Japan Times published a Kyodo article on recent comments from the Japanese government about Bitcoin regulation. It contains this statement:
Tokyo is also unlikely to impose taxes on capital gains from bitcoin transactions, though it may levy a consumption tax on purchases of the digital currency, which could be classified as a new investment vehicle, they added.
As Member of Parliament (Sangiin) Tsutomu Okubo tweeted here, there are some doubts about the accuracy of these statements.
Actually there is no need to introduce a new law for imposing taxes on capital gains from bitcoin transactions. The general rule in Article 33 of the Income Tax Act already requires paying income tax at whatever rate the individual taxpayer has for all kinds of capital gains. There is no exception for bitcoin capital gains in that Article. Until the Japanese government introduces such an exception, which is not likely to happen in my humble opinion, this Article requires paying income tax at normal rates on whatever gains someone made by holding bitcoins.
The consumption tax angle is more difficult.
What happens if someone operates a bitcoin exchange where he sells bitcoins to costumers himself, as opposed to brokering sales between customers of the exchange? Operating an ATM would be one way of doing this. Does he need to pay 8 percent consumption tax for whatever prices he gets paid for the bitcoins?
The answer to that question is not as clear as the answer to the question of capital gains.
One relevant Article is Article 6 of the Consumption Tax Act, which states that everything listed in Table 1 is not subject to consumption tax. And Number 2 of that Table exempts all “means of payment” as defined in Article 6 Paragraph 1 Number 7 of the Foreign Exchange and Foreign Trade Act. That means that selling foreign currency in an exchange booth or with an ATM is exempt from consumption tax.
The definition in the Foreign Exchange and Foreign Trade Act in full reads like this:
“The term ‘means of payment’ shall mean the following:
“(a) Banknotes, government money bills, small money bills, and coins
“(b) Checks (including traveler’s checks), bills of exchange, postal money orders, and letters of credit
“(c) Economic value inputted in vouchers, electronic equipment, or other objects (referred to as ‘Vouchers, etc.’ in Article 19, Paragraph 1) by electromagnetic devices (meaning electronic means, magnetic means or other means that are imperceptible by humans), which may be used for mutual payment among unspecified or many persons (limited to those of which the status of use is specified by Cabinet Order as approximate to that of a currency)
“(d) Those specified by Cabinet Order as equivalent to those listed in (a) or (b).”
The Article 2 Paragraph 1 (ii) of the Cabinet order specifies:
“Those which are similar to any of those listed in (a) or (b) of Article 6 Paragraph 1, item (vii) of the Act or in the preceding item, which may be used for payment.”
Looking at the above definition, especially item (c) is very close to recognizing bitcoins as “means of payment”. Bitcoins have economic value. They are inputs to electronic equipment or other objects (for example paper wallets). They may be used for mutual payment among unspecified or many persons. And contrary to the definition of prepaid services under the Payment Services Act, there is no requirement of having a central issuer in this definition.
However, item (c) also requires that the Cabinet Order specifies bitcoins as means of payment. That has not happened yet.
While item (ii) of the Cabinet Order cited above leaves some room to recognize “means of payment” similar to those specified in the Act, that is restricted to means of payment similar to those listed in items (a) and (b) of the act. Item (c) of the Act is not referenced in the Cabinet Order.
So for the time being, bitcoins are probably not “means of payment”, which means that the exception under Number 2 of Table 1 of the Consumption Tax Act does not apply.
If the Japanese government goes ahead and requires payment of consumption tax for bitcoins sold in Japan, that would certainly not help in winning the race to being the “World’s most advanced IT nation“. People would buy their bitcoins somewhere else. The Japanese Bitcoin economy would fall further back. London and New York would profit from Tokyo’s decline as a financial center. Japan would be stuck with a second rate Internet.
As noted before, the United Kingdom recently decided to go into exactly the other direction. They will not require VAT to be paid on bitcoins sold on some exchange or other. The Japanese government should consider this when deciding about this particular question.