Japan classifies crypto as financial products, paving the way for spot ETFs

Japan’s upper house gave final approval Wednesday to an amendment that reclassifies crypto assets as financial products under the Financial Instruments and Exchange Act – a move that explicitly opens the door for spot exchange-traded funds.

The bill, passed at a plenary session of the House of Councillors, shifts oversight of digital assets from the Payment Services Act to the broader financial regulation framework. Crypto businesses will now be governed alongside securities and other traditional financial instruments. The change also stiffens penalties for operating an unregistered crypto business.

The centerpiece for traders is the formal recognition of cryptocurrencies as financial products for the first time in Japanese law. That designation creates the legal foundation for spot crypto ETFs. Japan Exchange Group, which operates the Tokyo Stock Exchange, has said it is reviewing whether to list such ETFs around 2027. Finance Minister Satsuki Katayama confirmed on July 10 that the government would push ahead with a review aimed at permitting crypto ETFs domestically.

The amendment also overhauls Japan’s punitive crypto tax regime. Currently, crypto gains are taxed under a comprehensive income system that can reach 55%. The new law will replace that with a separate self-reported tax rate of about 20%, while allowing losses to be carried forward for three years. That change takes effect only after the Financial Instruments and Exchange Act is implemented – expected in 2027 – meaning the new tax system would apply starting in 2028.

For Japanese investors, the combination of ETF access and a flat 20% tax rate is a sea change. The current tax burden has long been cited as a reason retail traders avoid domestic exchanges or simply exit the market. Carrying forward losses over three years also softens the risk of a bad trade year.

The legislative path leaves a clear timeline. The law must still be formally promulgated, but the vote is the final parliamentary step. Approval sets a clock running: implementation in 2027, tax changes in 2028. Market participants will watch for the Finance Ministry’s review of ETF rules later this year and any updates from Japan Exchange Group on listing standards.

One question remains: whether the new regulatory framework will attract more institutional capital or mainly benefit the retail crowd that already trades through foreign platforms. With a clear legal structure and a lower tax bill, Japan may draw back some of the liquidity that left after the Mt. Gox era and Coincheck hack.