Japan plans to drop encryption asset tax rates to promote the development of the Web3 industry

Japan's Liberal Democratic Party (LDP) and New Komeito (Komeito) Tax Survey Committee recently clarified the outline of tax reform for fiscal 2025, proposing to review the tax system for encrypted assets (virtual currency), aiming to pave the way for the implementation of separate taxation. According to the reform proposals, the tax rate on encryption assets could drop to 20% in the future, while allowing for profit and loss reconciliation. However, the implementation of the reform will require the necessary legal preparations, including investor protection, trading suitability requirements, and the obligation of exchanges to report transactions to the tax authorities. Rep. Takuya Hirai of the Liberal Democratic Party's Digital Headquarters has submitted an urgent proposal to the Financial Services Agency (FSA) to include the proceeds from the transaction of encryption assets in the scope of separate taxation declarations as soon as possible, and to improve the regulatory framework to ensure that encryption assets play a role in promoting the national economy. Analysts point out that this will help attract more domestic and foreign companies and investors, and promote the development of Japan's Web3 industry and the improvement of international competitiveness. This move signals that the Japanese government is seriously considering improving the encryption asset tax system to enhance international competitiveness in the Web3 space. Currently, Japan classifies gains from crypto asset transactions as "miscellaneous income" with a tax rate of up to 55%. This high tax rate, the taxation of cryptocurrency-to-currency transactions, and the inability to reconcile profits and losses across years are considered to be the main hindrances to innovation in the Web3 space, leading to a large exodus of talent and start-ups overseas. Although the reform plan is still in the "review stage", the explicit mention of this issue in the tax reform outline indicates that Japan has taken an important step to improve the asset tax system. TaxDAO Commentary: Japan's encryption monetary tax policy can be called strict. Japan's current policy classifies encryption transaction gains as "miscellaneous income" with a maximum tax rate of up to 55%, and the exchange between encryption currencies is also taxed, allowing profits and losses to be reconciled across years. These regulations are undoubtedly a heavy burden for individual investors and businesses with encryption assets. Japan's tax reform plan proposes to explore the "separate taxation" of encryption transaction income. To put it simply, the proceeds from the transaction of the encryption asset are treated separately, and a fixed tax rate may be applied (expected to be around 20%), and profit and loss can be calculated across years. This is good news for investors to reduce the burden, and for businesses, it means greater financial flexibility and more predictable tax planning. In terms of horizontal comparison, at present, Japan has missed a lot of opportunities in the Web3 track. Singapore, on the other hand, has become a popular destination for global Web3 innovation due to its zero-capital gains tax policy, which has attracted a large influx of Web3 projects and funds. Japan clearly wants to increase its competitiveness in the Web3 space by adjusting its tax policy and re-attracting projects and talent. In fact, this tax reform is not the first effort made by the Japanese government to develop the Web3 industry. Not long ago, in August 2024, Japan hosted the "Web X" conference, and Japanese Prime Minister Fumio Kishida spoke as a special guest speaker, which had a good response. If this tax reform plan is implemented, its effect will be immediate. On the one hand, local companies, especially small start-ups, will benefit the most, as the tax burden allows them to invest more resources in innovation and operation to enhance their market competitiveness. On the other hand, this tax reform plan will improve Japan's image among international investors, attract more overseas Web3 projects to choose Japan as a base in Asia, and may even set off a wave of encryption assets in Japan. However, there are still some challenges before the tax reform can be implemented. For example, the tax reform also needs to be supported by a series of supporting measures, such as improving the investor protection mechanism, strengthening tax transparency and improving transaction compliance. As another example, tax reform may reduce tax revenues in the short term, which may cause concern among the public and relevant authorities. In addition, the pace of policy implementation in Japan is relatively conservative, and it is still unknown whether it can truly seize the global window period of the encryption industry and even the entire Web3 industry. In the future, when we look back, this tax reform could be an important turning point for Japan's Web3 industry. This is not only an incentive for businesses and investors, but also a statement that Japan does not want to continue to miss out on opportunities, but wants to embrace the Web3 industry more actively. If it does deliver on its promises, perhaps Japan will be the focus of global investors in the next bull market. 6. Enhance account abstraction and optimize Layer 2: Ethereum's third major upgrade is approaching, and the Ethereum Pectra upgrade is expected to be implemented in the first quarter of 2025. This is the third major upgrade for Ethereum, following the Ethereum Merge in September 2022 and the Cancun upgrade in March 2024. During the Ethereum Core developer conference call on January 9, 2025, Tim Beiko, Head of Technical Protocol Support at the Executive Layer, suggested launching Devnet 5 for the Pactra upgrade this week of January 13, with the possibility of upgrading Ethereum's public testnets Sepoila and Holesky in February 2025 and mainnet activation in March 2025. About the Pectra UpgradeThe Pectra Upgrade consists of two main parts: the Prague Execution Layer Upgrade and the Electra Consensus Layer Upgrade. The key proposals in this technical upgrade are to enhance account abstraction, optimize validator operations, and continue to improve the performance of the Ethereum network, including the technical protocol to optimize Layer 2, which is also the highlight of the Pectra upgrade. • Technical protocols related to consensus layer upgrades include: EIP-6110, EIP-7002, EIP-7251, EIP-7549, and EIP-7691. • Technical protocols related to execution layer upgrades include: EIP-7685, EIP-7623, EIP-7702, EIP-2537, EIP-2935. How the Pectra Upgrade Improves Ethereum's implementation protocol according to the EIP-7600 Pectra hard fork process, and the Ethereum improvements that are currently included in the Pectra upgrade include: EIP-6110: Use the deposit processing mechanism within the protocol on the consensus layer• When a validator deposits ETH, it no longer needs to rely on the consensus layer's voting mechanism for verification, thereby improving the security of the validator's operation, even if there is more than two-thirds of the hostile stakes, honest nodes can deal with it. At the same time, this mechanism can reduce the complexity of the client's software design and reduce the latency of the operation. EIP-7002: Trigger Withdrawal from the Execution Layer • Allows validators to withdraw through the execution layer, and credentials to trigger exits and withdrawals. EIP-7251: Add MAX_EFFECTIVE_BALANCE • Ethereum is allowed to stake more than 32 ETH, and the minimum threshold for staking remains unchanged at 32 ETH. Improvements to the technical protocol are designed to allow large node operators to reduce the number of validators in the network by merging multiple validators, thereby dropping peer-to-peer messaging, signature aggregation, and storage burdens. EIP-7549: Removing the Committee Index from Proof • Designed to enable more efficient consensus vote aggregation, drop validation costs, and network load. EIP-7691: Increase the number of blobs • Increase the number of blobs per block to a maximum of 6~9 to help Ethereum improve scalability through Layer 2 solutions. EIP-7685: Common Execution Layer Requests• This proposal defines a common framework for storing contract-triggered requests, which can simplify the addition of new request types without changing the structure of the execution block, and ultimately create a more secure system for users. EIP-7623: Increasing the cost of calldata• The limit on Ethereum block gas fees has not increased since the implementation of EIP-1599, but the amount of data released to the mainnet has been increasing, and the average size of blocks has been increasing, and the cost of calldata has not changed since the implementation of EIP-2028, but calldata needs to be re-evaluated since the introduction of blobs in EIP-4844 The cost is based on the maximum data size of the block, freeing up data space for more blobs that can help increase the throughput of the block. EIP-7702: Set EOA Account Codes• Added a new type tx to add code execution capabilities to EOA accounts to improve account flexibility and programmability. EIP-2537: Precompilation of BLS12-381 Curve Operations• By introducing precompiled contracts (Precompiles) to add support for BLS12-381 curve operations to Ethereum, the encryption algorithm BLS signature verification can be implemented, and multiple signatures can be aggregated into a single signature, thereby reducing the complexity of verification. EIP-2935: Saving Historical Block Hashes in State• Provides support for a stateless client model by storing the last 8192 block hashes in the system contract and provides more flexible historical block hash query capabilities. These hashes can be queried directly through the contract and provided to stateless clients as witness bundles. However, EIP-7594, a technical proposal that received more attention in the early days, has been suspended for more than 6 months and is not expected to be implemented in the Pectra upgrade. EIP-7594 introduces the Data Availability Sampling (DAS) protocol to ensure that blob data is available when only a subset of the data is downloaded.
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