Introduction
Under the current Japanese tax framework, income derived from crypto asset transactions is generally not treated as capital gains, but, classified either as business income or miscellaneous income. As a consequence, such income is subject to income tax in Japan at progressive rates, with a combined national and local maximum rate of 55.945%.
This heavy tax burden compared to other developed countries has long been regarded as a major obstacle to crypto-related investment activities in Japan. It is also an important consideration for foreign individuals holding significant volume of crypto assets when contemplating relocation to Japan or engaging in trading activities of crypto assets connected to the Japanese market.
The Outline of 2026 Tax Reform released last December by the ruling parties and government indicates a substantial shift in the policy of crypto related taxation. The reform contemplates the introduction of a fixed-rate separate taxation regime applicable to certain crypto asset transactions. Given the potential impact of this development on foreign investors with ties to Japan, it is important to consider both the scope of the proposed regime and its implications to foreign investors. Please note, however, that, at the time of writing, since the legislative wording related to the new regime has not been fully published, the precise scope of the regime has not yet been fully clarified.
Current Tax Treatment of Crypto Asset Transactions
Under the existing guidance issued by the National Tax Agency, income derived from crypto asset transactions is generally classified as either business income or miscellaneous income. As a result, such income is subject to income tax at progressive rates, which may lead to a materially higher tax burden than in jurisdictions where crypto gains are treated as capital gains. This tax treatment has historically been viewed as a factor undermining Japan’s competitiveness as a jurisdiction for crypto-related investment and has also been a factor influencing relocation and structuring decisions by crypto asset investors.
Overview of Proposed Tax Reform
Historically, crypto assets have been regulated under the Payment Services Act in Japan, reflecting their primary function as a means of settlement. Recent policy developments, however, indicate a movement toward repositioning crypto assets as financial instruments within the regulatory framework of the Financial Instruments and Exchange Act (FIEA). The 2026 Tax Reform is intended to align with this regulatory discussion.
Under the new framework proposed in the Outline of 2026 Tax Reform, subject to an amendment of the FIEA, income arising from certain crypto asset transactions will be subject to a fixed-rate separate taxation at the rate of 20.315%. This would mark a significant departure from the current progressive taxation regime and bring the taxation of eligible crypto gains closer to the treatment of listed securities.
A fixed-rate separate taxation is expected to apply only to the crypto assets which are listed on a Japanese licensed crypto asset exchange and to the sales of the crypto assets which are made through such exchange. Sales of crypto assets between private wallets, or through overseas crypto asset exchanges or decentralized exchanges (DEX), are expected to remain outside the scope of the new regime.
The tax reform will also permit losses arising from eligible crypto asset transactions to be carried forward for up to three years. However, such losses carried forward will only be permitted to offset gains from crypto asset transactions subject to the fixed-rate separate taxation, and will not be permitted to offset capital gains derived from the disposal of listed securities. In addition, the Outline of 2026 Tax Reform also proposes that a fixed-rate separate taxation will apply to derivatives related to crypto assets and crypto-related exchange-traded funds (ETF).
Implementation of the new regime is contingent upon an amendment to the FIEA, and it is currently anticipated that the new tax regime will apply to transactions conducted on or after January 1, 2028.
Tax Treatment of Foreign Individuals
The Japanese income tax treatment of crypto related gains varies significantly depending on the residency status of the individual concerned. Foreign individuals may be categorized as (i) a non-resident, (ii) a non-permanent resident, or (iii) a permanent resident for Japanese tax purposes.
Non-residents
A non-resident is defined as an individual other than a resident (Article 2(1)(v) of the Income Tax Act). A resident, in turn, is defined as an individual who has a domicile in Japan or has continuously resided there for one year or more (item 3 of the same paragraph). Accordingly, an individual who does not have a domicile in Japan and has not resided there for one year or more is classified as a non-resident. For example, an individual who resides abroad, or who stays in Japan only on a short-term basis, will be treated as a non-resident. A non-resident is subject to Japanese income tax only with respect to Japan-source income (Article 7(1)(iii) of the same Act). Under current interpretation published by the National Tax Agency, income derived from crypto asset transactions is not regarded as Japan-source income, even where trades are executed through Japanese exchanges. Accordingly, a non-resident is generally not subject to Japanese income tax on income from crypto asset transactions.
Non-permanent residents
A non-permanent resident is defined as a resident who does not hold Japanese nationality and who has resided in Japan for five years or less within the preceding ten years (Article 2(1)(iv) of the Income Tax Act). A non-permanent resident is subject to Japanese income tax with respect to income other than foreign-source income, as well as foreign-source income paid in Japan or remitted to Japan (Article 7(1)(ii) of the same Act). If a non-permanent resident engages in sales of crypto assets through a Japanese crypto asset exchange, since such income would generally not be regarded as foreign-source income and the consideration would be paid in Japan, it would be subject to Japanese income taxation. From January 1, 2028 onward, such income is expected to be subject to a fixed-rate separate taxation at a rate of 20.315%. In addition, even where sales are conducted through an overseas crypto asset exchange, income arising from the sales would generally not be treated as foreign-source income and therefore would also be subject to taxation in Japan. Such income is not subject to a fixed-rate separate taxation but subject to income taxation at progressive rates.
Permanent residents
An individual who has resided in Japan for more than five years is generally taxed on his or her worldwide income. Accordingly, income derived from sales of crypto assets through both domestic and overseas crypto asset exchanges is subject to Japanese taxation. Income from eligible transactions conducted through Japanese exchanges will benefit from the fixed-rate separate taxation regime once implemented.
It should also be noted that, under the Outline of 2026 Tax Reform, crypto assets are not currently included within the scope of Japan’s exit tax regime. However, this remains uncertain and the future discussion should be closely monitored.
Planning Considerations
The proposed tax reform gives rise to a number of practical considerations for foreign investors who hold or intend to hold crypto assets in connection with Japan. While the introduction of a fixed-rate separate taxation regime may reduce the tax burden on certain eligible transactions, the scope of the regime is limited and its application will depend on several factual and structural elements.
One important consideration concerns the timing of relocation to Japan and sales of crypto assets. Foreign individuals considering relocation to Japan should carefully evaluate the tax implications of disposing of crypto assets before or after establishing residency. In addition, the availability of fixed-rate separate taxation under the new regime would depend on whether transactions are conducted through Japanese licensed exchanges. As a result, the selection of trading platforms may become increasingly relevant from a tax perspective. Investors who currently trades primarily through overseas exchanges or decentralized platforms (DEX) may also consider whether using a Japanese crypto asset exchange could be an option for trading platforms in order to benefit from the new regime.
The reform may also prompt reconsideration of asset holding structures. In particular, a foreign investor with substantial crypto portfolios may wish to evaluate whether assets should continue to be held directly or through corporate or other structures, taking into account the interaction with applicable Japanese tax rules.
In light of these developments, foreign investors with Japan-related exposure should review their existing arrangements in light of the anticipated reform and consider whether adjustments to timing, platform selection, or holding structures may be appropriate.
Inheritance and Gift Tax Considerations
Although it is not heavily discussed in this newsletter, a foreign individual holding significant crypto assets should also be mindful of the potential application of Japan’s inheritance and gift tax regimes, which operate independently of income tax rules.
In this context, the situs of crypto assets may give rise to interpretative considerations. As crypto assets lack a clear physical location and are not expressly addressed under Japanese tax law, this should be carefully considered in the context of inheritance and gift tax planning. In addition, the scope of Japan’s inheritance and gift tax liability depends on the residency and nationality of the transferor and transferee, as well as the duration of residence in Japan. Foreign individuals who relocate to Japan may therefore, over time, become subject to broader inheritance and gift tax exposure.
Accordingly, investors holding substantial crypto assets should take these factors into account when considering relocation to Japan or long-term residence.
Conclusion
Japan’s proposed introduction of a fixed-rate separate taxation for certain crypto asset transactions represents a significant policy development that may substantially reduce the tax burden on eligible income. However, the tax outcome will continue to depend on residency status, the nature and location of trading activities, and asset holding structures.
Foreign investors with Japan-related exposure should therefore consider the potential implications of the tax reform and seek appropriate professional advice where necessary.
