During a recent conference in Hong Kong, sentiments surrounding Digital Asset Treasury (DAT) companies reflected a growing frustration over their performance when compared to Bitcoin. Matt Cole, CEO of Strive Asset Management, succinctly encapsulated this sentiment by suggesting, “Just buy an ETF,” implying that investors are increasingly losing patience with these companies’ lagging returns.
In contrast, the landscape in Japan tells a different story. DATs listed on the Tokyo exchange have consistently outperformed Bitcoin, attributable primarily to the favorable tax treatment of equities compared to cryptocurrencies. This advantage is particularly pronounced in a context where Japan’s tax structure imposes steep penalties on direct crypto gains while offering benefits to equity gains through lower tax rates and loss carryforwards.
In Japan, profits derived from cryptocurrencies are categorized as miscellaneous income, subjecting them to progressive tax rates that can escalate to 55% for the highest earners. Furthermore, these gains cannot be offset by losses from other income sources, nor can they be carried forward to future tax years. Conversely, profits from equities are taxed at a significantly lower rate of around 20%. Equity gains also benefit from allowances for loss carryforwards, as well as simpler reporting requirements.
This stark contrast in taxation creates an evident financial incentive for investors. Holding Bitcoin directly can lead to substantial tax liabilities, while acquiring shares in companies that hold Bitcoin allows individuals to take advantage of the lower tax treatment associated with equities. In this environment, Japanese investors seeking Bitcoin exposure without facing a 55% tax hit find themselves increasingly inclined to bid up the shares of these BTC-holding companies.
While American firms exist in a more neutral tax environment, resulting in their stocks typically trading closely in line with Bitcoin prices, the situation is not the same in Japan. Here, the Tokyo Stock Exchange and Japan Exchange Group have also begun to express concern over the volatility spurred by their tax regime. Reports indicate that they are cautioning companies against employing backdoor listing tactics, tightening audit processes, and signaling that the DAT model may introduce risks that retail investors do not fully comprehend.
Such discussions are not confined to Japan. Regulators in other Asian nations, including Hong Kong, India, and Australia, are reportedly expressing similar concerns regarding the potential vulnerabilities associated with the structure of listed companies engaging in cryptocurrency.
As the Japanese tax authority contemplates possible changes to the tax treatment of cryptocurrencies, there is speculation that the current advantages of DATs might soon diminish. Should the preferential tax structure shift, Japanese investors could see the appeal of Tokyo-listed DATs fade quickly. The advice to “just buy an ETF” may soon resonate with investors in Japan as well, potentially marking a significant shift in market strategies.
