The Japanese government has said it has no plans to regulate bitcoin as a financial product, but it will be taxable when used to make purchases or when bought on an exchange.
Japan's cabinet reiterated that bitcoin will be treated as a commodity rather than a currency, and that it will not come under the purview of the country's Financial Services Agency.
"Bitcoins are neither Japanese nor foreign currencies and its trading is different from deals stated by Japan's bank act as well as financial instruments and exchange act," it said.
"Any bitcoin transactions are taxable when they fulfil requisitions stated by laws on income tax, corporate tax and consumption tax."
"If there are transactions and subsequent gains, it is natural...for the finance ministry to consider how it can impose taxes," said chief cabinet secretary Yoshihide Suga, according to BBC.
The decision comes as the government is looking to solve issues related to the collapse of bitcoin exchange MtGox.
Earlier, Japan-based MtGox, which once hosted 80% of the world's bitcoin trades, collapsed after losing about 850,000 bitcoins to a hack. The company has filed for bankruptcy protection in Japan.
The Nikkei and Yomiuri newspapers earlier reported that the authorities want bitcoin transactions to be taxable, but they were unclear how the authorities would do this given the anonymity of bitcoin transactions.
Russia earlier banned the use of the currency completely, while China has restricted it as a means of payment. It is legal in the US as a "payment innovation", but will not be monitored by the central bank in any way.
Many other countries have warned consumers about the risks of digital currencies, and urged them to be cautious while dealing with such currencies.