION, DIGITAL ASSETS: FINAL REPORT ix (2022). ↩︎
  3. See OECD, TAXING VIRTUAL CURRENCIES: AN OVERVIEW OF TAX TREATMENTS AND EMERGING TAX POLICY ISSUES 7, 41, 54 (2020); OECD, ADDRESSING THE TAX CHALLENGES OF THE DIGITAL ECONOMY, ACTION 1 – 2015 FINAL REPORT, OECD/G20 BASE EROSION AND PROFIT SHIFTING PROJECT 44 (2015). ↩︎
  4. Binance, Binance P2P by the Numbers: Facts, Figures and Statistics Revealed!, Binance Blog (Oct. 20, 2021), https://www.binance.com/en/blog. ↩︎