The Financial Services Agency will soon present its plan to recognize bitcoin as fulfilling the functions of currency while the problem of bitcoin taxation remains unsolved and hotly debated.

Debates over the regulation of bitcoin continue unabated in Japan. The Financial Services Agency has provided information recently about possible legislative revisions aimed at recognition of bitcoins and other virtual currencies as fulfilling the functions of currency.

Japanese financial regulators believe that handling cryptocurrencies as methods of payment equivalent to traditional ones could strengthen consumer protection and spur growth in the virtual economy.

Although bitcoin might be given a pseudo-currency status, it is subject to taxation. Nikkei reports that the displeasure of Japanese bitcoin users focuses mostly on the issue of taxation. “Can’t you consider not imposing consumption tax on bitcoins in line with the international trend?”

Tsukasa Akimoto, a member of the ruling Liberal Democratic Party, asked Finance Minister Taro Aso at a lower house budget committee meeting on February 5. “Japan is not alone in taxing bitcoins,” Aso responded and mentioned Australia and other countries that tax virtual currencies.

The opinion of Japanese regulators is not actually concurrent with the one of the Group of Seven major industrialized countries. Last year, the European Court of Justice determined that bitcoins should be exempt from value added tax, treating the virtual currency as a means of payment similar to other forms of legal tender such as bank notes and coins. Thus Japan remains to be the only country of the Seven major industrialized countries to tax bitcoins.

“Japan is going against the world,” said Yuzo Kano, head of the Japan Authority of Digital Assets, an industry group for virtual currencies. “The taxation is bad for Japan in terms of its competitiveness.”

Bitcoin taxation badly affects people’s willingness to use the virtual currency. Exchange of yen into bitcoins through a domestic exchange is subject to the 8% consumption tax rate in Japan. It’s quite obvious that such situation can make consumers turn to outside exchanges to escape the consumption tax.

It can happen in the following way. Despite the fact that imported goods in Japan are subject to consumption tax collected at customs, it is possible to find a loophole while importing bitcoins and enter the country without being taxed.

Hiroyuki Nishida, a partner at Ernst & Young ShinNihon, a Tokyo-based tax accounting firm, explains that bitcoin is electronic information and “do not come through customs.” This loophole is already used by some foreign companies that benefit from selling bitcoins to Japanese buyers at cheaper rates.

While the question with bitcoin taxation remains unsolved, the Financial Services Agency will provide its first-ever plan for regulating virtual currencies at the current Diet session. If passed into law, it will grant bitcoin functions similar to conventional currencies.

However, until bitcoin gets the same tax-free status as other “means of payment” defined in the Foreign Exchange and Foreign Trade Act, it will still be treated as “object” at least for tax purposes. Virtual currencies need the same status as electronic money that is exempt from the tax because the consumption tax law recognizes its potential use as an alternative to conventional currencies for paying for goods and services.

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