Japan Mulls Treating Crypto as Financial Instruments, Weighs Tax Cuts

The FSA intends to apply the FIEA to 105 crypto assets in the specified category, while it is also considering reductions of tax rates for their holders and traders.

The proposed amendments would impose disclosure requirements on the operators of cryptocurrency exchanges for those 105 identified tokens, as well as subject individuals associated with the issuers or venues trading such assets to insider-trading prohibitions, as reported by Japanese media outlet The Asahi Shimbun. Currently, most crypto assets in Japan come under the category of exchange business law, rather than as securities or other financial instruments, which limits the extent of investor protection and regulatory oversight.

The move comes amid growing pressure for Japan to modernize its digital-asset frameworks. Currently, the gains from crypto-asset transactions are taxed as miscellaneous income (雑所得), and are subject to top marginal tax rates of up to 55 per cent. Reclassification of crypto-assets under FIEA would allow the FSA to bolster investor protection and bring crypto-assets closer to mainstream asset classes such as listed equities or investment trusts, potentially opening the door to more favourable tax treatment and a wider institutional investment base.

Key details are still being debated, including the selection criteria for the 105 tokens, which disclosure standards will apply, how insider-trading rules will be enforced, and exactly how tax rates might change. The stakeholders in the crypto industry of Japan will keep a close eye on this, as it could prove to be one of the most consequential regulatory changes since Japan last rewrote its crypto law in 2020.

From a strategic perspective, the development underlines Japan's ambition to remain competitive in the global digital-asset economy. As the Bank of Japan continues its own central-bank digital currency experiments, the regulatory push indicates a broader embracing of tokenisation and digital-asset infrastructure.

The implications are profound. Reclassification of crypto assets as financial instruments could make them more accessible to banks, pension funds, and other institutional players, which could boost liquidity and market depth. A tax rate reduction would also relieve one of the major disincentives for Japanese individuals: the heavy tax burden that comes with trading cryptocurrencies. By the same token, applying disclosure and insider-trading rules could mitigate some of the risks that have long bedeviled the crypto-market: opacity, market manipulation, and lack of investor safeguards.

Yet, there are challenges with regard to this regulatory shift. For one, narrowing the revised regulatory regime to only 105 tokens may create a two-tier market between "approved" digital-assets and the long tail of coins and tokens that remain unregulated or lightly regulated. That could influence investor perceptions, liquidity, risk-pricing, and listing behaviour such that assets outside the approved list may face de-facto second-class status.

Another concern is implementation: crypto-exchanges have historically operated under a lighter regime compared to securities firms, and the transition to the FIEA may require substantial operational changes, not only in custody practices but also in disclosure and governance. Regulatory coordination with tax authorities will also be key, particularly if changes in tax treatment are to be realized. In fact, without clarity on the timing and the scope of tax relief, investor sentiment may well remain cautious.

Then there is the regional context. Globally, many jurisdictions are advancing both CBDC and stablecoin regulation, with token-based deposit or settlement currencies gaining traction. This development in Japan aligns with the broader trend of seeking greater institutional legitimacy for digital-assets: Japanese banks are reportedly exploring issuance of yen-pegged stablecoins to improve settlement efficiency.

Japan's proposed move offers a meaningful case study. It embodies the balancing act of promoting innovation in tokenized finance while reinforcing investor protection, tax fairness, and market integrity. The outcome could also influence regional digital asset ecosystems in East Asia, especially as neighboring markets like South Korea and Singapore fine tune their frameworks.

By elevating cryptocurrencies to the status of regulated financial instruments for a select group of assets, Japan is signaling that it wants to bring the maturing digital-asset ecosystem under the same legal and tax architecture as traditional finance.