Legislation making bitcoin and virtual currencies legal currency took effect this month in Japan. The country’s Financial Services Agency released a text of the law last week.
The Accounting Standards Board of Japan will create a framework to determine how the accounting sector can address digital currency. According to the Nikkei, the process is expected to take six months.
Accounting Standards Still Needed
Many companies expressed concern that the government has not provided guidance for the accounting of cryptocurrencies.
Chikako Suzuki, a partner at PwC Aarata, told Nikkei Asian Review there is a risk that companies holding virtual currency could have incorrect valuations and could suddenly suffer major losses.
Approximately $1.7 billion of cryptocurrency, including bitcoin, Litecoin, Ripple and other cryptocurrencies, circulated across Japan two years ago. A Fuji Chimera Research Institute study projects this number to reach $9 billion by 2020.
Lessons From Mt. Gox
Amendments to banking law concerning virtual currency were passed in 2016. Uncertainty arose about the legal status of virtual currency following a multi-million dollar embezzlement scandal and the collapse of the Mt.Gox bitcoin exchange in 2014.
Mt.Gox was once largest cryptocurrency exchange before it collapsed, resulting in a loss of 850,000 coins ($480 million at the time). Mt. Gox had handled around 80 percent of global bitcoin transactions. The exchange admitted that there was a flaw in its system that enabled hackers to steal the coins.
The new law places virtual currency exchanges under the control of the Japanese Financial Services Agency. The exchanges must be registered and must verify the identity of customers opening accounts.
Japan’s Cabinet last year approved amendments to the law making bitcoin an officially recognized currency.
Japan Adapts To New Technology
The bill passed last year revised portions of the Banking Act to account for changes in the economy driven by the growth of telecommunications technologies.
The law did not change the taxing of virtual currency.
Virtual currency was described as having asset-like values, limited to items that are electronically recorded excluding Japanese currency, foreign currency and currency-like denominated assets. It is usable as payment.
Virtual currency was also described as asset-like values to be used in exchange for other items and transferred via electronic data processing.
Virtual Currency Considered An Asset
Under the law passed last year, virtual currency is considered as an asset for accounting purposes. The government has been asked if virtual currency should be recorded at book or market rate value. The government leaves this choice up to the individual party.
Virtual currency will still be treated as the transfer of taxable assets. The transactions are taxable.
Virtual currency received from overseas from intermediaries are not tax deductible purchases and instead are treated as non-taxable purchases.
Income from virtual currency earned by an individual is treated as miscellaneous income and is subject to tax on aggregate income. It is treated as operating revenue for corporations.
Currency-denominated assets are displayed in foreign or Japanese currency or assets against which monetary obligation are made in foreign or Japanese currency. Those assets against which monetary obligation is made in a currency-denominated asset is considered a currency-denominated asset.
Exchanges Are Regulated
The regulations passed last year include provisions for registering as a virtual currency exchange service provider (VCESP), and rules to ensure proper deployment of virtual currency exchange services, according to a summary by the International Financial Law Review.
Applicants need to be a stock company and have an office and representative in Japan. The applicant also has to meet financial requirements, including a minimum capital of $87,300 and positive net assets.
Once registered, the applicant has to follow the following rules:
1) Take responsibility for the security of systems related to its services.
2) Supervise external service providers properly by confirming their status in cases where exchange services are outsourced.
3) Take measures to protect users, including explaining that virtual currencies are not foreign or Japanese currencies and provide tri-monthly reports on transaction records, and segregate user deposits from its own deposits in a law-specified manner.
4) Segregate user deposits in virtual currencies or cash once a year a minimum with regard to segregating financial and management statements.
5) Have external audits annually at a minimum with regard to segregating financial and management statements.
6) Create internal management systems to address complaints about services that are fair.
7) Establish books and records about its services.
8) Submit a yearly report and quarterly reports about the relevant authority using the form specified in the law.
Under existing accounting guidelines in Japan, virtual currency holders can table it as inventory while issuers can deem it a liability. That’s the closest a company or an individual can get to considering digital currencies on a balance sheet, however.
Since there is no specific instruction or method of accounting to consider bitcoin and other popular currencies like Ether and Litecoin in Japan, many adopters leave their digital currency holdings off their books entirely, the report noted.
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