On December 20, 2024, the National Tax Agency (NTA) published a guidance titled “Tax Treatment of Crypto Assets (Information)”.

This is the ninth time (the first was in 2017) that the NTA has officially expressed its views on calculating taxes for cryptocurrency in an FAQ format.

We have been commenting on changes from the previous year’s FAQ every year since 2018.

No change in the departments within the NTA that are involved

This is a comparison of the National Tax Agency’s divisions listed on the cover of the FAQ:

In Version 2, the number of divisions increased from one in Version1 to six.

There were no changes in Versions 3,4,5,6,7,8,9.

There probably won’t be significant changes here going forward, but we’ll keep updating the table for information purposes.

Small change in title

The title of the FAQ changed in Version 2 due to the expansion of the scope of the FAQ from individual income tax.

In Version4, “Cryptocurrency” was changed to “Crypto Asset”.

In Version8, “Crypto Asset” was changed to “Crypto Asset and Others”

Number of FAQ items increased by 2 to 47 items

With Version 3, Corporate Tax was added as a section with new FAQ items.

The number of FAQ items increased from 21 in Version 2 to 32 in Version 3 due to the expansion of the scope of the FAQ.

There were no additional items in Version4.

There was one addition in Version5.

There were no additions in Version6.

There was one addition in Version7.

There were 11 additions in Version8.

In Version8, the Corporate Tax section was subdivided into Crypto Asset Related and Electronic Payment Method Related.

1. Income Tax and Corporate Tax
2. Income Tax
3. Corporate Tax
   1. Crypto Asset Related
   2. Electronic Payment Method Related

4. Inheritance Tax and Gift Tax
5. Income Tax Withholding
6. Consumption Tax
7. Statutory Declaration

There were 2 additions in Version 9.

With this in mind, here are the items covered in Version 9 of the FAQ:

Items 3-1-4 thru 3-1-8 were items that were introduced in “Year End Mark-to-Market Treatment of Cryptocurrencies Held by Entities (Information)” published by the NTA on January 20, 2023.

We covered these items in this article.

Japanese Tax Authorities Release FAQ – Year End Mark-to-Market of Cryptos Held by Entities

The reason why this FAQ is labeled as “information” is because it is not a law or regulation, but rather the view of the NTA.

Although it is not a law, the tax authorities in Japan will refer to this document when verifying the validity of tax calculations regarding crypto.

In practice, I expect various accounting and tax treatments to be based on this FAQ.

This hasn’t changed from Version 1.

Our comments will be inserted using blue text, and the rest is the original content of the FAQ.

The official document can be obtained at the following link:

暗号資産等に関する税務上の取扱い及び計算書について（令和6年12月）

1 Income Tax and Corporate Tax

1-1 Sale of Crypto Asset

Question

Please tell me how to calculate taxable income from the following Crypto Asset transaction.

(Example)
On April 2, I bought 4BTC for JPY 4,000,000.
On April 20, I sold 0.2BTC for JPY 210,000.

(Note) The above transaction does not take into account the transaction fees for buying and selling Crypto Asset.

Answer

In the above example, income is calculated by the following formula:

JPY 210,000 [transfer price] – ( (JPY4,000,000 ÷ 4BTC) [acquisition price per BTC(Note 1)] x 0.2BTC [bitcoin sold] ) [transfer cost] = JPY 10,000 [income](Note 2)

(Note 1)
The amount calculated by either the total average method or the moving average method (if not selected, the total average method for individuals and the moving average method for corporations).

(Note 2)
If there are other necessary expenses, the amount will be the amount minus the amount of those necessary expenses.

When selling (converting to Japanese yen) the crypto asset you hold, the taxable income amount is the difference between the selling price of the cryptocurrency and its acquisition cost.

[Related laws and regulations, etc.]
Income tax law 36, 37, 48-2
​​The implementing order for income tax law 119-2, 119-5
Corporate tax law 61
The implementing order for corporate tax law 118-6

Our comments:

I have no particular comments regarding the method of calculating the profit when converting cryptocurrency to Fiat (legal tender). (Same comment as Version1)

However, there was a significant change that was made in Version 3.

The general method to be taken when calculating acquisition cost was changed.

Until Version 2, the general method was moving average (total average method was permitted under the condition that it was continuously applied).

In Version 3, the general method was changed to total average method and moving average was made the exception.

In order to use the moving average method, one will now need to submit a declaration to the tax authorities.

This change was made regardless of the tax authorities previously claiming that the moving average method was “the appropriate method”.

This is a clear example of how policy is prioritized over accurate representation of transactions or theoretical arguments.

As we have shared in our previous articles, the moving average method tends to be beneficial to the tax-payer, due to the rounding effect when calculating the cost basis.

We will be touching more on this later in “2-5 Submission of Cryptocurrency Measurement Method”.

They changed the wording from BTC to bitcoin in Version 2 but for some reason they brought back BTC in Version 3.

They also fudged around with the related laws and regulations that were referenced.

In Version 1, transaction fees explicitly included in the acquisition cost.

However, in Version 2 they changed that to “transaction fees are not taken into account”.

Version 3 is the same in that regard.

The handling of fees incurred when acquiring cryptocurrency is covered in “1-4 Acquisition Cost of Crypto Asset”.

1-2 Purchase of Goods with Crypto Asset

Question

Please tell me how to calculate taxable income from the following crypto asset transaction.

(Example)
April 2 Purchased 4BTC for 4,000,000 yen.
October 5 Paid 0.3BTC to purchase goods worth 403,000 yen (including consumption tax).
The exchange rate at the time of transaction was 1 BTC = 1,350,000.

(Note) The above transaction does not take into account the transaction fees for buying and selling crypto asset.

Answer

In the above example, income is calculated according to the following formula:

403,000 yen [goods price (=transfer price of bitcoin] – ( (4,000,000 yen ÷ 4BTC) [acquisition cost per 1BTC] (Note 1) × 0.3 BTC [bitcoin paid] ) [transfer cost] = 103,000 yen (Note 2) [income]

(Note)
(1) The amount calculated by either the total average method or the moving average method (if not selected, the total average method for individuals and the moving average method for corporations).

(2) If there are other necessary expenses, the amount will be the amount minus the amount of those necessary expenses.

If you use the crypto asset you hold for payment when purchasing goods, this means that you transferred the crypto asset you hold, and the difference between the transfer price of that crypto asset and the acquisition cost of that crypto asset will be the income.

[Related laws and regulations, etc.]
Income tax law 36, 37, 48-2
​​The implementing order for income tax law 119-2, 119-5
Corporate tax law 61
The implementing order for corporate tax law 118-6

Our comments:

I have no particular comments regarding the method of profit calculation.

Change was made in Version 2 which stated that “transaction fees are not taken into account”, whereas Version 1 explicitly included transaction fees in the calculation example.

This change is the same as in “1-1 Sales of Crypto Asset”.

The comment below has been carried over from my commentary for Version 1.

It is not practical to calculate profit and loss every time one pays using bitcoin regularly in their daily lives.

Yes, it is true that the same tax rules apply to the use of foreign currencies.

But few people calculate and report exchange gains and losses when using foreign currencies during their holiday vacations in foreign countries.

We believe that a de minimis rule is necessary to exempt transactions below a certain amount.

1-3 Crypto-to-crypto Trades

Question

Please tell me how to calculate taxable income from the following crypto asset transaction.

(Example)
On April 2, I purchased 4 bitcoin (A) for 4,000,000 yen.

On November 2, I used 1 BTC to purchase 40 XRP.

The market value of XRP at the time of transaction was 1 XRP = 30,000 yen.

(Note)
1 The above transaction does not take into account the transaction fees for buying and selling crypto asset.

2 The above transaction is not considered as a case where the crypto asset is obtained temporarily and only as necessary.

Answer

(30,000 yen x 40XRP) [purchase price of XRP (=transfer price of bitcoin)] – ( (4,000,000 yen / 4BTC) [price per bitcoin (Note 1)] x 1BTC [bitcoin paid] ) [transfer cost] = 200,000 yen(Note 2) [income]

(Note)

1. The amount calculated by either the total average method or the moving average method (if not selected, the total average method for individuals and the moving average method for corporations).
2. If there are other necessary expenses, the amount will be the amount minus the amount of those necessary expenses.

If you use your own crypto asset to purchase another crypto asset B, you are purchasing crypto asset B with crypto asset A.

Therefore, taxable income from transferring crypto asset A shall be calculated in a way similar to “1-2 Purchase of Goods with crypto asset”.

[Related laws and regulations, etc.]
Income tax law 36, 37, 48-2
​​The implementing order for income tax law 119-2, 119-5
Corporate tax law 61
The implementing order for corporate tax law 118-6

Our comments:

Here too, a change has been made to “not take into account” the transaction fees when Version 1 was updated to Version 2.

The handling of fees incurred when acquiring cryptocurrency is covered in “1-4 Acquisition Cost of Crypto Asset”.

The comment below has been carried over from my commentary for Version 1.

I have no particular comments on the calculation method for profits related to crypto-to-crypto trades.

I believe most countries consider crypto-to-crypto exchanges as a taxable event.

However, I think a little more effort could have been made in the following two points.

First, it is often unrealistic or difficult to calculate gains and losses for each crypto-to-crypto exchange transaction.

In the case of listed stocks or FX, a transaction occurs and is completed within one brokerage account.

In this case, the calculation of trading gains and losses is easy and can be easily checked in most cases in the service provider’s user account information.

Even if one is using multiple accounts, one can generally determine the overall gain and loss by simply totaling the gains and losses of each account.

However, in the case of cryptocurrencies, one can freely send cryptocurrency between exchanges.

If one sends cryptocurrency purchased from one exchange to another exchange, the receiving exchange does not know the acquisition cost of the cryptocurrency.

Since there is no information on the acquisition cost, it is impossible for the receiving exchange to calculate gains and losses.

Therefore, it is not possible to determine the overall gain and loss by simply summing up the gain and loss data for each exchange if one is using multiple exchanges.

If one has a small number of transactions or is just using a few exchanges, one can use a spreadsheet to try to calculate gains and losses.

As the number of transactions or exchanges used increases, it becomes unrealistic or difficult to perform such calculations.

The second reason is a little more conceptual.

When exchanging one asset for another, the assumption is that it goes through yen once.

If there is a price difference between the assets being exchanged, a gain or loss is realized.

This is easy to understand when thinking of selling Apple stock to buy Google stock (both listed stocks).

One can’t trade AAPL with GOOG directly, they first sell AAPL for fiat, recognize any gain or loss at this point, and use that fiat to buy GOOG.

The thing with cryptocurrency is that BTC and ETH can be traded directly.

In most cases, users do not have the intention of realizing gains or losses when making these transactions.

Generally speaking, cryptocurrency does not give its holders any rights or represent any obligations, unlike financial products or fiat currencies .

In simple terms, holding cryptocurrency means holding a random string of characters called a Private Key.

Exchanging cryptocurrency for cryptocurrency is simply exchanging one string of characters for another.

It is similar to a person with an orange exchanging it for a person with an apple.

Even if the tax law is strictly applied in such a case, it may be subject to taxation.

But from a technical perspective, it seems awkward to me that merely exchanging a string of random letters would be considered a taxable event (this is akin to generating taxable events when exchanging email).

From a practical perspective and a conceptual perspective, I think it is appropriate to tax cryptocurrency when exchanged for fiat.

1-4 Donations using Crypto Asset

Question

Please explain the tax treatment when making a donation using crypto assets as described below.

(Example)

On April 2, Year X, 4 BTC (with a book value of 5,000,000 yen) owned by the donor was transferred to the wallet held by Organization A, a certified non-profit organization, as a donation related to a specific non-profit activity conducted by Organization A.

• This donation is not allocated to any business related to capital contributions.
• The donor has not received any compensation or return gifts from Organization A for this donation.
• The donor has received documentation from Organization A certifying the following details, which include their name (or business name) and address:

1. Confirmation that Organization A has received the donation.
2. Confirmation that the donation is related to a specific non-profit activity conducted by Organization A.
3. Confirmation that the donation amount is 5,400,000 yen.
4. Confirmation that the date of receipt of the donation was April 2, Year X.

(Note)
Regarding 3. (donation amount: 5,400,000 yen), this figure was calculated based on the final trading price of 1 BTC on April 1, Year X as published by a crypto asset exchange (1,350,000 yen per BTC × 4 BTC).

However, there was no significant difference between the final trading price of 1 BTC on April 1 and the price at which Organization A received the 4 BTC in its wallet.

Answer

In the case described, the donation amount is 5,400,000 yen, as it is a donation made to a certified non-profit organization (NPO).

The difference between the book value (5,000,000 yen) and the donation amount (5,400,000 yen), which is 400,000 yen, is considered a taxable gain from the transfer of the crypto asset.

(Tax Treatment Under the Income Tax Act)
Under Japan’s Income Tax Act, donations are not limited to monetary (Japanese yen) contributions.

If crypto assets are donated, the donation amount is the market value of the crypto asset at the time of donation.

As a general rule, this market value is determined based on the price at the time the recipient organization (Organization A) receives the crypto asset.
However, if there are no significant price fluctuations, the value can also be calculated based on the final trading price of the crypto asset on the day before receipt, as published by a recognized pricing entity.

Deductibility of Donations for Individuals

If an individual donates to a certified NPO, they can choose between deducting the donation amount from their taxable income (寄附金控除 / donation deduction) or applying a tax credit against their tax liability (税額控除 / tax credit deduction).

The individual can choose the more favorable option when filing their tax return.

(Note)
1. A “recognized price provider” refers to an entity that continuously publishes crypto asset trading prices, and whose published prices have a significant impact on the determination of trading prices or exchange rates for crypto assets.
2. Donations that provide special benefits to the donor or are clearly used for capital contributions are excluded from these deductions.
If an individual gives crypto assets as a gift (excluding gifts to heirs that take effect upon the donor’s death), the market value at the time of the gift is included in business income or miscellaneous income calculations.
Therefore, if an individual donates their crypto assets to a corporation, for business income or miscellaneous income calculations, the market value at the time of donation is included in gross revenue, and the book value of the crypto asset is recorded as a deductible expense.

(Tax Treatment Under the Corporate Tax Law)
The same principle applies to corporate tax—if a corporation donates crypto assets, the donation amount is based on the market value of the crypto asset at the time of donation.
If a corporation makes a donation to a certified NPO or a special NPO, the donation amount may be treated separately from general donation deductions and may be deductible within specific limits.
3. Donations clearly related to capital contributions are excluded.
Since donating crypto assets to Organization A constitutes a transfer of assets without compensation, the corporation must recognize the difference between the market value at the time of donation and the book value as taxable income or deductible loss when calculating income for that fiscal year.

[Related laws and regulations, etc.]
Income tax law 40, 78
The implementing order for income tax law 87
Corporate tax law 37, 61
Special Tax Measures Act 41-18-2, 66-11-3

Our comments:

Conceptually the same as transfers without consideration but with specific treatment around donation deductions.

No particular comments.

1-5 Acquisition Cost of Crypto Asset

Question

I purchased crypto asset on a Japanese exchange and paid a transaction fee. In this case, what is the acquisition cost of the purchased crypto asset?

(Example)
On October 2, I purchased 2BTC for JPY 2,000,000. Transaction fee was JPY 550 (including consumption tax).

Answer

The acquisition cost of the acquired crypto asset in the above example is the purchase price of JPY 2,000,000 plus the transaction fee of JPY 550, totaling JPY 2,000,550.

The acquisition cost of crypto asset will be as follows, depending on the method of acquisition.

In  the case of 1 below,the acquisition cost includes transaction fees and any other expenses that were required in acquiring the crypto asset.

1. When obtained (purchased) by paying a consideration: The amount of the consideration paid at the time of purchase
2. Crypto assets acquired through self issuance: The cost of issuance
3. When obtained by gift or inheritance (excluding the cases described in 3 below): The value (market value) at the time of the gift or inheritance.
4. When obtained by gift on owner’s death, inheritance, or specific inheritance: The amount evaluated by the method chosen by the donor at the time of the donor’s death (the evaluation value of the crypto asset possessed by the donor at the time of death).
5. Otherwise: The value (market value) at the time of acquisition.

(Note) ‘Otherwise’ refers to, for example, cases where crypto asset is obtained through exchange, mining, or fork, and in such cases, the acquisition value is the value (market value) at the time of acquisition.

Furthermore, when a crypto asset is obtained through a fork, the acquisition value is 0 yen (refer to “1-5 Acquisition of Cryptocurrency Through Forks”).”

Reference: For a corporation that is a taxable business entity (applying the tax-excluded accounting method) and conducts the above example transaction, what is the acquisition cost of the purchased crypto asset?

The acquisition cost of the crypto asset in the above example is JPY2,000,500 (Note 1, 2).

(Note)

1. Under Consumption Tax Law, the transfer of crypto asset and other payment methods is not subject to taxation, but the transaction fee paid to a crypto asset exchange operator as a commission for the transaction is considered a consideration for providing services related to the brokerage, and is subject to consumption tax.
2. If the person conducting the transaction in this case is a taxable enterprise under the Consumption Tax Law and applies the tax-excluded accounting method, the amount of consumption tax and other taxes included in the transaction fee (JPY 50 = JPY 500 x 10/110) and the amount of the consideration for the taxable transaction (JPY 500 = JPY 500 – JPY 50) are divided, and the acquisition price of the purchased crypto asset is the sum of the amount of the consideration for the taxable transaction (JPY 2,000,500 = JPY 2,000,000 + JPY 500).

[Related laws and regulations, etc.]

Income tax law 36, 37, 40
​​The implementing order for income tax law 119-6
Income Tax Administrative Circular 2
Corporate tax law 61
The implementing order for corporate tax law 118-5
Accounting Circular 2

Our comments:

In Version 1, information was provided on the calculation of acquisition cost using the moving average method and the total average method.

In Version 2, the focus of the question has changed to the handling of transaction fees when acquiring cryptocurrencies.

The treatment of including transaction fees incurred when acquiring cryptocurrency in the acquisition price has not changed from Version 1.

The new information being provided in Version 2 was regarding the handling of consumption tax.

Not changed in Version 3 other than reflecting the increase in consumption tax from 8% to 10% in the illustrative example.

There were no changes in Versions 4,5,6,7.

The acquisition cost should be calculated by extracting the consumption tax part from the transaction fees, but it will become quite complicated if the transaction data from the exchange is not formatted to accommodate this.

If you actually start calculating the acquisition cost, you will quickly realize that the handling of transaction fees is complex.

Transaction fees are displayed in various formats in the transaction data depending on the exchange.

(Examples)
fees are generated separately from the order amount
fees are deducted from the order amount
fees are incurred in the base currency
fees are incurred in the trade currency
fees are displayed as negative (rebate)
fees are displayed as rewards in an exchange token

It will be very tedious to sort through each of these scenarios and build logic to calculate total gains and losses.

1-6 Acquisition of Crypto Assets Through Forks

Question

If one acquires a new crypto asset that was born as a result of a chain fork, will this acquisition generate taxable income under individual income tax or corporate tax?

Answer

If one acquires a new crypto asset through a split (fork) of an existing crypto asset, no taxable income will arise.

Under the Income Tax Act, when acquiring something with economic value, the income amount is calculated based on the market value at the time of acquisition.

However, regarding the new crypto asset acquired as a result of a chain fork mentioned in the above question, it is considered that there was no trading market at the time of the fork and the crypto asset did not have value at that time.

Therefore, no income will be generated at the time of acquisition, and income will be generated when the new crypto asset is sold or used.

In that case, the acquisition price will be 0 yen.

The same goes for corporate tax.

The acquisition cost of the newly acquired crypto asset as a result of a split (fork) is 0 yen, and it is considered that there is no amount of profit to be included when calculating taxable income.

[Related laws and regulations, etc.]
Income tax law 36
Corporate tax law 22

Our comments:

In Version 2, bits of language on corporate tax was added, but the content itself is basically the same as Version 1.

Not much change in Version 3 either, other than some words added to clarify that taxable income is not recognized at the time the crypto is received, but can be subject to taxable income recognition in the future when it is sold or converted into another asset.

There were no changes in Versions 4,5,6,7.

The comment below has been carried over from my commentary for Version1.

In the FAQ, it is stated that upon the fork, there is no market and the asset has no value, so the acquisition price is considered to be zero yen, and as a result, there is no income at the time of acquisition.

However, as the existing assumption is that, if an asset is acquired, the income amount is calculated based on the market value at the time of acquisition.

I consider applying this assumption to cryptocurrencies to be an issue in some cases.

Blockchain forks occur at certain frequencies due to how blockchains work.

For example when blocks are consecutively mined in a short period of time, this could lead to forks in the chain.

In the above example, the chain that is ultimately recognized as valid by the majority of nodes in the network is preserved, and the fork chain is discarded.

Therefore, new coins that have value do not arise from all forks.

However, many blockchains are open source and can be freely forked by anyone.

It is possible that a fork could occur without the taxpayer’s knowing.

The taxpayer could unknowingly acquire a cryptocurrency with value.

Also, even if a spot market did not exist at the time a new cryptocurrency was created, it is possible that a price for the cryptocurrency could be formed in a derivative market for the cryptocurrency.

As pointed out in the comments for FAQ 3, we believe that by taxing at the time of exchange for fiat currency or use, it simplifies the calculation of taxable income and protects taxpayers.

1-7 Acquisition of Crypto Asset Through Mining, Staking, Lending, etc.

Question

If crypto asset is obtained through mining, staking, lending, etc., how will it be treated from an income tax or corporate tax perspective?

Answer

Profit from acquiring crypto asset through mining, staking, lending, etc., is subject to income tax or corporate tax.

If one acquires crypto asset through mining, staking, lending, etc. (hereinafter, mining etc.), the amount of income is calculated by subtracting necessary expenses (costs incurred through mining etc.) from the amount of revenue (the market value of the crypto asset at the time it was acquired through mining etc.).

[Related laws and regulations, etc.]
Income tax law 27, 35, 36, 37
Corporate tax law 22, 22-2

Our comments:

Not much change in Version 2 from Version 1 other than the addition of treatment for corporate tax.

There were no significant changes in Versions 3,4,5.

In Version 6, staking and lending were added, but there were no changes in the Answer to the Question.

Staking and lending have various forms, so generalization may not be appropriate, but it is common for the staker or lender to receive tokens as rewards (often referred to as “yield”), for sending tokens to a smart contract and not moving them for a certain period of time.

Most of these services or products are marketed as decentralized, but in reality, they are often developed and operated by a small team and are highly centralized.

Mining does not require tokens, but staking and lending do.

Users that engage in staking and lending will purchase tokens with the expectation of future returns from the efforts of the development and operation by the team.

Therefore, in the United States, these services often lead to discussions of whether they fall under the category of securities.

Personally, I think that mining bitcoin, which is simply generating numbers randomly, and staking and lending are different in nature and substance.

The comment below has been carried over from my commentary for Version 1.

It seems like a reasonable conclusion at first glance, but upon further thought, there appears to be a few issues.

If one interprets receiving bitcoin (cryptocurrency) as payment for providing the service of mining, then yes, the received bitcoin would be considered income.

However, mining itself is not a service, and there is no organization like a company or individual that can be considered the recipient of the service.

Mining bitcoin is merely generating random numbers using a computer.

It is called mining as an analogy because it shares certain similarities as gold mining.

Gold mining companies and oil mining companies do not consider mining gold or oil itself as their business.

They consider selling the mined commodities as their business and income tax is also recognized not at the time of mining, but at the time of sale.

If we think of bitcoin mining in the same way as commodity mining, it seems reasonable to recognize taxable income at the time of sale or use, not at the time of mining.

1-8 Crypto Asset Transactions by Non-Residents and Foreign Entities

Question

I reside in the United States and sold my crypto asset to a Japanese crypto asset exchange.

In this case, do I need to file a tax return in Japan?

Answer

No, you do not need to file a tax return in Japan.

Under Japan’s income tax laws, residents are taxed on their worldwide income, while non-residents are only taxed on income sourced from Japan (domestic-source income).

Moreover, the following types of income are subject to tax on the disposition of assets that are subject to domestic-source income, subject to certain conditions (excluding income attributable to a permanent establishment):

(1) Income from the disposition of domestic real estate;
(2) Income from the disposition of rights or other interests in domestic real estate;
(3) Income from the cutting or disposition of domestic forest land;
(4) Income from the disposition of shares or other securities issued by domestic corporations under certain conditions;
(5) Income from the disposition of shares or other securities of real estate-related corporations; and
(6) Income from the disposition of domestic assets during the period in which a non-resident stays in Japan.

Therefore, income derived from the sale of crypto asset held by a non-resident to a Japanese crypto asset exchange is not subject to income tax in Japan.

The same applies to foreign entities; they are not required to file a tax return in Japan in this case.

(Note) Income derived from the sale of crypto asset held by non-residents or foreign entities to Japanese crypto asset exchanges is also not subject to withholding tax.

[Related Laws and Regulations]
Income tax law 161
Income tax law 212
Income tax order 281
Corporate tax law 138
Corporate tax order 178

Our comments:

This is a new item that was added in Version 7.

We have no particular comments but this got us thinking whether the tax authorities frequently receive questions like this.

Many Japanese cryptocurrency exchanges contract with companies known as LP or MM to provide liquidity on their exchange platforms.

Many of these LPs or MMs are foreign entities.

Since these LPs or MMs buy and sell cryptocurrencies on Japanese exchanges that have engaged them, it is understandable that they would want to obtain clarification from the authorities on whether these activities would lead to tax liability.

2 Income Tax

2-1 When to Recognize Income from Crypto Asset Transactions in Total Income

Question

In what year should the profit generated from crypto asset transactions be recognized as income?

Answer

In principle, it should be considered as income in the year in which the transfer of the crypto asset sold, etc. took place.

However, it is also possible to consider it as income in the year in which the contract for the sale, etc. of the crypto asset was entered.

Profit and loss generated from crypto asset transactions are generally classified as miscellaneous income (other miscellaneous income) (refer to “2-2 Income Classification of Crypto Asset”).

The timing at which such income should be considered as part of the total income is determined based on the nature of the income, in accordance with the timing at which other income should be considered as part of the total income.

Therefore, the timing at which income generated from crypto asset transactions should be recognized in total income is determined based on the nature of the income, in accordance with the timing at which income from transfer of assets is recognized.

[Related laws and regulations, etc.]
Income tax law 35, 36
Income tax basic disclosure 36-12、36-14

Our comments:

This is a new item that was added in Version 3.

We have no particular comments.

2-2 Income Classification of Crypto Asset

Question

Under Income Tax Law, what category of income will gains from crypto asset transactions be classified as?

Answer

In general, gains resulting from the use of crypto assets are classified as miscellaneous income (other miscellaneous income).

Gains and losses arising from crypto asset transactions are considered gain or loss recognized in relation to the relative relationship between domestic currency or foreign currency and therefore are generally classified as miscellaneous income (other miscellaneous income).

However, if the amount of income from crypto asset transactions in that year exceeds 3 million yen, it will be classified into the following income categories:

1. If there is record-keeping of accounting documents related to crypto asset transactions, it is generally classified as business income.
2. If there is no record-keeping of accounting documents related to cryptocurrency transactions, it is generally classified as miscellaneous income (miscellaneous income related to business).

Furthermore, if “the crypto asset transaction is performed in conjunction with acts that are the basis for various types of income such as business income”, for example, if the business income earner owns the crypto asset as a business asset, and is using the crypto asset as a means of payment when purchasing inventory etc., then it is classified as business income

[Related laws and regulations, etc.]
Income tax law 27, 35, 36
Income tax basic disclosure 35-2

Our comments:

Not much change from Version 1 to Version 2, other than a few words here and there.

There were no significant changes in Versions 3,4,5.

However, there was a significant change in Version 7.

The essence of the content has not changed, so it’s more accurate to say that there were changes in the wording that were significant in nature.

To summarize the content of the FAQ before Version 7:

If profits are made from cryptocurrency transactions, it is generally considered “miscellaneous income”.

However, if cryptocurrency transactions are recognized as a business, it is considered “business income”.

There were no explicit criteria for determining whether a transaction constituted a business, so it was left to judgment of facts and circumstances, which left ambiguity and subjectiveness.

However, in Version 7, specific criteria for classification as “business income” was documented in actual wording.

This is huge.

Those requirements are:

• Keeping accounting documents
• Income amount (crypto gross sales) exceeding 3 million yen

This change should be considered as a change to broadly align tax rules that came out of the revision of the “Basic Directive on Income Tax” dated October 7, 2022, rather than a rule specifically designed for cryptocurrencies.

The purpose of the revision to this Basic Directive is to “clarify the approach to determining whether an income is classified as business income”.

The background to this is the recent trend of increasing side jobs for company employees.

We think what ended up happening is that cryptocurrency traders just happened to be at the receiving end of this favorable income classification criteria that arose from the government’s push to “reform the way of working”.

“Business income” is more advantageous for taxpayers in many ways than “miscellaneous income”.

It is recommended that those who are likely to meet the requirements of “business income” confirm that the above requirements are met during their tax year.

Note that the term “income amount” refers to the gross sale amount of crypto assets.

It does not refer to net profit, so in the case of bitcoin, selling around 1 BTC during the tax year would meet the income requirement.

According to the explanation of the Basic Directive on Income Tax Treatment of Miscellaneous Income (PDF/270KB), the requirement for keeping accounting documents is more important than the income requirement of exceeding 3 million yen in determining the classification as business income.

Even if the income amount is less than 3 million yen, if the requirement for keeping accounting documents is met, the business income classification will not be immediately denied.

However, clearing the quantitative threshold of exceeding 3 million yen provides more peace of mind in removing uncertainty.

2-3 ​​Necessary Expenses of Crypto Asset

Question

In the case of reporting income from the sale of crypto asset, what expenses are considered necessary business expenses?

Answer

Necessary expenses when calculating taxable income from the sale of crypto asset include, for example, the following costs

• Transfer cost of the crypto asset sold
• Transaction fees paid for the sale of the crypto asset

In addition, the cost of using the internet or smart phones, the cost of purchasing a computer, etc. can also be included in the necessary expenses, as long as the amount of such expenses is deemed to be directly necessary for the sale of the crypto asset.

In principle, income from the sale of crypto asset is classified as miscellaneous income (other miscellaneous income) (see “2-2 Income Classification of Crypto Asset”).

The amount that can be included in the necessary expenses is the transfer cost of the crypto asset and other expenses directly related to the sale of the crypto asset.

Please note the following items regarding necessary expenses.

(1) Regarding the usage fees for internet, smartphones, and other communication lines, they are generally paid in lump sum, without clear segregation of whether they were for cryptocurrency transactions or other uses.

However, in terms of such expenses, only when the usage fees for cryptocurrency transactions can be clearly separated, the clearly separated amount can be included as necessary expenses.

(2) For assets such as a personal computer that have a useful life of more than one year and exceed a certain monetary value, the necessary expenses should be divided over the entire useful life of the asset (such expenses are called “depreciation expenses”), rather than being expensed in a lump sum for the year.

If a cryptocurrency transaction is classified as business income or miscellaneous income (miscellaneous income related to business), the amount of expenses incurred for sales expenses, general administrative expenses, and other expenses related to the business that generates income in that year can be included as necessary expenses.

[Related laws and regulations, etc.]
Income tax law 37, 45, 48-2
Income tax law enforcement ordinance 96

Our comments:

This was a new item introduced in Version 2.

No significant changes in Versions 3,4,5,6.

Although there were some changes in the wording in Version 7, there seems to be no change in the conclusion that the following amounts can be included as necessary expenses:

(1) Direct expenses such as the transfer cost of cryptocurrencies and other expenses directly incurred when selling cryptocurrencies.

(2) Indirect expenses such as sales expenses, general administrative expenses, and other expenses related to the business that generates income in that year.

Judgment is required when determining what expenses can be included in necessary expenses.

The best approach would be to keep all your receipts during the year and consult with your tax accountant.

2-4 Cost Basis of the Transferred Crypto Asset

Question

I have continuously bought and sold the same type of crypto asset as follows.

What is the transfer cost for the sale of this crypto asset?

(Example)
I first purchased bitcoin on April 1 and subsequently bought and sold it several times as shown below.

The total amount of sales (quantity) for the year was 5,295,000 yen (5 BTC) and the total amount of purchases (quantity) was 4,037,800 yen (6.5 BTC)

(Breakdown)
・ On April 1, 4 BTC was purchased for 1,845,000 yen (on hand balance 4 BTC)
・ On June 20, 2 BTC was purchased for 1,650,000 yen (on hand balance 6 BTC)
・ On July 10, 2 BTC was sold for 2,400,000 yen (on hand balance 4 BTC)
・ On September 15, 0.5 BTC was purchased for 542,800 yen (on hand balance 4.5 BTC)
・ On November 30, 3 BTC was sold for 2,895,000 yen (on hand balance 1.5 BTC)

(Note) The above transactions do not take into account trading fees for crypto asset.

Answer:

In the above example, the total average method results in a transfer cost of 3,106,000 yen, and the moving average method results in a transfer cost of 3,080,200 yen.

When calculating the income from the sale of multiple crypto assets, it is necessary to calculate the transfer cost.

The transfer cost is calculated by subtracting the (3) valuation of crypto asset held at the end of the year (December 31) from the sum of (1) valuation of crypto asset held at the beginning of the year (January 1) from the previous year and (2) total acquisition cost of crypto asset acquired during the year for each type of crypto asset (for example, bitcoin, etc.).

This “valuation of crypto asset held at the end of the year” is obtained by multiplying “the acquisition cost per unit at the end of the year” by “the number of units held at the end of the year”, and “the acquisition cost per unit at the end of the year” is calculated using either the “total average method” or the “moving average method”.

In the above example, the transfer cost is as follows depending on the evaluation method:

Total average method: The method of calculating the “acquisition cost per unit at the end of the year” by dividing the sum of the valuation of a crypto asset held at the beginning of the year and the total acquisition cost of that crypto asset acquired during the year by the total quantity of that crypto asset.

Moving average method: The method of calculating the “acquisition cost per unit at the end of the year” by adding the acquisition cost of a crypto asset acquired at each acquisition point to the total acquisition cost of that crypto asset held at that acquisition point and dividing it by the total quantity of that crypto asset held at that acquisition point.

When using the total average method

The “acquisition cost per unit at the end of the year” is 621,200 yen, and the “valuation of crypto asset held at the end of the year” is 931,800 yen according to the following calculation.

Therefore, the transfer cost is 3,106,000 yen (4,037,800 yen – 931,800 yen).

<Calculation>

(1) Total acquisition cost of the same type (name) of crypto asset acquired during the year ÷
(2) Quantity of the same type (name) of crypto asset acquired during the year =
(3) Acquisition cost per unit at the end of the year

(Note) If there is crypto asset carried over from the previous year, add the value and quantity to 1 and 2 respectively.

(1) Total acquisition cost of bitcoin acquired during the year 4,037,800 yen
(2) Quantity of bitcoin acquired during the year 6.5BTC
(3) Acquisition cost per unit at the end of the year (1÷2) 621,200 yen
(4) Valuation of bitcoin held at the end of the year (3×1.5BTC) 931,800 yen

When using the moving average method

The “acquisition cost per unit at the end of the year” is 638,400 yen, and the “valuation of crypto asset held at the end of the year” is 957,600 yen according to the following calculation.

Therefore, the transfer cost is 3,080,200 yen (4,037,800 yen – 957,600 yen).

<Calculation>
When acquiring crypto assets of different types (names), revise the average unit price using the following calculation formula.

(1) Total book value of the same type (name) of crypto asset held at the acquisition point ÷
(2) Quantity of the same type (name) of crypto asset held at the acquisition point =
(3) Average unit price at the acquisition point

(Note)
1 If there is crypto asset carried over from the previous year, add the value and quantity to 1 and 2 respectively.

2 The “average unit price at the acquisition point” calculated from the closest date to December 31 of that year will be the “acquisition cost per unit at the end of the year”.

(1) Average unit price at acquisition point (April 1)

(1) Total book value of bitcoin held at acquisition point 1,845,000 yen

(2) Quantity of bitcoin held at acquisition point 4BTC

(3) Average unit price at acquisition point (1÷2) 461,250 yen

(2) Average unit price at acquisition point (June 20)

(1) Total book value of bitcoin held at acquisition point 3,495,000 yen

(461,250 yen × 4BTC) [book value of crypto asset held at acquisition] + 1,650,000 yen [acquisition cost on June 20th] = 3,495,000 yen

(2) Quantity of bitcoin held on the acquisition date 6 BTC

(3) Average acquisition price on the acquisition date (1 ÷ 2) 582,500 yen

(3) Average acquisition price on the acquisition date (September 15)

(1) Total book value of bitcoin held on the acquisition date 2,872,800 yen

(582,500 yen x 4 BTC) [book value of cryptocurrency held at the time of acquisition] + 542,800 yen [purchase amount on September 15th] = 2,872,800 yen

(2) Quantity of bitcoin held on the acquisition date 4.5 BTC

(3) Average acquisition price on the acquisition date (1 ÷ 2) 638,400 yen

(4) Unit acquisition price at the end of the year 638,400 yen

= Average acquisition price on September 15 638,400 yen

(5) Evaluation of bitcoin held at the end of the year

638,400 yen (unit acquisition price at the end of the year) x 1.5 BTC (quantity held at the end of the year) = 957,600 yen

To make calculating the income from the sale, including the transfer cost of crypto asset fairly simple, it is possible to create a “Crypto Asset Calculation Sheet (for the total average method or the moving average method)” based on the “Annual Trading Report” sent by the crypto asset exchange operator. (Refer to “2-8 Calculation of Taxable Income using the Annual Transaction Report”)

The “Crypto Asset Calculation Sheet (for the total average method or the moving average method)” can be found on the website of the National Tax Agency.

Link

[Related laws and regulations, etc.]
Income tax law 48-2
Income tax law enforcement ordinance 119-2

Our comments:

This is a new item introduced in Version 3.

I have no particular comments as it is only a basic explanation of the moving average and total average method.

2-5 Submission of Crypto Asset Measurement Method

Question

I recently acquired my first crypto asset, but I heard that I need to elect a method for evaluating it.

Can you tell me the specific steps in submitting an election?

Answer

In order to file your income tax return, it is necessary to submit a “Notice of Method of Evaluation of Crypto Asset for Income Tax” to the head of the tax office in the area where you are a taxpayer by the deadline for submitting your income tax return (generally March 15 of the following year) after you first acquired your crypto asset.

As stated in “2-4 Cost Basis of Crypto Asset,” the evaluation value of the crypto asset you own at the end of the year (December 31) is calculated using either the “Total Average Method” or the “Moving Average Method” as the basic calculation for determining the transfer price of crypto asset such as selling it.

These evaluation methods are selected for each type of crypto asset (name) and if you
(1) acquire a crypto asset for the first time or
(2) acquire a different type of crypto asset, you must submit a notice (Notice of Method of Evaluation of Crypto Asset for Income Tax) that includes the selected evaluation method and other necessary information to the head of the tax office in the area where you are a taxpayer by the deadline for submitting your income tax return (generally March 15 of the following year).

(Note)
(1) This treatment was implemented as a result of revisions to the Income Tax Law, etc. in 2019.

(2) If the Notice of Method of Evaluation is not submitted, the default evaluation method will be “Total Average Method”.

(3) An example of the Notice of Method of Evaluation of Crypto Asset for Income Tax is provided on the next page.

[Related Laws and Regulations]
Income tax law 48-2
Enforcement order of the income tax law 119-2, 119-3, 119-5
Cabinet order amending part of the enforcement order of the income tax law (No. 95 of 2019) Article 4

This form can be downloaded from the National Tax Agency’s website.

If you have multiple types of crypto asset and are unable to list them all in the “1 Evaluation Method” section of the form, please list the relevant items on a separate sheet and submit it along with the form.

Our comments:

This was a new item that was introduced in Version 3.

There was a significant change that was made in Version 3.

The general method to be taken when calculating acquisition cost was changed.

Until Version 2, the general method was moving average (total average method was permitted under the condition that it was continuously applied).

In Version 3, the general method was changed to total average method and moving average was made the exception.

In order to use the moving average method, one will now need to submit a declaration to the tax authorities.

This change was made regardless of the tax authorities previously claiming that the moving average method was “the appropriate method”.

As we have shared in our previous articles, the moving average method tends to be beneficial to the tax-payer, due to the rounding effect when calculating the cost basis.

Furthermore, the moving average method, in which the most recent prices are more likely to be reflected in the cost, is superior to the total average method from the perspective of accurate cost calculation.

This is a clear example of how policy is prioritized over accurate representation of transactions or theoretical arguments.

Whether or not it would be better to submit and elect using the moving average method would depend on various factors, and careful consideration should be given.
The fact that the cost basis calculation method election can be made on a coin by coin basis is noteworthy (i.e. choose total average method for bitcoin and moving average method for Doge).

2-6 When Changing the Method of Crypto Asset Measurement

Question

I submitted a “Notice of Method of Evaluation of Crypto Asset for Income Tax” electing the total average method as the evaluation method for crypto asset, but I am now considering changing the evaluation method to the moving average method.

Can you tell me the specific procedures for this change?

Answer

In order to change the evaluation method, it is necessary to submit an application for change of evaluation method (Notice of Method of Evaluation of Crypto Asset for Income Tax) to the head of the local tax office in the jurisdiction of the taxpayer, by March 15 of the year in which you wish to change the evaluation method, and to receive the approval of the change.

As mentioned in “2-5 Submission of Crypto Asset Measurement Method” submitting a “Notice of Method of Evaluation of Crypto Asset for Income Tax” is required in order to select either “total average method” or “moving average method” as the evaluation method for the evaluation of crypto asset held at the end of the year (December 31), which forms the basis for calculating the transfer price relating to the sale, etc. of crypto assets.

If you want to change this elected evaluation method (including the case where the evaluation method was “total average method” for those who did not notify the evaluation method), you need to submit an application letter (Notice of Change of Evaluation Method for Crypto Asset for Income Tax) to the head of the tax office in charge of the tax return location, by March 15 of the year you want to change, containing the designated matters, including the evaluation method you want to change.

Note:

1. If no notice of approval or rejection is received by December 31 of the year in which the application is submitted, the change will be deemed to have been approved.
2. If the change is made within a period of 3 years from the adoption of the previous evaluation method, or if the proposed evaluation method makes it difficult to calculate the income amount appropriately, the application may be rejected.
3. An example of the application for change of evaluation method can be found on the next page.

[Related Laws and Regulations]
Income tax law 48-2
Enforcement order of the income tax law 101, 119-2, 119-4
Income tax basic disclosure 47-16-2、48-2-3

This form can be downloaded from the National Tax Agency’s website.

If you are making changes to multiple types of crypto asset and are unable to list them all in the “1 Evaluation Method” section of the form, please list the relevant items on a separate sheet and submit it along with the form.

Our comments:

Until Version 2, the calculation method for the acquisition price was left to the judgment of the taxpayer.

However, from Version 3, the taxpayer will need to obtain approval in order to change the calculation method for the acquisition price.

Below are my comments carried over from Version 1.

In the FAQ, both the moving average method and the total average method (with the condition of continuous application) are permitted, and the moving average method is considered “appropriate”. (In Version 1 and 2, the authorities had stated that the moving average method was the “appropriate” method. Regardless, in Version 3, they changed the default method to total average method, even though it is an inferior method in terms of accuracy compared to moving average method.)

However, there are other methods of calculating cost that are considered appropriate besides the moving average method and the total average method.

The first-in, first-out method and the individual cost method are examples.

In the United States, the first-in, first-out method is the basis for calculating the acquisition cost of cryptocurrency.

The individual cost method is also permitted under the condition that transaction records are properly maintained and the cryptocurrency itself that was the subject to the transaction can be uniquely identified.

Cryptocurrencies using the UTXO (Unspent Transaction Output) model, such as Bitcoin, allow individual identification of the cryptocurrency that was the subject of the transaction. (Ethereum is account-based and does not have UTXO, so it is not possible to individually identify the ETH that was the subject of the transaction)

Since the assets that were the subject of the transaction can be individually identified, it should be said that the individual cost method most accurately represents the cost and is most appropriate as the cost calculation method.

bitcoin is an asset with completely new properties that have never existed before.

Instead of simply applying the framework for existing assets, it is better to discuss how to faithfully represent the actual substance of the transaction.

The other point of interest is the section where it says “fractions of less than 1 yen that occur in the acquisition cost calculation may be rounded up”

If the cost increases, the gain will be calculated less, so the conclusion is that rounding up the fraction is advantageous.

Whether the moving average or the total average is advantageous is case-by-case.

Except in cases where the result is clear, it seems best to adopt the moving average method, considering the benefits of fraction rounding.

2-7 When the Purchase Price or Sale Price of the Crypto Asset is Unknown

Question

I have traded crypto asset this year, but I have not kept a record of the transactions, so I do not know the acquisition cost or sale price of the crypto asset.

Is there a way to check these prices?

Answer

You can confirm the acquisition cost and sale price of crypto asset transactions according to the following categories:

1 Crypto asset transactions through domestic crypto asset exchanges

For crypto asset transactions after January 1, 2018, the National Tax Agency requests that crypto asset exchanges provide an “Annual Trading Report” containing the following information to individual taxpayers.

• Annual Purchase Quantity: The quantity of crypto asset purchased during the year
• Annual Purchase Amount: The amount of money spent on purchasing crypto asset during the year (acquisition cost)
• Annual Sale Quantity: The quantity of crypto asset sold during the year
• Annual Sale Amount: The amount of money received from selling crypto asset during the year

If you do not have an Annual Trading Report, please request a new one from the crypto asset exchange.

(Note) For transactions before 2018, an Annual Trading Report may not have been provided. In that case, please refer to the following category 2 to confirm the acquisition cost and sale price of crypto asset yourself.

2 Crypto asset transactions other than those in category 1 (transactions through foreign crypto asset exchanges, transactions between individuals)

To confirm the acquisition cost and sale price of individual cryptocurrencies, you can use the following methods, for example:

• Confirm the acquisition cost and sale price of crypto asset by checking the withdrawal status of the bank account used to purchase crypto asset and the deposit status of the bank account used to sell crypto asset.
• Confirm the acquisition cost and sale price of crypto asset by using the transaction history of crypto asset transactions and the transaction market published by the crypto asset exchange (Note).

(Note) In the case of transactions between individuals, use the transaction market of the crypto asset exchange that you mainly use.

If the correct amount is found after submitting the final tax return, please correct the content of the final tax return (request for a revision or correction).

In addition, it is permitted to consider the acquisition cost of the crypto asset sold as 5% of the selling price.

For example, if a crypto asset is sold for 5 million yen, the acquisition cost of that crypto asset can be deemed as 250,000 yen, which is 5% of the selling price.

[Related laws and regulations, etc.]
Income tax basic disclosure 48-2-4

Our comments:

This was a new item introduced in Version 2.

In Version 3, the 5% rule, which states that if the acquisition cost of cryptocurrency is unknown, it may be deemed as 5% of the selling price.

2-8 Calculation of Taxable Income using the Annual Transaction Report

Question

Crypto Asset exchange A and B sent the following annual transaction reports.

Please teach me how to calculate the amount of income from crypto asset using these annual transaction reports.

Answer

By inputting the red and blue portions of the annual transaction report into the “Calculation Sheet for Crypto Asset (using the total average cost method)” published on the National Tax Agency homepage, you can easily calculate the amount of income.

Link

In the above case, the amount of income from crypto asset is 2,189,000 yen.

Please refer to the next page for an example of calculating the “Calculation Sheet for Crypto Asset (using the total average cost method)”.

[Related laws and regulations, etc.]
–

Our comments:

This was a new item introduced in Version 2.

I have no particular comments.

2-9 Contents of the Annual Transaction Report

Question

An annual transaction report was sent from a crypto asset exchange, but what is recorded in this annual transaction report?

Answer

1. Beginning quantity for the year: The quantity of crypto asset holdings as of January 1 of that year
2. Purchased quantity during the year: The quantity of crypto asset purchases made during the year
3. Purchased amount during the year: The amount of money spent on crypto asset purchases during the year (acquisition cost)
4. Sold quantity during the year: The quantity of crypto asset sales made during the year
5. Sold amount during the year: The amount of money received from crypto asset sales during the year
6. Transfer-in quantity: The quantity of crypto asset received in the account other than purchases made during the year
7. Transfer-out quantity: The quantity of crypto asset paid out from the account other than sales made during the year
8. End-of-year quantity: The quantity of crypto asset holdings as of December 31 of that year
9. Total profit or loss: The total amount of profit or loss from crypto asset margin trading for the year
10. Transaction fee: The amount of transaction fees paid to the crypto asset exchange during the yea

* In cases where crypto asset sales, purchases, etc. are made using a foreign currency, the amount converted into yen based on the TTM of the telegraphic trading market at the time of the transaction is the basis for each item.

In the case of the following transactions, the contents of each column are as follows:

(1) In the case of receiving crypto asset from a crypto asset exchange for free
“Sold quantity during the year”: –
“Sold amount during the year”: The value (market value) of the crypto asset received
“Purchased quantity during the year”: The number of crypto asset received
“Purchased amount during the year”: The value (market value) of the crypto asset received”

(2) When settling with crypto asset

• If you converted the crypto asset to fiat currency and made the payment through a crypto asset exchange:
  “Annual Sale Quantity”: The quantity of crypto asset that was converted to fiat currency
  “Annual Sale Amount”: The value (market value) of the crypto asset that was converted to fiat currency
• If you made the payment directly with the crypto asset:
  “Transfer Out Quantity”: The quantity of crypto asset used for the payment

(3) If you exchanged crypto asset A for crypto asset B through a crypto asset exchange:
A crypto asset’s “Annual Sale Quantity”: The quantity of crypto asset A that was exchanged
A crypto asset’s “Annual Sale Amount”: The value (market value) of the crypto asset B that was obtained
B crypto asset’s “Annual Purchase Quantity”: The quantity of crypto asset B that was obtained
B crypto asset’s “Annual Purchase Amount”: The value (market value) of the crypto asset B that was obtained

Please note that the format of the annual trading report may vary depending on the crypto asset exchange.

[Related laws and regulations, etc.]
–

Our comments:

This is a new item introduced in Version 2.

I have no particular comments on this item.

2-10 ​​When Transferring Crypto Asset at Below Market Value (Zero Value)

Question

As in the following example, I sold crypto asset at the same price as the acquisition price, so there is no profit from the sale, but the sales amount was lower compared to the market price (market value) at that time.

Is it necessary to file a tax return even though there is no income other than the income from this sale?

(Example)

• I bought 1 BTC for 450,000 yen on April 9.
• I sold 1 BTC for 450,000 yen on May 20.

The exchange rate at the time of sale was 1 BTC = 1,000,000 yen.

(Note) Transaction fees for buying and selling crypto asset are not taken into account in the above example.

Answer

In the above example, for the calculation of miscellaneous income, the total income amount is calculated as 700,000 yen (equivalent to 70% of the market value), so it is necessary to report an income amount of 250,000 yen.

After April 1, 2019, when an individual transfers crypto asset to another individual or corporation by means of a transfer (Note 1) in consideration of a value that is significantly lower than the market value, it is necessary to include a portion of the difference between such value and the market value of such crypto asset that is considered a gift in essence (Note 2), at the time of such transfer in the total income amount for miscellaneous income, etc. (Note 3)

(Note)
1 “Transfer by means of a value that is significantly lower than the market value” refers to selling for less than 70% of the market value.

2 The amount “considered as a gift in essence” means the amount after subtracting the consideration amount from the equivalent of 70% of the market value.

3 In case an individual who acquired a crypto asset transfers it, the acquisition price of the crypto asset that serves as the basis of the calculation will be the total of the consideration and the amount considered as a gift, which is the difference between the price of the crypto asset at the time of acquisition and the amount of the consideration.

4 This applies to income tax from 2019 onwards.

In the above (example), the amount to be included in the total income is 840,000 yen because it meets the criteria of a low-value transfer.

(Calculation)
Determination of whether or not it falls under low-value transfer
(1) Sales price: 450,000 yen
(2) Amount equivalent to 70% of market value: 1,000,000 yen x 70% = 700,000 yen
(3) Because (1) < (2), the sales price is less than the amount equivalent to 70% of the market value, the transaction is deemed a low-value transfer.

Total Income Calculation
When a transaction is deemed a low-value transfer, the total income must include the actual sales price and the difference between the actual sales price and the amount equivalent to 70% of the market value.

450,000 yen [Actual sales price] + (700,000 yen – 450,000 yen) [Difference between actual sales price and the amount equivalent to 70% of the market value] = 700,000 yen [Total income]

Taxable Income Calculation
700,000 yen [Total income] – 450,000 yen [Transfer cost] = 250,000 yen [Taxable Income]

Also, on and after April 1, 2019, if crypto asset is transferred to other individuals or corporations through gifts (excluding death-related gifts) or inheritance (excluding specific inheritance for inheritors), the value (market value) of the crypto asset at the time of the gift or inheritance must be included in the total income for miscellaneous income, etc.

(Note)
1 If an individual acquires a crypto asset and transfers them, the acquisition cost of the crypto asset will be the value of the cryptocurrency asset at the time of gift or inheritance.

2 This applies to income tax from 2019 onwards.

3 If an individual acquires a crypto asset through inheritance, gift, or donation, they will be subject to inheritance tax or gift tax.

Please see “4-1 When Crypto Asset is Acquired Through Inheritance or Gift” for more information.

[Related Laws and Regulations]
Income tax law 40
Enforcement order of the income tax law 87
Income tax basic disclosure 40-2, 40-3

Our comments:

This was a new item that was added in Version 3.

We have no particular comments.

2-11 Treatment of Losses from Crypto Asset Transactions

Question

I incurred a loss in the amount of miscellaneous income through crypto asset trading.

Can this loss be used to offset other income such as salary income?

Answer

A loss incurred in the calculation of miscellaneous income cannot be used to offset other income.

Under the Income Tax Act, income that can be used to offset other income includes real estate income, business income, mountain forest income, and transfer income.

Since miscellaneous income does not fall under these categories of income, a loss incurred in the calculation of miscellaneous income cannot be netted with other income, even if there is such a loss.

[Related laws and regulations, etc.]
Income tax law 69

Our comments:

No significant changes from Versions 1,2,3,4.

While losses cannot from miscellaneous income can’t be used to offset income from other income categories, that changes if the income is classified as other than miscellaneous, such as business income or transfer income.

2-12 Crypto Asset Margin Trading

Question

Will crypto asset margin trading be subject to the separate taxation system for declaration, similar to foreign exchange margin trading (commonly known as FX)?

Answer

Income from margin trading of crypto asset is not subject to the separate reporting taxation (special taxation of miscellaneous income related to futures trading) specified in the Special Taxation Measures Act, so it will be subject to comprehensive taxation and must be reported.

Foreign exchange margin trading (so-called FX) falls under financial product futures trading under the Financial Instruments and Exchange Law, so it is subject to separate reporting taxation.

Though margin trading of crypto asset is considered futures trading of financial instruments etc. as does FX, it is excluded from separate reporting taxation under the Special Measures Act, and therefore, income from such transactions will be reported under comprehensive taxation.

[Related laws and regulations, etc.]
Income tax law 35
Special Tax Measures Act 41-14

Our comments:

The content is pretty much the same as Version 1,2,3.

The amendment to the Financial Instruments and Exchange Law has resulted in crypto asset derivatives falling under the purview of the law.

Previously, crypto exchanges only needed to register with the Financial Services Agency as required by the Payment Services Act, but now, registration as a Type 1 Financial Instruments Business Operator is necessary to provide services such as crypto margin trading and FX.

The comment below has been carried over from my commentary for Version 1,2,3.

I am personally opposed to special tax treatments in general.

Lowering the tax rate is never a bad thing, but tax exemptions that favor only a certain group of people are not fair.

2-13 Crypto Asset Margin Trading (2)

Question

Please tell me the method of calculating the amount of income in the case of the following crypto asset transactions based on credit.

(Example)
・ Went short 1BTC for 1,000,000 yen on September 1.
・ Went long 1BTC for 800,000 yen on September 24.

(Note) In the above transactions, fees for buying and selling crypto asset are not considered.

Answer

In the above example, the income amount is calculated as follows:

(Formula)
1,000,000 yen [selling price] – 800,000 yen (Note 1) [buying price] = 200,000 yen (Note 2)

(Note)
1 The transfer cost is the amount calculated by the specific identification method.
2 If there are other necessary expenses, the amount after deducting such expenses.

A crypto asset credit transaction is a buying and selling of crypto asset that is conducted based on credit from another party

In this method of crypto asset credit trading, when buying and selling crypto asset and then settling by buying and selling the same type of crypto asset, the income amount is the difference between the normal amount of consideration to be received by the transfer of crypto asset (selling price) (Note 1) and the consideration amount of the crypto asset at the time of buying (buying price) (Note 2).

In addition, income from crypto asset credit transactions is considered income for the year in which the transaction is settled.

(Note)
1 When a seller conducts a sale, the interest received from the other party is included in the sale price, and the so-called commodity loan fee paid to the other party is deducted from the sale price.

2 When a buyer conducts a purchase, the interest paid to the other party is included in the purchase price, and the so-called commodity loan fee received from the other party is deducted from the purchase price.

[Related Laws and Regulations]
Enforcement order of the income tax law 119-7
Income tax basic disclosure 36・37, Article 22

Our comments:

This was a new item that was added in Version 3.

We have no particular comments.

3 Corporate Tax

3-1 Crypto Asset Related

3-1-1 When to Recognize Profit From Transferring Crypto Asset

Question

When selling crypto asset, buying goods with crypto asset, or exchanging crypto asset, which fiscal year should the resulting transfer gains or losses be recorded in?

Answer

The transfer gains or losses resulting from selling, buying, or exchanging crypto asset should be recorded in the fiscal year in which the contract for the sale, purchase, or exchange of crypto asset was made (i.e., the date of the agreement).

For transactions involving the sale of crypto asset (1-1 Sales of Crypto Asset), the purchase of goods with crypto asset (1-2 Purchase of Goods with Crypto Asset), or the exchange of crypto asset (1-3 Crypto-to-crypto Trades), as they are all considered a transfer of crypto asset, the transfer gains or losses related to these transactions should be recorded in the fiscal year in which the agreement for the transfer was made (i.e., the date of the agreement).

[Related Laws and Regulations]
Corporate tax law 61

Our comments:

This was a new item that was added in Version 3.

The transfer loss and gain of cryptocurrency is stated as being recorded in the fiscal year of the contract date of the sale, etc.

However, in practice, the timing of the transfer of cryptocurrency and the contract date may be different.

If the transfer of cryptocurrency has not taken place and the payment has not been collected by the end of the fiscal year, it is expected to cause operational problems with only taxes being incurred.

Accounting should not only focus on the contract date, but also take into account the rights and obligations of the parties to the contract, and handle the transaction in a way that reflects the substance of the transaction.

The income recognition of transfer loss and gain of securities are also generally based on the contract date under tax law, but basing it off of delivery date is also allowed as an exception.

In our view, accounting and tax treatment that take into account the actual state of the transaction should be permitted.

3-1-2 Cost Basis of Transferred Crypto Asset

Question

Can you tell me about the transfer cost of crypto asset?

Answer

The transfer cost of crypto asset is calculated as follows:

Transfer cost = Book value per unit of crypto asset x Quantity of crypto asset transferred

The profit (loss) from the transfer of crypto asset is the difference between the consideration that is normally received for the transfer of that crypto asset and the transfer cost of that crypto asset.

This transfer cost is the amount obtained by multiplying the book value per unit of crypto asset (note) by the quantity of crypto asset transferred.

(Note)

1.The calculation of the book value per unit is done by using either the moving average method or the total average method (the statutory evaluation method is the moving average method. If you use the overall average method, please notify the head of the local tax office, etc.).

This calculation method election is made for each crypto asset.

a. Crypto assets that fall under Crypto Assets with Specific Transfer Restrictions (Note 2) but do not qualify as Self-Issued Crypto Assets (Note 3).

b. Crypto assets that fall under Crypto Assets with Specific Transfer Restrictions and also qualify as Self-Issued Crypto Assets

c. Crypto assets that qualify as Specific Self-Issued Crypto Assets (Note 4).

d. Crypto assets other than those listed in 1 to 3 above.

2. Crypto Assets with Specific Transfer Restrictions refer to crypto assets that are subject to transfer restrictions or other conditions, where a proper disclosure procedure has been conducted to ensure the public is informed of these conditions.
A crypto asset falls under this category if it meets both of the following conditions:

1. The crypto asset has specific conditions attached (Note 1).

(Note 1) Specific conditions refer to transfer restrictions defined in Article 23, Paragraph 1, Item 9 of the Cabinet Office Ordinance on Crypto Asset Exchange Service Providers (Cabinet Office Ordinance No. 7 of 2017, hereinafter referred to as the “Exchange Ordinance”).

These conditions are stipulated by rules of the Japan Virtual and Crypto Assets Exchange Association (JVCEA), designated by the Financial Services Agency (FSA), regarding the disclosure and provision of information for restricted transfer crypto assets.

2. The entity has followed appropriate disclosure procedures (Note 2) through a crypto asset exchange service provider. These procedures ensure that the crypto asset exchange provider discloses the specific conditions via the Japan Virtual and Crypto Assets Exchange Association (JVCEA).

(Note 2) The required disclosure procedures include one or more of the following:

1. A request to the crypto asset exchange provider to impose the above-mentioned transfer restriction.
2. A notification to the crypto asset exchange provider that a transfer restriction is imposed or will be imposed (only if the provider can verify the notification content).
3. A request to another entity to notify the crypto asset exchange provider that a transfer restriction is imposed or will be imposed (only if the provider can verify the notification content).

The specific disclosure methods are outlined in the JVCEA’s regulations on the disclosure and provision of information for restricted transfer crypto assets.

3. Self-Issued Crypto Assets refer to crypto assets issued by a corporation that continues to hold them from the time of issuance.

4. Specific Self-Issued Crypto Assets are Self-Issued Crypto Assets that have been subject to continuous transfer restrictions or other conditions from the time of issuance.
A crypto asset falls under this category if it continuously meets either of the following conditions from the time of issuance:
A. Technological Measures Preventing Transfer to Third Parties. The following technical measures must be in place:

1. A specified period during which the asset cannot be transferred.
2. The transfer restriction can only be lifted by officers, employees, or other specified individuals of the issuing corporation (including entities in a full control relationship with the issuing corporation).

B. Held in a Trust That Meets All of the Following Conditions (Limited to Taxable Trusts)

1. The trust’s trustee must be a trust company, and the beneficiary must be the issuing corporation.
2. The trust agreement must prohibit the trustee from transferring assets and liabilities within the trust to any party other than the trustee or beneficiary.
3. The trust agreement must prohibit the issuing corporation from transferring the trust’s beneficiary rights or changing the designated beneficiaries.

(Related laws and regulations)
Corporate tax law 61
Enforcement order of the corporate tax law 118-6
Corporate tax law implementation regulations 26-10
Exchange Ordinance 23
Designation of Rules of the Certified Fund Settlement Business Association Pursuant to the Provisions of Article 23, Paragraph 1, Item 9 of the Cabinet Office Ordinance on Crypto Asset Exchange Service Providers (Financial Services Agency Notification No. 36 of Reiwa 6)

Our comments:

This was a new item that was added in Version 3.

In the case of personal income tax, the principle method of calculating the acquisition cost has changed from previously being the moving average method to the total average method in Version 3, as seen in Question 2-5.

For entities, the principle method is the moving average method, and the total average method is the exception that is permitted after submitting an application to the tax office.

At the present time, it is not known why the principle calculation methods are different for individuals and entities.

To read about our views on why moving average is preferable, please refer to comments on Questions 2-5 and 2-6.

In Version 9, language was added regarding Crypto Assets with Specific Transfer Restrictions and Specific Self Issued Crypto Assets.

3-1-3 Mark-to-market of Crypto Asset at Year-end

Question

Our company held crypto asset at year end.

Is there any tax treatment that is required at year end?

Answer

An entity must measure the value of crypto assets it holds at the end of its fiscal year using the fair value method, as follows:
1. Market Crypto Assets (Note 1) that do not fall under any of the following categories:

1. Crypto Assets with Specific Transfer Restrictions
2. Specific Self-Issued Crypto Assets

2. Crypto Assets with Specific Transfer Restrictions that qualify as Market Crypto Assets (excluding Self-Issued Crypto Assets) and for which the fair value method has been selected for valuation (Note 2).

If a corporation holds the above (1) or (2) crypto assets on its own books, the difference between the fair value and the book value (referred to as “mark-to-market gain or loss” in this context) must be included in taxable profit or deductible loss for that fiscal year.

Additionally, the mark-to-market gain or loss must be reversed in the following fiscal year.

The fair value of Market Crypto Assets is calculated by multiplying the quantity of the asset by one of the following:

(1)The final trading price of the Market Crypto Asset as published by a price publisher on the last day of the fiscal year (if no such price is published on that day, the most recent final trading price published before that day that is closest to the last day of the fiscal year).

(2)The final exchange rate of the Market Crypto Asset as published by a price publisher on the last day of the fiscal year multiplied by the final trading price of the other Market Crypto Asset exchanged at that rate (if no such exchange rate is published on that day, the most recent final exchange rate published before that day that is closest to the last day of the fiscal year).

(Note 1) See “3-1-4 Crypto Assets That Trade In An Active Market” for a definition of Market Crypto Asset.

(Note 2) Crypto Assets with Specific Transfer Restrictions that qualify as Market Crypto Assets (excluding Self-Issued Crypto Assets) must be evaluated using either the fair value method or the cost method at the fiscal year-end. The statutory evaluation method is the cost method. If the fair value method is selected, a notification must be submitted to the relevant tax office.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7, 118-8, 118-9,118-10

Our comments:

This was a new item that was added in Version 3.

A significant rule has been clarified that unrealized gains and losses on cryptocurrency held by entities will be subject to taxation.

The impact of this is huge.

For income tax on individuals, there is no taxation on unrealized gains (losses).

However, for corporate tax purposes, unrealized gains (losses) for cryptocurrencies are considered taxable, creating a significant gap in tax treatment between the two.

Unrealized gains (losses) have no cash backing, as they are not realized.

It will be difficult to make a convincing argument on why unrealized gains should be taxed.

Yes, I understand that the tax treatment is consistent with that for securities held for trading purposes.

But cryptocurrencies are not just held for trading purposes only.

Taxation on unrealized gains (losses), without considering the purpose of the asset, creates significant issues in two ways:

First, it hinders the business activities of businesses.

Businesses hold cryptocurrencies for various reasons.

One reason is to protect excess cash from inflation policies implemented by the government and central banks, and to preserve the financial strength of its balance sheet.

Another reason why corporations hold crypto assets is that it may be necessary for their business activities.

There are various situations, I’ll share a situation about a business that provides services using smart contracts as an example:

Smart contracts are programs executed on the blockchain.

Typically, cryptocurrencies are required to execute these programs.

Businesses that provide services using smart contracts need to execute the program on a daily basis, and therefore need to hold cryptocurrencies.

Businesses that hold cryptocurrencies for business reasons must hedge against the tax exposure that arise from mark-to-market taxation.

This can be done through purchasing derivative contracts, but it also increases costs, administrative burdens, and introduces additional counterparty risks.

The second significant issue is that it significantly reduces the efficiency of funds.

Profits should be reinvested to generate compound interest, but taxing unrealized gains greatly reduces the efficiency of funds.

It is generally considered to be not fair tax treatment to favor a certain entity structure over another, and creating that regulatory arbitrage may lead to distorted management decisions and unintended consequences.

Improving the efficiency of funds is crucial for economic growth, and as a result, it also increases tax revenues.

Taxing unrealized gains (and losses) is problematic from this point of view.

In Version 8, a new concept is introduced as reference information: “crypto assets with restrictions on transfer and other conditions”.

For “crypto assets with restrictions on transfer and other conditions”, the cost method can be applied.

The requirements include not being able to transfer the relevant crypto assets for at least one year and notifying the crypto asset exchange operator.

Methods for imposing transfer restrictions, such as technical lock-ups or multi-signature (multi-sig), are mentioned.

However, it is important to be cautious, as all of these methods could unnecessarily increase risks such as loss of assets due to bugs or errors.

One could also question the logical reason as to why the reporting to the crypto asset exchange operator is even necessary to begin with.

For securities, accounting and tax treatment is conducted according to purpose and intent and there is no requirement for lock-ups or notifications to brokerages.

It seems unreasonable and inconsistent to require lock-ups and notifications to exchange operators for crypto assets.

The application of the cost method to Crypto Assets with Specific Transfer Restrictions and Specific Self Issued Crypto Assets that was introduced in Version 8 as “Reference” was officially incorporated into the FAQ in Version 9.

3-1-4 Crypto Assets That Trade In An Active Market

Question

What is considered a crypto asset with an active market for the purpose of mark-to-market measurement at year end?

Answer

A crypto asset with an active market refers to a crypto asset that is owned by an entity and meets all of the following criteria.

1. The trading price and other information (note) are continuously published, and they have a significant impact on determining the trading price or exchange ratio of the crypto asset.

Note: trading price and other information refers to the price of trading or the exchange ratio with other crypto assets.

2. Sufficient quantity and frequency of transactions are continuously carried out for the publication of the trading price and other information in 1.

3. Meets one of the following requirements:

A. The publication of trading price and other information in 1 is done by someone other than the entity.

B. The transactions in 2 are mainly those that were not carried out by the entity on its own account.

Whether a certain crypto asset trades in an active market depends on the type of crypto asset held, its past trading history, and the situation of the crypto asset exchange or sales platform on which it is traded.

This judgment must be made based on the actual condition of each crypto asset.

For example, if there is a significant difference in purchase and sale prices that can be obtained within a reasonable range among crypto asset exchanges or sales platforms, or if the price difference desired by the seller and buyer is significantly large, it is usually judged that the market is not active from the perspective of 1 and 2.

Also, the above third criteria is established in order to exclude such prices from the scope of fair market value from the perspective of corporation tax, because such prices, if they are created and manipulated by the person who publishes the purchase and sale prices etc. based on the transactions conducted mainly by himself/herself, can result in profit adjustments.

Therefore, in the case of a crypto asset exchange operator, if there are purchase and sale prices etc. other than those of the crypto asset exchange or sales platform operated by the operator for a certain crypto asset, that crypto asset will fall under the third criteria mentioned above.

Also, even if purchase and sale prices etc. of a certain crypto asset are published only on the crypto asset exchange or sales platform operated by the operator, if those prices are mainly based on transactions conducted by others (via intermediaries or agency), that crypto asset will fall under the third criteria mentioned above.

Even if the crypto asset trades in an active market, the following crypto assets are not subject to mark-to-market measurement at year end.

• Specific Self Issued Crypto Assets
• Crypto Assets with Specific Transfer Restrictions that are Self Issued Crypto Assets
• Crypto Assets with Specific Transfer Restrictions (Excluding Self Issued Crypto Assets) for which the fair value method was not selected as the valuation method

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

Our comments:

Most crypto assets have low trading volume and do not have enough liquidity to be considered an active market from a traditional sense.

The trades that can be seen flickering on an exchange’s trading screen are mostly those that are placed but service providers called LPs (Liquidity Providers) or MMs (Market Makers).

If one tries to sell a large amount of coins that the market has no appetite for, the LP or MM will pull their orders, resulting in significant slippage, which will be a loss for the seller.

Among cryptocurrencies, BTC is the most liquid by far and arguably the only one that can be considered to have an active market.

But even with bitcoin, the Japanese market can only handle a few billion yen within a 2% spread.

In our view, it is reasonable to reflect an appropriate liquidity discount (DLOL) when performing mark-to-market adjustments at the end of the period.

3-1-5 Crypto Assets That Are Traded on DEXs

Question

Crypto asset A (we are not the issuer of this assetand transfer restrictions (Note) have not been put in place) owned by our company is listed on a DEX (decentralized exchange).

On this DEX, the exchange ratio between the crypto asset A and market crypto asset B is made clear by an automatic market maker, and based on this clear exchange ratio, trades of the exchange between the crypto asset A and the market crypto asset B are conducted at any time.

In this case, will the crypto asset A be the subject of mark-to-market at year end under corporate tax law?

(Note) Transfer restrictions stipulated in Article 23, Paragraph 1, Item 9 of the Cabinet Office Ordinance on Crypto Asset Exchange Service Providers (Cabinet Office Ordinance No. 7 of 2017).

Answer

If crypto asset A is a crypto asset that trends in an active market, it will be subject to mark-to-market at the end of the period.

Under corporate tax law, a crypto asset with an active market refers to a crypto asset that is owned by an entity and meets all of the following criteria.

1. The trading price and other information (Note) are continuously published, and they have a significant impact on determining the trading price or exchange ratio of the crypto asset.

Note: trading price and other information refers to the price of trading or the exchange ratio with other crypto assets.

2. Sufficient quantity and frequency of transactions are continuously carried out for the publication of the trading price and other information in 1.

3. Meets one of the following requirements:

A. The publication of trading price and other information in 1 is done by someone other than the entity.

B. The transactions in 2 are mainly those that were not carried out by the entity on its own account.

DEX, or decentralized exchange, is generally understood to be a trading platform without a central administrator.

The concept of a market is generally understood to include trading systems where buying and selling and exchanging can be done at any time.

In this case, the DEX in question has an exchange ratio for crypto assets that is made clear by an automatic market maker, and based on this clear exchange ratio, trades for the exchange of crypto assets are conducted at any time.

Therefore, this DEX can be considered within the scope of the market.

As such, as long as there are no special circumstances such as the exchange ratio published on this DEX being significantly different from that of other crypto asset exchanges, and as long as crypto asset exchange trades are continuously being settled on this DEX, the crypto assets traded on this DEX will be subject to mark-to-market at the end of the period as long as they meet the criteria 1-3 above.

If the crypto asset traded on this DEX qualifies as a crypto asset with an active market, then Crypto Asset A does not fall under Specific Self-Issued Crypto Assets, as it is not issued by your company.

Furthermore, since no transfer restrictions are imposed, it also does not qualify as a Crypto Asset with Specific Restrictions.

Therefore, it is subject to mark-to-market valuation at the fiscal year-end.

In such cases, the fair value at the end of the fiscal year is generally determined by multiplying the final exchange ratio of the crypto asset on the last day of the fiscal year, as published by the DEX, by the final trading price of the other crypto asset with an active market that was exchanged at that ratio.

(Note 2) If the final exchange ratio on the last day of the fiscal year is not available, the most recent final exchange ratio published prior to that day, closest to the end of the fiscal year, will be used.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7, 118-8

Our comments:

Same comments as that for FAQ3-1-4.

The liquidity of crypto assets that only trade on DEXs is usually very low.

In such cases there could be a significant deviation from the spot price that is displayed and the price at which a trade is actually settled.

The pricing mechanism used by most DEXs is called AMMs (Automatic Market Maker).

Due to the mechanism of AMMs, spreads will widen as the size of the trade gets larger.

Also, blockchain transactions are constantly being monitored by third parties and large transactions will be subject to front-running and will likely settle at unfavorable prices.

This is commonly known as a “sandwich attack” and is a type of MEV (Miner Extractable Value).

The same thing occurs in traditional finance due to high frequency traders, but in terms of the ratio of siphoned profits to transaction amount, the impact is significantly greater for DEX transactions.

When making mark-to-market adjustments at the end of the period based on DEX price information, it is reasonable to reflect not only liquidity discounts (DLOL) but also costs such as MEV.

3-1-6 Mark-to-Market of Crypto Assets that are Locked for Staking

Question

The company owns cryptocurrency A (we did not issue this cryptocurrencyand transfer restrictions (Note) have not been put in place), which is currently locked-up (a mechanism that prevents the transfer of cryptocurrency to a different party) in order to obtain rewards through staking.

Under this lockup, the company is unable to transfer the cryptocurrency A until specified conditions are met.

In this case, will the locked up cryptocurrency A be subject to mark-to-market at year-end for corporate tax purposes and is it necessary to include the mark-to-market gain or loss in the amount of profit or loss?

Cryptocurrency A is listed on a cryptocurrency exchange, with sufficient quantity and frequency of trades, and the trading price is continuously published.

The company is not the operator of the exchange.

(Note) Transfer restrictions stipulated in Article 23, Paragraph 1, Item 9 of the Cabinet Office Ordinance on Crypto Asset Exchange Service Providers (Cabinet Office Ordinance No. 7 of 2017).

Answer

The crypto asset will be subject to mark-to-market at year-end under corporate tax law and the difference between the fair value and the book value of the crypto asset should be recorded as profit or loss at the end of the fiscal year.

If an entity holds any of the following crypto assets at the end of its fiscal year on its own account, it must measure their fair value using the mark-to-market method.

The difference between the fair value and the book value must be recognized as taxable income or deductible loss for that fiscal year.

1. Crypto assets with an active market that do not fall under any of the following categories:

1. Crypto Assets with Specific Transfer Restrictions
2. Specific Self-Issued Crypto Assets

2. Crypto Assets with Specific Transfer Restrictions that qualify as crypto assets with an active market (excluding Self-Issued Crypto Assets) and for which the mark-to-market method has been chosen for valuation.

In this case, Crypto Asset A held by your company is locked up and cannot be transferred, but staking rewards can still be earned during the lock-up period.

Additionally, since your company bears the price fluctuation risk of Crypto Asset A in the future, it is considered that your company holds Crypto Asset A on its own account.

Furthermore, as Crypto Asset A continuously meets the required conditions for an active market, including regular publication of trading prices, it qualifies as a crypto asset with an active market.

Since your company did not issue Crypto Asset A, it does not qualify as a Specific Self-Issued Crypto Asset.

Additionally, as no transfer restrictions are imposed, it does not qualify as a Crypto Asset with Specific Transfer Restrictions.

As a result, your company must measure the fair value of Crypto Asset A at the end of the fiscal year using the mark-to-market method.

The difference between the fair value and the book value must be recognized as taxable income or deductible loss for that fiscal year.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

Our comments:

The conclusion that the crypto asset in question is subject to mark-to-market is predicated on the fact that there is an active market for the asset.

This is probably not a conclusion that most people currently staking cryptocurrencies will instinctively arrive at.

The reason is because it ignores the purpose or intent of holding the asset in the first place.

Let’s look at Ethereum as an example.

Ethereum previously used the PoW (Proof of Work) consensus mechanism like Bitcoin, where miners generated blocks.

However, in 2022, Ethereum transitioned to Proof of Stake (PoS), where validators are responsible for block generation.

To become a validator, one must stake 32 ETH.

If a company staked 32 ETH to contribute to the Ethereum network, and at the end of the year, the price of ETH has gone up, the company will have to sell some of their ETH to pay taxes.

And as a result, they will no longer have 32 ETH and would be disqualified from being a validator.

For some assets, there are different tax treatments depending on the purpose or intent of holding the asset.

Stocks are an example of such assets.

Shares held for trading purposes are subject to mark-to-market taxation, while investment purpose shares and subsidiary shares are not, as they are held to exert influence on the investee company, not for short-term trading.

In our view, crypto assets should also be treated in a similar manner, considering the purpose of holding them, in order to ensure consistency with existing tax treatment and also to prevent unintended consequences of tax hindering business practices.

3-1-7 Mark-to-market of Crypto Assets that are Being Lent

Question

Our company has lent crypto A (we are not the issuer of this cryptoand transfer restrictions (Note) have not been put in place), which we own to earn usage fees.

Regarding this crypto asset A, we are unable to transfer it until the lending period ends.

In this case, will crypto asset A that our company is lending be subject to mark-to-market under corporate tax law and will it be necessary to include the mark-to-market gain or loss in the amount of profit or loss?

Crypto asset A is listed on a cryptocurrency exchange, with sufficient quantity and frequency of trading and continuous disclosure of trading prices.

Additionally, our company does not operate that cryptocurrency exchange.

(Note) Transfer restrictions stipulated in Article 23, Paragraph 1, Item 9 of the Cabinet Office Ordinance on Crypto Asset Exchange Service Providers (Cabinet Office Ordinance No. 7 of 2017).

Answer

The crypto asset will be subject to mark-to-market at year-end under corporate tax law and the difference between the fair value and the book value of the crypto asset should be recorded as profit or loss at the end of the fiscal year.

If an entity holds any of the following crypto assets at the end of its fiscal year on its own account, it must measure their fair value using the mark-to-market method.

The difference between the fair value and the book value must be recognized as taxable income or deductible loss for that fiscal year.

1. Crypto assets with an active market that do not fall under any of the following categories:

1. Crypto Assets with Specific Transfer Restrictions
2. Specific Self-Issued Crypto Assets

2. Crypto Assets with Specific Transfer Restrictions that qualify as crypto assets with an active market (excluding Self-Issued Crypto Assets) and for which the mark-to-market method has been chosen for valuation.

In this case, your company has lent out Crypto Asset A, but during the lending period, you are able to earn usage fees.

Additionally, since your company bears the future price fluctuation risk of Crypto Asset A, it is considered that your company holds Crypto Asset A on its own account.

Furthermore, as Crypto Asset A continuously meets the required conditions for an active market, including regular publication of trading prices, it qualifies as a crypto asset with an active market.

Since your company did not issue Crypto Asset A, it does not qualify as a Specific Self-Issued Crypto Asset.

Additionally, as no transfer restrictions are imposed, it does not qualify as a Crypto Asset with Specific Transfer Restrictions.

As a result, your company must measure the fair value of Crypto Asset A at the end of the fiscal year using the mark-to-market method.

The difference between the fair value and the book value must be recognized as taxable income or deductible loss for that fiscal year.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

Our comments:

Same comments as the other sections.

When lending crypto for long durations, it will be prudent to consider tax planning and hedging strategies to avoid any unintended tax exposure at year end.

3-1-8 Mark-to-Market of Borrowed Crypto Assets

Question

Our company borrows cryptocurrency A from parties other than cryptocurrency exchange operators and earns revenue by lending it out or using it in other ways during the borrowing period.

In this case, will cryptocurrency A that our company has borrowed be subject to mark-to-market under corporate tax law and will it be necessary to include the mark-to-market gain or loss in the amount of profit or loss?

Additionally, cryptocurrency A is listed on a cryptocurrency exchange, with sufficient quantity and frequency of trading and continuous disclosure of trading prices.

Furthermore, our company does not operate that cryptocurrency exchange and also does not trade in cryptocurrency A on that exchange.

Answer

Cryptocurrency borrowed by the company may be subject to mark-to-market under corporate tax law, but it is not necessary to include the difference between the fair value and the book value in the amount of profit or loss.

If an entity holds any of the following crypto assets at the end of its fiscal year on its own account, it must measure their fair value using the mark-to-market method.

The difference between the fair value and the book value must be recognized as taxable income or deductible loss for that fiscal year.

1. Crypto assets with an active market that do not fall under any of the following categories:

5. Crypto Assets with Specific Transfer Restrictions
6. Specific Self-Issued Crypto Assets

2. Crypto Assets with Specific Transfer Restrictions that qualify as crypto assets with an active market (excluding Self-Issued Crypto Assets) and for which the mark-to-market method has been chosen for valuation.

The concept of “hold” here is a broad one that encompasses those that do not become the subject of ownership, and considering the fact that the company borrowing the cryptocurrency has the power of disposition of the borrowed cryptocurrency, it may be considered that the company holds the cryptocurrency.

In this case, cryptocurrency A satisfies the specified criteria such as continuous disclosure of trading prices, etc., and is a cryptocurrency with an active market, and if it is considered that the company holds cryptocurrency A, the fair value assessed under fair value method should be the fair value at that time.

However, considering that the company does not bear the risk of future price fluctuations of the cryptocurrency A that requires return, in general, it can not be said that the company holds the cryptocurrency A in its own account, therefore, the difference between the fair value and the book value does not need to be included in the amount of profit or loss for that fiscal year.

For reference

If your company sells crypto assets borrowed from a third party, this will constitute a crypto asset transaction on margin. If those assets are not repurchased by the end of the fiscal year in which the sale took place, the profit or loss equivalent calculated as if the repurchase had been made at that time will have to be recorded in profit or loss for that fiscal year, pursuant to FAQ 3-11 Crypto Asset Margin Trading.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

Our comments:

The reference information is concerning.

When borrowing in crypto and then converting it to cas or other assets, exposure still remains regarding the borrowed crypto.

Let’s look at some journal entries as an example:

Assumption: Crypto value at the time of borrowing is 100, crypto value at year end is 150

If the crypto if converted to yen at the same time it is borrowed:

1 Journal entry at the time of borrowing:

Crypto 100 Liability 100

2 Journal entry at the time of converting to yen:

Cash 100 Crypto 100

3 If the crypto value at the end of the term increases, the following journal entry is needed to increase the amount of the borrowed crypto liability:

Mark-to-market loss 50 Liability 50

As per FAQ 3-1-7, the lender will make the opposite journal entry and the liability (of the debtor) and asset (of the creditor) reconcile.

4 Lender’s journal entry

Asset 50 Mark-to-market gain 50

However, according to the FAQ, if the crypto is not bought back by the end of the period, the profit or loss equivalent calculated as if it had been bought back must be recorded as gain or loss.

The exact journal entries that are required are not clear at this time, but a possible one would be as follows:

5 Journal entry assuming the crypto is bought back at the end of the period:

Crypto 150 Gain from assumed buyback 150

In journal entry 3, a mark-to-market loss of 50 was recorded, resulting in a net profit of 100.

Entry 5 will be reversed when the buyback is actually made in future periods, and recognized as an expense at that time.

6 Journal entry when actually buying back the crypto (assuming the value of the crypto has further increased to 200):

Gain from assumed buyback 150 Crypto 150
Crypto 200 Cash 200

7 Journal entry for repayment of the loan at the same time:

Mark-to-market loss 50 Liability 50
Liability 200 Crypto 200

In summary,

When there is no need to deem a repurchase, the effect on annual taxable income in Years 1 and 2 are as follows:

Year 1: 50 loss
Year 2: 50 loss
Total: 100 loss

In the case where there is deemed repurchase, the effect on annual taxable income for Years 1 and 2 are as follows:

Year 1: 100 gain
Year 2: 200 loss
Total: 100 loss
The former is in line with the tax treatment of the lender.

For the second one where there is a deemed repurchase, the asset of the creditor and liability of the debtor will not reconcile, indicating an inconsistency in treatment for the lender and borrower.

The purpose of the requirement for deemed repurchase is unknown at this time.

Considering the inconsistency in the tax treatment of the lender and the borrower and the additional administrative procedures that will be required to perform the calculation and entry for the deemed repurchase, in our view, it seems that the accounting treatment that the FAQ is proposing is unnecessary and questionable.

We caught one typo in the FAQ; it refers to “FAQ 3-11 Crypto Asset Margin Trading” but the reference should be 3-1-13 instead of 3-11.

3-1-9 Crypto Assets that are Specific Self-issued Crypto Assets

Question

Our company has created four private keys for Crypto Asset A, which we issued and have continuously held since its issuance.

We have implemented a measure that requires three of these private keys to transfer the crypto asset, and this measure has been in place since its issuance.

Additionally, we have entrusted a document containing two of these private keys to our tax advisor and have signed a custodial agreement. (These two private keys are only documented on the entrusted paper.)

The contract stipulates a two-year custodial period, during which we cannot request the return of the entrusted private keys until the period expires.

There is an active market for Crypto Asset A, but is it necessary to perform a fair value assessment at the end of the fiscal year?

Our tax advisor is neither an officer nor an employee of our company or any related companies, nor does he have any familial or other private relationships with these individuals.

Answer

Since your Crypto Asset A qualifies as a specific self-issued crypto asset until the custody period for the private keys expires, it is not necessary to evaluate it at fair value at the end of your company’s fiscal year that falls within this custody period.

For crypto assets held by entities at the end of the fiscal year, which have an active market, the evaluation amount at that time should be based on the fair value method.

Additionally, if the entity holds such crypto assets on its own account, the difference between the evaluation amount and the book value must be included in the taxable income or deductible expenses for that fiscal year.

On the other hand, even for crypto asset with an active market, if an entity has issued and continuously held the crypto assets since issuance, and has implemented technical measures form the time of issuance to prevent transfer to others, meeting both of the following conditions (1 and 2), such crypto assets are considered specific self-issued crypto assets and are not subject to year-end fair value evaluation.

1. THere is a specified period during which the transfer is not allowed
2. The technical measures cannot be lifted by only the officers and employees (hereinafter referred to as “officers, etc.”) of the entity that issued the crypto asset (including any other entities with a wholly controlling relationship with that entity, hereinafter referred to as “issuing entity, etc.”) or other certain individuals (“), collectively referred to as “related parties”.

(*) Certain individuals refer to the following:

1. Relatives of the officers, etc., of the issuing entity, etc.
2. Individuals who are not legally married to the officers, etc., of the issuing entity, etc., but are in a de facto marriage-like relationship
3. Individuals other than those mentioned in (i) or (ii) who are financially dependent on the money or other assets received from the officers, etc., of the issuing corporation, etc.
4. Relatives of the individuals described in (ii) or (iii) who live together as part of the same household

Your company has entrusted a tax advisor, who is not a related party, with the custody of documents containing two of the private keys associated with Crypto Asset A.

Under the terms of the contract, the return of the entrusted private keys cannot be requested until the specified custody period expires.

Since Crypto Asset A cannot be transferred without three of the four private keys, and two of these keys can only be verified through the entrusted documents, during the custody period with the tax advisor, Crypto Asset A cannot be transferred solely by your company’s related parties.

Furthermore, the contract specifies a custody period of two years, during which the transfer of Crypto Asset A is not possible.

Therefore, the series of measures your company has taken with respect to Crypto Asset A satisfies both conditions (1 and 2) mentioned earlier.

Since these measures have been in place continuously from the time of issuance, Crypto Asset A qualifies as a specific-issued crypto asset and is not subject to fair value evaluation at the end of the period.

However, once the custody period for the private keys has expired, the condition outlined in item 1 will no longer be met, and Crypto Asset A will no longer qualify as a specific self-issued crypto asset.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7
Corporate tax law implementation regulations 26-10
Corporate tax basic notification 2-3-67-2

Our comments:

This is a new item introduced in Version 8.

A new concept called “specific self-issued crypto assets” has been introduced, allowing entities to adopt the cost method instead of fair value evaluation at the end of the period if they impose a lock-up of more than one year.

In the example, private keys are entrusted to a tax advisor, but if the tax advisor loses the keys, the crypto assets will be lost forever.

This is a very risky scheme and should be carefully pursued when there is an assumption that the assets can be reissued in case of accidents.

3-1-10 Crypto Assets Jointly Issued by Multiple Entities

Question

Our company plans to launch a joint project with multiple other entities.

In issuing a new crypto asset related to this project, a predetermined amount of the crypto asset will be allocated to each entity simultaneously upon issuance, according to an agreement among the joining participants.

Regarding the crypto assets allocated to our company at the time of issuance, will those with continuous transfer restrictions from the time of allocation be considered specific self-issued crypto assets?

Answer

Among the crypto asset allocated to your company, those that meet certain conditions from the time of allocation – specifically, those with continuous transfer restrictions or other conditions – qualify as specific self-issued crypto assets.

A crypto asset issued by a corporation and continuously held from the time of issuance, with continuous transfer restrictions or other conditions from that time, is considered a specific self-issued crypto asset.

These specific assets refer to crypto assets that meet either of the following requirements continuously from the time of issuance:

1. There are technical measures in place to prevent transfer to others, and these measures satisfy all the following conditions:
   1. A period during which transfers are not allowed is specified
   2. The technical measures cannot be lifted by only the officers, employees, or certain other individuals of the entity that issued the crypto asset (including entities in a wholly controlling relationship with the entity)
2. The crypto asset is held as trust property under a trust that meets all the following conditions (limited to taxable trusts for beneficiaries, etc.):
   1. The trustee of the trust is solely a trust company, and the beneficiaries,etc., of the trust are only the corporation that issued the crypto asset
   2. The trust agreement specifies that the trustee will not transfer the assets and liabilities belonging to the trust property to anyone other than the trustee or beneficiaries, etc.
   3. The trust agreement stipulates that the corporation that issued the crypto asset cannot transfer the beneficiary rights of the trust or change the beneficiaries, etc., of the trust

When multiple entities jointly conduct a business and jointly issue crypto assets related to that business, it is generally expected that the contract or agreement among the joint participants will specify the quantity of crypto assets allocated to each entity at the time of issuance.

In such cases, when multiple entities jointly conduct a business and jointly issue crypto assets, the allocation of a predetermined quantity to each entity at the time of issuance, as specified in the contract or agreement, can be regarded as each entity issuing the crypto assets for their own joint venture.

Therefore, the crypto assets allocated to your company in accordance with the contract or agreement among the joint participants, held continuously from the time of allocation and meeting either of the conditions (1 or 2) above from that time, would qualify as specific self-issued crypto assets.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7
Corporate tax law implementation regulations 26-10

Our comments:

This is a new item that was introduced in Version 8.

Same comment as that for FAQ3-1-9.

3-1-11 Crypto Assets with Specific Transfer Restrictions

Question

Our company has applied transfer restrictions to Crypto Asset A (which was not issued by our company) during the current fiscal year, in accordance with the Rules on Information Disclosure and Publication of Restricted Transfer Crypto Assets (Japan Virtual and Crypto Assets Exchange Association) and related guidelines.

Additionally, we have notified the crypto asset exchange service provider of this change.

However, the type, quantity, and other details of Crypto Asset A are expected to be published on the Japan Virtual and Crypto Assets Exchange Association’s website in the next fiscal year.

Although Crypto Asset A has an active market, is it necessary to conduct a mark-to-market valuation at the end of the current fiscal year?

Furthermore, our company has not yet selected an evaluation method for Crypto Assets with Specific Transfer Restrictions.

Answer

Your company is not required to conduct a mark-to-market valuation for Crypto Asset A at the end of the current fiscal year.

Entities must measure the fair value of crypto assets with an active market at the end of the fiscal year using the mark-to-market method.

If the crypto asset is held on the company’s own account, the difference between the fair value and the book value must be included as taxable income or deductible loss for that fiscal year.

However, even if a crypto asset has an active market, it is classified as a Crypto Asset with Specific Transfer Restrictions if it meets both of the following conditions:

1. The crypto asset is subject to specific conditions (Note 1).
2. The entity has carried out certain procedures (Note 2) to ensure that the transfer restrictions are disclosed by a crypto asset exchange service provider through the Certified Fund Settlement Business Association.

Restricted Transfer Crypto Assets that are not Self-Issued Crypto Assets may be valued using either the mark-to-market method or the cost method, as chosen by the corporation.

If a corporation does not select a valuation method, the asset must be valued using the cost method.

(Note 1) Specific conditions refer to transfer restrictions defined in Article 23, Paragraph 1, Item 9 of the Cabinet Office Ordinance on Crypto Asset Exchange Service Providers (Cabinet Office Ordinance No. 7 of 2017, “Exchange Ordinance”).

These conditions are specified by rules set by the Certified Fund Settlement Business Association and designated by the Financial Services Agency (FSA).

The details of these restrictions are outlined in the Rules on Information Disclosure and Publication of Restricted Transfer Crypto Assets (Japan Virtual and Crypto Assets Exchange Association).

(Note 2) The required procedures involve measures taken by the crypto asset exchange provider to disclose transfer restrictions.

The procedures include one or more of the following:

1. A request to the exchange provider to impose the transfer restriction.
2. A notification to the exchange provider stating that a transfer restriction is or will be imposed (only if the exchange provider can verify the notification content).
3. A request to another party to notify the exchange provider that a transfer restriction is or will be imposed (only if the exchange provider can verify the notification content).

The details of these procedures are specified in the Rules on Information Disclosure and Publication of Restricted Transfer Crypto Assets (Japan Virtual and Crypto Assets Exchange Association).

Since your company has applied transfer restrictions to Crypto Asset A during the current fiscal year, it satisfies Condition 1 above.

Additionally, if your company completes the required procedures (Condition 2) by the end of the fiscal year, the asset qualifies as a Restricted Transfer Crypto Asset, even if its official disclosure occurs in the next fiscal year.

Your company has notified the crypto asset exchange provider of the transfer restriction during the current fiscal year, meaning Crypto Asset A meets Condition 2 as well.
Therefore, Crypto Asset A qualifies as a Crypto Asset with Specific Transfer Restrictions.

Furthermore, since your company did not issue Crypto Asset A, it does not qualify as a Self-Issued Crypto Asset.

Since Crypto Asset A qualifies as a Crypto Asset with Specific Transfer Restrictions but not as a Self-Issued Crypto Asset, your company may choose between the mark-to-market method and the cost method for valuation.

However, as your company has not selected a valuation method, the default cost method applies.

As a result, Crypto Asset A is not subject to mark-to-market valuation at the end of the fiscal year.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7
Corporate tax law implementation regulations 26-10
Exchange Ordinance 23
Designation of Rules of the Certified Fund Settlement Business Association Pursuant to the Provisions of Article 23, Paragraph 1, Item 9 of the Cabinet Office Ordinance on Crypto Asset Exchange Service Providers (Financial Services Agency Notification No. 36 of Reiwa 6)

Our comments:

A new concept introduced in Version 9 is the Crypto Assets with Specific Transfer Restrictions.

Previously, we have discussed how, for corporations, holding crypto assets at the end of the fiscal year and being subject to mark-to-market valuation for tax purposes has caused various issues.

With this revision, if a crypto asset meets the requirements for Crypto Assets with Specific Transfer Restrictions, even non-self-issued crypto assets such as bitcoin can be valued using the cost method instead of the mark-to-market method (which could be a good thing).

However, we believe that the requirements for Crypto Assets with Transfer Restrictions are problematic.

To meet these requirements, bitcoin and other crypto assets must be held on a crypto asset exchange, which introduces a new risk factor in itself.

For example, in the case of securities, tax treatment also varies depending on the purpose of holding, but there is no requirement that securities must be deposited with a brokerage.

This raises the question of why only crypto assets are subject to such unique conditions.

One can view a list of crypto assets with transfer restrictions as they are published on the JVCEA (Japan Virtual and Crypto Assets Exchange Association) website.
https://jvcea.or.jp/about/document/#iten

3-1-12 Crypto Asset Margin Trading

Question

Please tell me the method of calculating the amount of income in the case of the following crypto asset transactions based on credit.

(Example)

• Went short 1BTC for 1,000,000 yen on September 1.
• Went long 1BTC for 800,000 yen on September 24.

(Note) In the above transactions, fees for buying and selling crypto asset are not considered.

Answer

In the above example, the income amount is calculated as follows:

(Formula)
1,000,000 yen [selling price] – 800,000 yen (Note 1) [buying price] = 200,000 yen [income amount]

(Note)
1 The transfer cost is the amount calculated by the specific identification method.

A crypto asset margin trade refers to the buying and selling of crypto asset in which credit is provided by a crypto asset exchange operator (referred to in this question as a “crypto asset exchange operator”). This is defined in Article 2, Paragraph 7 of the Payment Services Act.

The transfer loss or gain amount of crypto asset in this method of crypto asset credit transaction is the difference between the amount of consideration that should normally be obtained by the transfer of crypto asset (selling price) (Note 2,4) and the amount of consideration related to the purchase of crypto asset (purchasing price) (Note 3,4) in the case of selling and then settling with the same type of crypto asset purchase.

(Note)
2 The amount equivalent to the interest received from crypto asset exchange operators is included in the selling price.

3 The buying commission fee and so-called borrowing fee paid to crypto asset exchange operators are included in the buying price.

4 With regard to 2 and 3 above, if they are included as income or expenses in the amount of profit or loss as they occur, with the condition of continuing application, such treatment may be permitted (however, excluding buying and selling commission fees).

When the opposite of the crypto asset credit transaction mentioned above is conducted, i.e. when crypto asset is bought and then the same type of crypto asset is sold and settled, the transfer loss and gain amount of crypto asset will be the difference between the amount of consideration that should be normally obtained by the transfer of crypto asset (selling price) (note 5, 7) and the amount of consideration related to the buying of crypto asset (buying price) (note 6, 7).

(Note)
5 The so-called borrowing fee received from third parties is included in the selling price.

6 The buying commission fee and amount equivalent to interest paid to

third parties are included in the buying price.

7 With regard to 5 and 6 above, if they are included as income or expenses in the amount of profit or loss as they occur, with the condition of continuing application, such treatment may be permitted (however, excluding buying and selling commission fees).

Also, so-called crypto asset FX trading and crypto asset futures trading are classified as derivative trading, not crypto asset credit trading.

[Related laws and regulations, etc.]
Corporate tax law 61, 61-5
Corporate Tax Law Enforcement Ordinance 118-6
Corporate tax basic notification 2-3-62

Our comments:

This was a new item that was added in Version 3.

No particular comments.

3-1-13 When to Recognize Profit From Crypto Asset Margin Trading

Question

In which fiscal year should the transfer gains or losses that occur as a result of crypto asset credit transactions be recorded?

Answer

They should be recorded in the fiscal year that the following day belongs to.

(1) For transactions in which crypto asset is sold and then subsequently bought to settle the transaction…the day the buy contract was entered to settle the transaction.

(2) For transactions in which crypto asset is bought and then subsequently sold to settle the transaction…the day the sell contract was entered to settle the transaction.

The timing of recognition stated in Answer (1) is an exception to the general rule stated in “3-1 When to Recognize Profit From Transferring Crypto Asset”, which requires entities to recognize gains or losses based on the contract date of the sell transaction.

For transactions where crypto asset is bought and then subsequently sold (Answer 2), the timing of recognition will be the fiscal year in which the contract for the sell transaction is entered, which is in accordance with the general rule stated in “3-1 When to Recognize Profit From Transferring Crypto Asset”.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate tax law implementation regulations 26-9
Corporate tax basic notification 2-1-21-14

Our comments:

This was a new item that was added in Version 3.

No particular comments.

3-1-14 Provisional Settlement Profit for Crypto Asset Margin Trading

Question

Our company conducts crypto asset credit transactions, but at the end of the fiscal year, there are some transactions that are not settled.

What treatment is necessary at the end of the fiscal year?

Answer

If a entity conducts crypto asset credit transactions and at the end of the fiscal year, there are some that are not settled, then the amount corresponding to the profit or loss calculated as if it were settled at the end of the fiscal year (hereinafter referred to as “provisional settlement profit or loss amount”) is to be included in the amount of profit or loss for that fiscal year.

The provisional settlement profit or loss amount is determined as follows, respectively, according to the following classification (limited to crypto asset related to un-settled crypto asset credit transactions at the end of the fiscal year):

(1) In the case of going short crypto asset through credit transactions:

The amount of consideration related to the sale – (the fair value of the crypto asset at the end of the period × the quantity of the crypto asset)

(2) In the case of going long crypto asset through credit transactions:

(the fair value of the crypto asset at the end of the period × the quantity of the crypto asset) – the amount of consideration related to the purchase

The provisional settlement profit or loss is reversed in the following fiscal year.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-11
Corporate tax law implementation regulations 26-10

Our comments:

This was a new item that was added in Version 3.

The topic in question is similar to the one in Question 3-3 where unrealized losses on the cryptocurrency held by entities at the end of the fiscal year are subject to taxation.

We believe there are similar drawbacks with the taxation of unrealized gains/losses from credit transactions.

3-2 Electronic Payment Method Related

3-2-1 Tax Implications When Acquiring Electronic Payment Methods

Question

Our company acquired an electronic payment method through payment.

What is the acquisition cost for tax purposes?

Answer

The value based on the face amount of the electronic payment method is considered the acquisition cost for tax purposes.

Electronic payment methods are issued at a price linked to the value of legal currency, and they are promised to be redeemed at the same value based on the face amount.

They are deemed to have a nature similar to demand deposits and are considered a type of monetary claim.

In accounting, when electronic payment methods are acquired, they are recorded as assets on the delivery date at a value based on their face amount.

If there is a difference between the amount of money paid for the acquisition of the electronic payment method and the value based on their face amount, this difference is treated as a gain or loss.

Therefore, for tax purposes as well, the acquisition cost of electronic payment instruments is based on their face amount.

If there is a difference between the amount of money paid and the value based on the face amount of the acquired electronic payments instruments, the amount that is less than the face amount or exceeds the face amount must be included in the calculation of the income or loss for the fiscal year in which the electronic payment instruments were acquired.
Furthermore, if the amount exceeding the value based on the face amount qualifies as a donation, a certain deduction limit applies to the donation amount.

[Related laws and regulations, etc.]
Corporate tax law 22-4, 37

Our comments:

This was a new item that was added in Version 8.

No particular comments.

3-2-2 Tax Implications When Transferring Electronic Payment Methods

Question

Our company transferred an electronic payment method to a third party.

What are the tax implications?

Answer

When electronic payment methods are transferred to a third party, if there is a difference between the amount received from the third party and the book value of the electronic payment instruments, the gain or loss on the transfer must be included in the calculation of income or loss for the fiscal year in which the transfer occurred.

Specifically, if the amount received from the third party exceeds the book value of the electronic payment instruments, the excess amount must be included in taxable income.

Conversely, if the amount received from the third party is less than the book value of the electronic payment method, the shortfall shall be included as a deductible expense.

Furthermore, if the amount below the book value qualifies as a donation, a certain deduction limit applies to the donation amount.

[Related laws and regulations, etc.]
Corporate tax law 22-4, 22-2, 37

Our comments:

This was a new item that was added in Version 8.

No particular comments.

3-2-3 Year-end Tax Implications of Electronic Payment Methods

Question

Our company holds an electronic payment method but is it subject to year-end fair value measurement?

Answer

There is no need to evaluate electronic payment methods held at the end of the fiscal year at fair value.

Additionally, the allowance for doubtful accounts related to electronic payment methods held at the end of the fiscal year cannot be included as a deductible expense in the calculation of taxable income unless these instruments qualify as individually evaluated monetary claims.

Electronic payment instruments are issued at a price linked to the value of legal currency and are promised to be redeemed at the same value as their face amount or have similar characteristics.

They are considered similar in nature to demand deposits and are regarded as monetary claims.

Monetary claims are not subject to fair value evaluation at the end of the fiscal year for tax purposes.

Therefore, there is no need to evaluate electronic payment instruments held at the end of the fiscal year at fair value.

Moreover, entities that meet certain criteria, such as having capital of 100 million yen or less, are allowed to include the allowance for doubtful accounts related to certain monetary claims as deductible expense in calculating taxable income.

In this context, claims similar to deposits or entrusted money are not considered collectively evaluated monetary claims (monetary claims such as accounts receivable, loans, and similar claims subject to allowance for doubtful accounts based on the bad debt experience rate). Since electronic payment instruments do not qualify as collectively evaluated monetary claims, unless the electronic payment instruments held by the corporation at the end of the fiscal year qualify as individually evaluated monetary claims (where a loss is expected on part of the claim due to reasons such as a deferment of payment based on the approval of a reorganization plan), the allowance for doubtful accounts related to these electronic payment instruments cannot be included as a deductible expense in calculating taxable income.

[Related laws and regulations, etc.]
Corporate tax law 52-1-2
Corporate tax basic circular 11-2-18

Our comments:

This was a new item that was added in Version 8.

No particular comments.

3-2-4 Tax Implications of Foreign Currency Denominated Electronic Payment Methods

Question

Our company has foreign currency denominated electronic payment method.

How is this converted into yen at the end of the period?

Answer

For foreign currency-denominated electronic payment methods, you can choose either the end-of-period exchange rate method or the historical exchange rate method for conversion at the end of the fiscal year.

If no conversion method is selected for the end of the period, the historical exchange rate method will be applied by default.

Electronic payment methods are issued at a price linked to the value of legal currency and are promised to be redeemed at the same value as their face amount or possess similar characteristics.

They are considered similar in nature to demand deposits and are regarded as monetary claims.

In terms of taxation, foreign currency-denominated electronic payment instruments are classified as foreign currency-denominated claims other than short-term foreign currency-denominated claims.

For foreign currency-denominated claims other than short-term foreign currency-denominated claims, you can choose either the end-of-period exchange rate method or the historical exchange rate method for conversion at the end of the fiscal year.

However, since the statutory conversion method defaults to the historical exchange rate method if no conversion method is selected for the end of the period, if you choose to use the end-of-period exchange rate method, you must file a notification using the “Notification Form for the End-of-Period Exchange Rate Method for Foreign Currency-Denominated Assets, etc.” or apply for approval of charges using the “Application for Approval to Change the End-of-Period Exchange Rate Method for Foreign Currency-Denominated Asset, etc.”

[Related laws and regulations, etc.]
Corporate tax law 61-9
The implementing order for corporate tax law 122-4 ~ 122-7

Our comments:
This was a new item that was added in Version 8.

No particular comments.

4 Inheritance Tax and Gift Tax

4-1 When Crypto Asset is Acquired Through Inheritance or Gift

Question:

What is the tax treatment for crypto asset acquired through inheritance or gift?

Answer:

Inheritance tax or gift tax will be imposed when crypto asset is acquired through inheritance, bequest, or gift from the inherited person, etc.

The Inheritance Tax Law provides that an individual will be subject to inheritance tax or gift tax when economic assets with a value that can be estimated in money are acquired through inheritance, bequest, or gift.

As for crypto asset, it is specified in the Payment Services Act as an “asset with a value that can be used to settle a debt to an unspecified person”, so if crypto asset is acquired through inheritance, bequest, or gift from the inherited person, etc., inheritance tax or gift tax will be imposed.

(Note) Taxation of individuals that gifted crypto asset
If an individual transfers crypto assets through a donation (excluding donations made as a result of death) or inheritance (excluding specific inheritances given to an heir), they must include the value (market value) of the crypto asset at the time of the donation or inheritance in their total income for the calculation of the income tax.

For more information, see “When Transferring Crypto Asset at Below Market Value (Zero Value)”

[Related laws and regulations, etc.]
Inheritance Tax Law 2, 2-2
Inheritance Tax Law Basic Understanding 11-2-1

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

I have no further comments regarding the tax treatment.

However, what is more important is to prepare carefully in advance before something happens.

If you keep your bitcoin on a domestic exchange, the transfer to your family will be smooth if your family knows the existence of the account.

It is not so easy in the case of a foreign exchange.

Furthermore, self-custody should be the default for bitcoin.

Leaving your bitcoin on an exchange is not recommended unless you are a trader.

If an exchange is hacked, you won’t get your bitcoin back.

And exchanges have been hacked and will be hacked in the future.

It is important to prepare for the worst case scenario, and ensure your family is informed of the storage location of wallets and how to use them, so that they can access your bitcoin in case something happens to you.

4-2 How to Measure Crypto Asset Acquired Through Inheritance or Gift

Question

How can I measure crypto asset that I have acquired through inheritance or gift?

Answer

Crypto asset with an active market is measured based on the trading price at the time of the taxable event published by a crypto asset exchange where the taxpayer is trading.

Regarding the valuation method for crypto asset, since there is no provision in the valuation directive, it will be valued in accordance with the valuation method specified in the Valuation Directive 5 (Valuation of assets without specified valuation method) based on the objective exchange value established by active trading in which a certain market price is established.

In this case, for crypto asset with an active market(Note 1), the trading price at the time of taxable event published by a crypto asset exchange where the taxpayer is trading(Notes 2, 3, 4) will be used for valuation, similar to foreign currency.

For crypto asset without an active market, individual valuation will be conducted taking into consideration the content and characteristics, trading realities, etc. of the crypto asset(Note 5) as an objective exchange value cannot be established due to the lack of an established market price.

(Note)

1 “An active market” refers to a situation where sufficient quantity and frequency of transactions are carried out at a crypto asset exchange or a crypto asset sales venue, and price information is consistently provided.

2 “Trading price at the time of taxable event published by a crypto asset exchange” includes the transaction price recorded on a balance certificate provided by a crypto asset exchange in response to a request from a taxpayer.

3 In the case where both the purchase price and the selling price are published at a crypto asset exchange (crypto asset sales venue), it is not a problem using the selling price of the taxpayer.

4 If the taxpayer is conducting transactions with multiple crypto asset exchanges, it is not a problem to evaluate based on the transaction price at the time of taxable event published by the selected crypto asset exchange by the taxpayer.

5 For example, methods of evaluation such as considering actual transaction price and expert opinion can be considered.

[Related laws and regulations, etc.]
Valuation Directive 4-3, 5

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

An active market is defined as a market where there is a sufficient quantity and frequency of trades, but this definition is not very helpful because “sufficient” is not defined.

When looking at the trading screen of an exchange, the screen seems to be active with flashing prices, but most of the trades are actually made by liquidity providers.

When selling a large amount of cryptocurrency, the price will drop significantly.

bitcoin is the only cryptocurrency with enough liquidity to sell a large amount without affecting the market price.

When valuing cryptocurrency, it may be a good idea to consider a liquidity discount or consult with a valuation expert, if the amount is significant.

5 Income Tax Withholding

5-1 Payment of Salary, etc. Using Crypto Asset

Question

Our company has decided to pay a part of our monthly salaries in a crypto asset that can be traded on exchanges, following a request from our employees.

How should we handle the withholding tax on this salary?

(Example)
On October 10, we paid 200,000 JPY in cash to an employee for their September salary and also paid part of the salary in a crypto asset (valued at 50,000 JPY at the time of payment) that the company owns.

Answer

The total amount of the employee’s salary is 250,000 JPY, consisting of 200,000 JPY in cash and 50,000 JPY in crypto asset.

Therefore, the total salary of 250,000 JPY should be used to calculate the withholding tax.

Salaries are usually paid in cash, but in cases like the one you mentioned, where a separate agreement is made in the employment contract to pay part of the salary in crypto asset, the value of the crypto asset payment should also be considered as part of the income from salary.

Therefore, as the withholding tax obligor, your company should calculate the withholding tax on the total salary, including the value of the crypto asset payment.

Note that for non-cash benefits-in-kind, the economic benefit should be evaluated, but in the case of crypto asset, the value at the time of payment should be used for evaluation.

[Related laws and regulations, etc.]
Income tax law 28, 36, 183

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

It is common to receive salary in bitcoin but the amount to be received is still denominated in fiat.
However, there are also bitcoiners who set their compensation denominated in bitcoin.

For example, hourly rate = 0.01 BTC, regardless of bitcoin price in USD.

As more people use bitcoin to measure the value of goods, bitcoin will become more accepted as a currency and not just an investment asset.

6 Consumption Tax

6-1 Treatment of Consumption Tax When Transferring Crypto Asset

Question

Our company has transferred (sold) our crypto asset through a domestic crypto asset exchange. Can you explain the consumption tax consequences in this case?

Answer

The transfer of crypto asset through a domestic crypto asset exchange is not subject to consumption tax.

According to the Consumption Tax Law, the transfer of payment means and similar items is tax-exempt.

The transfer of crypto asset through a domestic crypto asset exchange is classified as the transfer of such payment means, and is therefore tax-exempt.

In addition, when filing a fixed tax return under general taxation, the tax base ratio is calculated based on the taxable sales, tax-exempt sales, and non-taxable sales for the relevant tax period, but the transfer of crypto asset that falls under the category of payment means does not need to be included in the calculation of the tax base ratio for non-taxable sales.

(Reference)

1. Fees paid to a crypto asset exchange as commission for the sale and purchase of crypto asset are considered as the consideration for the service of intermediation, and are subject to consumption tax.In the case of using the individual correspondence method for reporting consumption tax for the fees incurred for the purchase of crypto asset for the purpose of buying and selling crypto asset, the tax on the purchase for tax purposes (i.e., tax-excluded sales corresponding to tax-included purchase) corresponds only to purchases other than transfer of taxable assets, etc.
2. The transfer of crypto asset made domestically before June 2017 is subject to consumption tax.If a business operator subject to consumption tax has no choice but to record the name of the other party or the like in the books and request documents in order to apply for a deduction of the amount of tax on the purchase for tax purposes with regard to the purchase of crypto asset made domestically before June 2017 through an intermediary such as a crypto asset exchange, the books should be recorded to show the reason and the name of the intermediary.
3. For transfers of electronic payment methods conducted within Japan on or after June 1, 2023, the same applies as mentioned above: these transfers are considered transfers of payment instruments, etc., and are therefore exempt from consumption tax.Additionally, when calculating the taxable sales ratio, there is no need to include the sales amount of such exempt transactions in the calculation of non-taxable sales.

[Related laws and regulations, etc.]
Consumption tax law 6-1, 30, Table 1-2 (Supplementary Table 1-2)
Consumption Tax Act Enforcement Ordinance 9-4, 48-2, 49

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

I am really glad that the transfer of cryptocurrency is not subject to sales tax.

bitcoin is often referred to as digital gold because of its similarities with the metal.

Transfer (selling) of gold is subject to consumption tax.

This creates a difference between the price in Japan and the market price overseas.

If you buy gold overseas and sell it in Japan, you will earn a profit equal to the consumption tax.

In the case of gold, you will be taxed by customs when you bring it into Japan, but cryptocurrency is borderless.

We do not know how the price difference with foreign countries will affect price discovery of bitcoin in the long run, but it is good that there are fewer factors that could hinder natural price formation, even if only for a short period of time.

More importantly, bitcoin’s goal is to become the money of the future.

If sales tax was charged on transfers, maintaining transaction records would become too complicated and it would not function as a means of exchange.

It is fortunate that the authorities have settled on bitcoin being tax-exempt for consumption tax, in this respect.

6-2 Fees Received from Crypto Lending

Question

Our company entered into and concluded a crypto asset lending transaction agreement with a domestic crypto asset exchange operator and lent out crypto asset that we owned.

We received a certain rate of the amount of the lent crypto asset as a usage fee after one year when the contract period expired.

According to the usage regulations set by the crypto asset exchange operator, our company is to lend crypto asset to the exchange operator and after the contract period has expired, the same and equivalent crypto asset must be returned from the exchange operator to our company and the usage fee will be paid to our company.

Please let us know the tax treatment regarding consumption tax in this case.

Answer

The lending of crypto asset as consideration for the usage fee is subject to consumption tax.

As specified in the usage regulations set by the crypto asset exchange, the transaction in question is considered “lending of assets” as the business operator receives compensation after the expiration of the contract period, and the lent crypto asset is returned by the exchange in the same type and equivalent crypto asset.

Furthermore, the transaction in question does not fall under the non-taxable transactions listed in the second supplementary table of the Consumption Tax Law, which includes the transfer of means of payment or its equivalent (crypto asset), lending of money as consideration for interest, and lending of securities.

Therefore, the lending of crypto asset as consideration for the usage fee is subject to consumption tax.

[Related laws and regulations, etc.]
Consumption tax law 2-1-8, 4-1, 6-1, Supplementary Table 2
Consumption Tax Act Enforcement Ordinance 9-4

Our comments:

This is a new item that appeared in Version 5.

It was most likely added as a response to the recent trend of lending crypto to earn yield, commonly in the form known as lending.

Intuitively, the yield on “lending” seems similar to interest on loans or deposits.

However, the FAQ categorizes it as “usage fee” instead of interest because the tax authorities do not consider crypto to be money, and therefore “crypto lending” is different from lending money.

In the US, the SEC also claims that crypto yield products are not money loans but securities.

We strongly advise users to exercise caution before participating in lending.

The borrower of the crypto that the user is lending out needs to earn a higher yield than what they are paying out to the user.

That is risky business, considering the relatively high yield that these products are promising.

Lending crypto can result in the worst-case scenario of not getting your coins back.

Not your keys, not your coins applies to lending, as it applies to leaving coins on exchanges.

One shouldn’t be doing either.

7 Statutory Declaration

7-1 Whether to Include Crypto Asset in the Property and Debt Statement

Question

I have crypto asset held at crypto asset exchanges in Japan and overseas.

Do I have to include crypto asset in the Property and Debt Statement?

Answer

If you have crypto asset on December 31, it will be necessary to record it in the Property and Debt Statement.

The location of the crypto asset exchange where crypto asset is deposited does not affect whether or not it should be recorded in the Property and Debt Statement.

Please record by type of crypto asset (such as bitcoin) and by purpose (personal or business).

(Note) The location of crypto asset refers to the address (if you do not have an address, the residence) of the person who has the property, as stipulated in Article 3, Item 6 and Article 2 of the Remittance and Other Statements Regulations.

[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 6-2-1
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 12-2-8
Remittance and Other Statements Regulations12-3-6, 15-1-2, Supplementary Table 3

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

Other than that it is better to keep bitcoin off of exchanges as much as possible, I have no particular comments.

For your information, the requirements for submitting a Property and Debt Statement are as follows:

Those who need to submit a Property and Debt Statement are those who are required to submit a tax return or those who are eligible to submit a tax refund application (only in cases where the total amount of tax for that year exceeds the total of the dividend deduction and the special deductions for year-end adjustments for housing loans, etc.), and meet either of the following conditions:

1 The total amount of various income except for retirement income for the year exceeds JPY 20 million.

The total amount of various income includes the total amount of income after deducting special deductions in cases where there is income subject to separate taxation.

However, this does not include the carried-over deductions for (1) carry-over of net losses or miscellaneous losses, (2) carry-over of transfer losses in cases of replacement of residential properties, (3) carry-over of transfer losses for specific residential properties, (4) carry-over of transfer losses for listed shares, etc., (5) carry-over of transfer losses for shares issued by specific small and medium-sized companies, and (6) carry-over of losses for settlement of differences, etc. in futures trading, after the application of these deductions.

2 On December 31 of that year, you have assets with a total value of JPY 300 million or more or foreign-out special assets with a total value of JPY 100 million or more (assets acquired through inheritance or inheritance in the year of inheritance start can be excluded from the determination of the total value).

Here, “property value” refers to the total value of property value, not the amount subtracted from the property value by the amount of debt.

In addition, “Assets Subject to Special Cases for Moving Abroad” refers to the rights referred to in subparagraph 1 or 2 of paragraph 2 of Article 60 of the Income Tax Act or paragraph 3 of the same Article for unpaid credit transactions, etc.

(Note) For the Property and Debt Statement from the 5th year of the Reiwa era, in addition to the above, residents who have assets with a total value of JPY 1 billion or more as of December 31 of that year are also subject.

Link

7-2 How to Record the Value of Crypto Asset in the Property and Debt Statement

Question

How do I record the value of crypto asset in my Property and Debt Statement?

Answer

Regarding the value of crypto asset, it will be recorded as the current market price as of December 31 of that year.

An active market for cryptocurrencies(Note 1) exists and a certain market price is established through active trading, and since the objective exchange value is made clear, the trading price(Note 2, 3, 4) published by the crypto asset exchange with whom the party submitting the Property and Debt Statement is conducting transactions shall be recorded as the market price as of December 31 of that year.

(Note)

1. “An active market exists” refers to the case where sufficient quantity and frequency of transactions are conducted on a crypto asset exchange or sales platform, and price information is continuously provided.
2. “The trading price as of December 31 of that year published by the crypto asset exchange” includes the trading price recorded on the balance certificate provided in response to the request of the party submitting the Property and Debt Statement.
3. If the purchase price and selling price are published on the crypto asset exchange (sales platform), it is acceptable to record the selling price of the crypto asset to the crypto asset exchange by the party submitting the Property and Debt Statement.
4. If the party submitting the Property and Debt Statement is conducting transactions with multiple crypto asset exchanges, it is acceptable to record the trading price as of December 31 of that year published by the crypto asset exchange chosen by the party submitting the Property and Debt Statement.

If it is difficult to determine the fair value, it is acceptable to record an estimated value based on the acquisition cost, sales example prices, or other reasonable methods, according to the condition of the assets as of December 31 of that year.

In this case, the estimated value of crypto assets can be calculated using methods such as the following examples:

1. The selling and purchasing actual price as of December 31 of that year (if there is no selling and purchasing actual price as of December 31 of that year, the selling and purchasing actual price within that year on the nearest date prior to December 31 of that year), among which the selling and purchasing actual price deemed appropriate
2. If there is no value obtained in 1, the transfer price in the case of transferring the crypto asset from January 1 of the following year to the deadline for submitting the property and debt schedule
3. If there is no value obtained in 1 or 2, the acquisition price.

[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 6-2-4
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 12-2-3
Remittance and Other Statements Regulations12-5, 15-4

Our comments:

This is a new item that was added in Version 2.

I have no particular comments.

7-3 Whether to Include Crypto Asset in the Foreign Property Statement

Question

I hold crypto asset on a foreign crypto asset exchange.

Do I have to include the crypto asset in the Foreign Property Statement?

Answer:

No, crypto asset does not have to be included in the Foreign Property Statement.

According to the provisions of Article 12, Paragraph 3, Item 6 of the Regulations on Property and Debt Statement for Foreign Transfers, etc., crypto asset falls under the category of property whose location is determined by the place of residence (if the party does not have a place of residence, their place of residence) of the party possessing the property.

In addition, the Foreign Property Statement is to be submitted by resident individuals (individuals who have a place of residence in Japan or who have continuously had a place of residence for more than one year, excluding non-permanent residents).

Therefore, crypto asset held on a foreign crypto asset exchange by a resident individual is not considered “property located abroad” and will not be included in the foreign property and debt schedule.

See “7-1 Whether to Include Crypto Asset in the Property and Debt Statement” for details.

[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 5
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 10-7
Remittance and Other Statements Regulations12-3-6

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

I don’t have any particular comments other than that it is generally better to not keep bitcoin on exchanges as much as possible.

For more information on the requirement to submit a Foreign Property Statement, see below.

Requirement to submit

The parties required to submit a Foreign Property Statement are “resident individuals other than non-permanent residents” who have foreign property (excluding property acquired by inheritance abroad at the beginning of the year of succession) whose total value exceeds 50 million yen as of December 31 of that year.

Here, “resident individual” and “non-permanent resident” refer to those defined in the Income Tax Act, and the determination of whether an individual is a resident is based on their circumstances as of December 31 of that year.

According to the Income Tax Act, a “resident individual” refers to an individual who has a place of residence in Japan or has continuously had a place of residence for more than one year, and a “non-permanent resident” refers to a resident individual who does not have Japanese nationality and has a total period of residence or place of residence in Japan of five years or less within the past ten years.

Applicable Assets

The foreign property held as of December 31 of that year is the subject matter.

“Foreign property” refers to “property located abroad,” and the determination of whether property is “located abroad” is made on a case-by-case basis based on the circumstances as of December 31 of that year.

In addition, the “value” of foreign property is determined based on the “market price” or “estimated value” equivalent to the market price as of December 31 of that year, and the conversion into Japanese

Link to tax answer

Summary

The changes in Version 8 were mostly year-end valuation items which were previously released by the NTA in a different FAQ.

Key changes in Version 9 were related to the official introduction of Crypto Assets with Specific Transfer Restrictions.

Below are my comments from Version 3.

However, the following two changes that were made in Version 3 are a huge concern:

1. For individuals, the principle cost calculation method has been changed from moving average method to the total average method (related to FAQ1-3)
2. For entities, the unrealized gains or losses from holding cryptocurrency and cryptocurrency margin trading positions at the end of the period have become taxable (related to FAQ22 and FAQ25)

The change from the moving average method to the total average method is a concern, not because of the quantitative impact, but because it is not based on any theoretical foundation and the fact that fundamental concepts like this can easily be changed on a whim is very concerning.

The mark-to-market of cryptocurrency held by entities and taxation on unrealized gains and losses will be a significant issue for companies that conduct business using cryptocurrency.

But the change to Question 2-2 in Version 7 that laid out explicit criteria regarding the classification of business income was a breath of fresh air in that this was a change that could actually be beneficial to the taxpayer.

Even if the change was not directed at making bitcoin or crypto more user friendly, and even if it was an unintended effect of other government policies (diversifying ways of working), a benefit to the average taxpayer is a step in the right direction.

The comment below has been carried over from my closing summary for Version 1 and 2 with some additions.

bitcoin is an unique asset that has properties that have never existed before.

To make Bitcoin more understandable, existing things are used as analogies.

While analogies are useful in making things easier to understand, they do not necessarily accurately represent reality.

bitcoin is called a “coin”, but there is no physical coin and there is no issuer or administrator.

When we say that bitcoin is “sent” or “exchanged”, nothing physically moves.

People store bitcoin on “wallets”, but there is no bitcoin in the wallet itself.

If we apply analogies directly to accounting and tax calculation, there is a risk of failing to faithfully represent reality.

In this FAQ, I think that the following items in particular should be reconsidered to faithfully represent reality:

• Crypto-to-crypto Trades => Change to taxable when exchanged for fiat;
• Acquisition of Cryptocurrency Through Forks=> Change to taxable when exchanged for fiat or used;
• Acquisition of Cryptocurrency Through Mining => Change to taxable when exchanged for fiat or used;
• Income Classification of Cryptocurrency => Change to transfer income being the default;
• Permit cost calculation methods that faithfully represent economic reality
• Unrealized gains/losses excluded from taxation

Taxing when exchanging for legal currency more accurately represents reality and has the following effects:

• Simplifying taxable income calculation (benefit for both taxpayers and authorities);
• Improving tax capture rate and efficiency (benefit for authorities);
• Encouraging research, application, and improvement of new technology (benefit for the whole country)

I have been advocating for these improvements for years, but while Version 9 in 2024 has partially addressed the issue by opening the door to excluding unrealized gains from taxation, the situation still cannot be considered improved.

The post Japanese Tax Authorities Releases FAQ (Ver9) on Crypto Taxes appeared first on Japan Professional Alliance.

On December 25, 2023, the National Tax Agency (NTA) published a guidance titled “Tax Treatment of Crypto Assets (Information)”.

This is the seventh time (the first was in 2017) that the NTA has officially expressed its views on calculating taxes for cryptocurrency in an FAQ format.

We have been commenting on changes from the previous year’s FAQ every year since 2018.

This year, 11 items were added, but half of them pertain to the content of the “Year End Mark-to-Market Treatment of Cryptocurrencies Held by Entities (Information)” published by the NTA on January 20, 2023.

The important changes in the newly released FAQ Version 8 are the issues related to “Specific Self-issued Crypto Assets” and the concept of “Crypto Assets with Transfer Restrictions and Other Conditions” that will be introduced from 2024.

No change in the departments within the NTA that are involved

This is a comparison of the National Tax Agency’s divisions listed on the cover of the FAQ:

In Version 2, the number of divisions increased from one in Version1 to six.

There were no changes in Versions 3,4,5,6,7,8.

There probably won’t be significant changes here going forward, but we’ll keep updating the table for information purposes.

Small change in title

The title of the FAQ changed in Version 2 due to the expansion of the scope of the FAQ from individual income tax.

In Version4, “Cryptocurrency” was changed to “Crypto Asset”.

In Version8, “Crypto Asset” was changed to “Crypto Asset and Others”

Number of FAQ items increased by 11 to 45 items

With Version 3, Corporate Tax was added as a section with new FAQ items.

The number of FAQ items increased from 21 in Version 2 to 32 in Version 3 due to the expansion of the scope of the FAQ.

There were no additional items in Version4.

There was one addition in Version5.

There were no additions in Version6.

There was one addition in Version7.

There were 11 additions in Version8.

In Version8, the Corporate Tax section was subdivided into Crypto Asset Related and Electronic Payment Method Related.

1. Income Tax and Corporate Tax
2. Income Tax
3. Corporate Tax
   1. Crypto Asset Related
   2. Electronic Payment Method Related

4. Inheritance Tax and Gift Tax
5. Income Tax Withholding
6. Consumption Tax
7. Statutory Declaration

With this in mind, here are the items covered in Version8 of the FAQ:

Items 3-1-4 thru 3-1-8 were items that were introduced in “Year End Mark-to-Market Treatment of Cryptocurrencies Held by Entities (Information)” published by the NTA on January 20, 2023.

We covered these items in this article.

Japanese Tax Authorities Release FAQ – Year End Mark-to-Market of Cryptos Held by Entities

The reason why this FAQ is labeled as “information” is because it is not a law or regulation, but rather the view of the NTA.

Although it is not a law, the tax authorities in Japan will refer to this document when verifying the validity of tax calculations regarding crypto.

In practice, I expect various accounting and tax treatments to be based on this FAQ.

This hasn’t changed from Version 1.

Our comments will be inserted using blue text, and the rest is the original content of the FAQ.

The official document can be obtained at the following link:

暗号資産等に関する税務上の取扱い及び計算書について（令和5年12月）｜国税庁 (nta.go.jp)

1 Income Tax and Corporate Tax

1-1 Sale of Crypto Asset

Question

Please tell me how to calculate taxable income from the following Crypto Asset transaction.

(Example)
On April 2, I bought 4BTC for JPY 4,000,000.
On April 20, I sold 0.2BTC for JPY 210,000.

(Note) The above transaction does not take into account the transaction fees for buying and selling Crypto Asset.

Answer

In the above example, income is calculated by the following formula:

JPY 210,000 [transfer price] – ( (JPY4,000,000 ÷ 4BTC) [acquisition price per BTC(Note 1)] x 0.2BTC [bitcoin sold] ) [transfer cost] = JPY 10,000 [income](Note 2)

(Note 1)
The amount calculated by either the total average method or the moving average method (if not selected, the total average method for individuals and the moving average method for corporations).

(Note 2)
If there are other necessary expenses, the amount will be the amount minus the amount of those necessary expenses.

When selling (converting to Japanese yen) the crypto asset you hold, income is the difference between the selling price of the crypto asset and the acquisition price of the crypto asset sold.

[Related laws and regulations, etc.]
Income tax law 36, 37, 48-2
​​The implementing order for income tax law 119-2, 119-5
Corporate tax law 61
The implementing order for corporate tax law 118-6

Our comments:

I have no particular comments regarding the method of calculating the profit when converting cryptocurrency to Fiat (legal tender). (Same comment as Version1)

However, there was a significant change that was made in Version 3.

The general method to be taken when calculating acquisition cost was changed.

Until Version 2, the general method was moving average (total average method was permitted under the condition that it was continuously applied).

In Version 3, the general method was changed to total average method and moving average was made the exception.

In order to use the moving average method, one will now need to submit a declaration to the tax authorities.

This change was made regardless of the tax authorities previously claiming that the moving average method was “the appropriate method”.

This is a clear example of how policy is prioritized over accurate representation of transactions or theoretical arguments.

As we have shared in our previous articles, the moving average method tends to be beneficial to the tax-payer, due to the rounding effect when calculating the cost basis.

We will be touching more on this later in “2-5 Submission of Cryptocurrency Measurement Method”.

They changed the wording from BTC to bitcoin in Version 2 but for some reason they brought back BTC in Version 3.

They also fudged around with the related laws and regulations that were referenced.

In Version 1, transaction fees explicitly included in the acquisition cost.

However, in Version 2 they changed that to “transaction fees are not taken into account”.

Version 3 is the same in that regard.

The handling of fees incurred when acquiring cryptocurrency is covered in “1-4 Acquisition Cost of Crypto Asset”.

1-2 Purchase of Goods with Crypto Asset

Question

Please tell me how to calculate taxable income from the following crypto asset transaction.

(Example)
April 2 Purchased 4BTC for 4,000,000 yen.
October 5 Paid 0.3BTC to purchase goods worth 403,000 yen (including consumption tax).
The exchange rate at the time of transaction was 1 BTC = 1,350,000.

(Note) The above transaction does not take into account the transaction fees for buying and selling crypto asset.

Answer

In the above example, income is calculated according to the following formula:

403,000 yen [goods price (=transfer price of bitcoin] – ( (4,000,000 yen ÷ 4BTC) [acquisition cost per 1BTC] (Note 1) × 0.3 BTC [bitcoin paid] ) [transfer cost] = 103,000 yen (Note 2) [income]

(Note)
(1) The amount calculated by either the total average method or the moving average method (if not selected, the total average method for individuals and the moving average method for corporations).

(2) If there are other necessary expenses, the amount will be the amount minus the amount of those necessary expenses.

If you use the crypto asset you hold for payment when purchasing goods, this means that you transferred the crypto asset you hold, and the difference between the transfer price of that crypto asset and the acquisition cost of that crypto asset will be the income.

[Related laws and regulations, etc.]
Income tax law 36, 37, 48-2
​​The implementing order for income tax law 119-2, 119-5
Corporate tax law 61
The implementing order for corporate tax law 118-6

Our comments:

I have no particular comments regarding the method of profit calculation.

Change was made in Version 2 which stated that “transaction fees are not taken into account”, whereas Version 1 explicitly included transaction fees in the calculation example.

This change is the same as in “1-1 Sales of Crypto Asset”.

The comment below has been carried over from my commentary for Version 1.

It is not practical to calculate profit and loss every time one pays using bitcoin regularly in their daily lives.

Yes, it is true that the same tax rules apply to the use of foreign currencies.

But few people calculate and report exchange gains and losses when using foreign currencies during their holiday vacations in foreign countries.

We believe that a de minimis rule is necessary to exempt transactions below a certain amount.

1-3 Crypto-to-crypto Trades

Question

Please tell me how to calculate taxable income from the following crypto asset transaction.

(Example)
On April 2, I purchased 4 bitcoin (A) for 4,000,000 yen.

On November 2, I used 1 BTC to purchase 40 XRP.

The market value of XRP at the time of transaction was 1 XRP = 30,000 yen.

(Note)
1 The above transaction does not take into account the transaction fees for buying and selling crypto asset.

2 The above transaction is not considered as a case where the crypto asset is obtained temporarily and only as necessary.

Answer

(30,000 yen x 40XRP) [purchase price of XRP (=transfer price of bitcoin)] – ( (4,000,000 yen / 4BTC) [price per bitcoin (Note 1)] x 1BTC [bitcoin paid] ) [transfer cost] = 200,000 yen(Note 2) [income]

(Note)

1. The amount calculated by either the total average method or the moving average method (if not selected, the total average method for individuals and the moving average method for corporations).
2. If there are other necessary expenses, the amount will be the amount minus the amount of those necessary expenses.

If you use your own crypto asset to purchase another crypto asset B, you are purchasing crypto asset B with crypto asset A.

Therefore, taxable income from transferring crypto asset A shall be calculated in a way similar to “1-2 Purchase of Goods with crypto asset”.

[Related laws and regulations, etc.]
Income tax law 36, 37, 48-2
​​The implementing order for income tax law 119-2, 119-5
Corporate tax law 61
The implementing order for corporate tax law 118-6

Our comments:

Here too, a change has been made to “not take into account” the transaction fees when Version 1 was updated to Version 2.

The handling of fees incurred when acquiring cryptocurrency is covered in “1-4 Acquisition Cost of Crypto Asset”.

The comment below has been carried over from my commentary for Version 1.

I have no particular comments on the calculation method for profits related to crypto-to-crypto trades.

I believe most countries consider crypto-to-crypto exchanges as a taxable event.

However, I think a little more effort could have been made in the following two points.

First, it is often unrealistic or difficult to calculate gains and losses for each crypto-to-crypto exchange transaction.

In the case of listed stocks or FX, a transaction occurs and is completed within one brokerage account.

In this case, the calculation of trading gains and losses is easy and can be easily checked in most cases in the service provider’s user account information.

Even if one is using multiple accounts, one can generally determine the overall gain and loss by simply totaling the gains and losses of each account.

However, in the case of cryptocurrencies, one can freely send cryptocurrency between exchanges.

If one sends cryptocurrency purchased from one exchange to another exchange, the receiving exchange does not know the acquisition cost of the cryptocurrency.

Since there is no information on the acquisition cost, it is impossible for the receiving exchange to calculate gains and losses.

Therefore, it is not possible to determine the overall gain and loss by simply summing up the gain and loss data for each exchange if one is using multiple exchanges.

If one has a small number of transactions or is just using a few exchanges, one can use a spreadsheet to try to calculate gains and losses.

As the number of transactions or exchanges used increases, it becomes unrealistic or difficult to perform such calculations.

The second reason is a little more conceptual.

When exchanging one asset for another, the assumption is that it goes through yen once.

If there is a price difference between the assets being exchanged, a gain or loss is realized.

This is easy to understand when thinking of selling Apple stock to buy Google stock (both listed stocks).

One can’t trade AAPL with GOOG directly, they first sell AAPL for fiat, recognize any gain or loss at this point, and use that fiat to buy GOOG.

The thing with cryptocurrency is that BTC and ETH can be traded directly.

In most cases, users do not have the intention of realizing gains or losses when making these transactions.

Generally speaking, cryptocurrency does not give its holders any rights or represent any obligations, unlike financial products or fiat currencies .

In simple terms, holding cryptocurrency means holding a random string of characters called a Private Key.

Exchanging cryptocurrency for cryptocurrency is simply exchanging one string of characters for another.

It is similar to a person with an orange exchanging it for a person with an apple.

Even if the tax law is strictly applied in such a case, it may be subject to taxation.

But from a technical perspective, it seems awkward to me that merely exchanging a string of random letters would be considered a taxable event (this is akin to generating taxable events when exchanging email).

From a practical perspective and a conceptual perspective, I think it is appropriate to tax cryptocurrency when exchanged for fiat.

1-4 Acquisition Cost of Crypto Asset

Question

I purchased crypto asset on a Japanese exchange and paid a transaction fee. In this case, what is the acquisition cost of the purchased crypto asset?

(Example)
On October 2, I purchased 2BTC for JPY 2,000,000. Transaction fee was JPY 550 (including consumption tax).

Answer

The acquisition cost of the acquired crypto asset in the above example is the purchase price of JPY 2,000,000 plus the transaction fee of JPY 550, totaling JPY 2,000,550.

The acquisition cost of crypto asset will be as follows, depending on the method of acquisition.

The acquisition cost includes transaction fees and any other expenses that were required in acquiring the crypto asset.

1. When obtained (purchased) by paying a consideration: The amount of the consideration paid at the time of purchase
2. When obtained by gift or inheritance (excluding the cases described in 3 below): The value (market value) at the time of the gift or inheritance.
3. When obtained by gift on owner’s death, inheritance, or specific inheritance: The amount evaluated by the method chosen by the donor at the time of the donor’s death (the evaluation value of the crypto asset possessed by the donor at the time of death).
4. Otherwise: The value (market value) at the time of acquisition.

(Note) ‘Otherwise’ refers to, for example, cases where crypto asset is obtained through exchange, mining, or fork, and in such cases, the acquisition value is the value (market value) at the time of acquisition.

Furthermore, when a crypto asset is obtained through a fork, the acquisition value is 0 yen (refer to “1-5 Acquisition of Cryptocurrency Through Forks”).”

Reference: For a corporation that is a taxable business entity (applying the tax-excluded accounting method) and conducts the above example transaction, what is the acquisition cost of the purchased crypto asset?

The acquisition cost of the crypto asset in the above example is JPY2,000,500 (Note 1, 2).

(Note)

1. Under Consumption Tax Law, the transfer of crypto asset and other payment methods is not subject to taxation, but the transaction fee paid to a crypto asset exchange operator as a commission for the transaction is considered a consideration for providing services related to the brokerage, and is subject to consumption tax.
2. If the person conducting the transaction in this case is a taxable enterprise under the Consumption Tax Law and applies the tax-excluded accounting method, the amount of consumption tax and other taxes included in the transaction fee (JPY 50 = JPY 500 x 10/110) and the amount of the consideration for the taxable transaction (JPY 500 = JPY 500 – JPY 50) are divided, and the acquisition price of the purchased crypto asset is the sum of the amount of the consideration for the taxable transaction (JPY 2,000,500 = JPY 2,000,000 + JPY 500).

[Related laws and regulations, etc.]

Income tax law 36, 37, 40
​​The implementing order for income tax law 119-6
Corporate tax law 61
The implementing order for corporate tax law 118-5
Accounting Circular 2

Our comments:

In Version 1, information was provided on the calculation of acquisition cost using the moving average method and the total average method.

In Version 2, the focus of the question has changed to the handling of transaction fees when acquiring cryptocurrencies.

The treatment of including transaction fees incurred when acquiring cryptocurrency in the acquisition price has not changed from Version 1.

The new information being provided in Version 2 was regarding the handling of consumption tax.

Not changed in Version 3 other than reflecting the increase in consumption tax from 8% to 10% in the illustrative example.

There were no changes in Versions 4,5,6,7.

The acquisition cost should be calculated by extracting the consumption tax part from the transaction fees, but it will become quite complicated if the transaction data from the exchange is not formatted to accommodate this.

If you actually start calculating the acquisition cost, you will quickly realize that the handling of transaction fees is complex.

Transaction fees are displayed in various formats in the transaction data depending on the exchange.

(Examples)
fees are generated separately from the order amount
fees are deducted from the order amount
fees are incurred in the base currency
fees are incurred in the trade currency
fees are displayed as negative (rebate)
fees are displayed as rewards in an exchange token

It will be very tedious to sort through each of these scenarios and build logic to calculate total gains and losses.

1-5 Acquisition of Crypto Assets Through Forks

Question

If one acquires a new crypto asset that was born as a result of a chain fork, will this acquisition generate taxable income under individual income tax or corporate tax?

Answer

If one acquires a new crypto asset through a split (fork) of an existing crypto asset, no taxable income will arise.

Under the Income Tax Act, when acquiring something with economic value, the income amount is calculated based on the market value at the time of acquisition.

However, regarding the new crypto asset acquired as a result of a chain fork mentioned in the above question, it is considered that there was no trading market at the time of the fork and the crypto asset did not have value at that time.

Therefore, no income will be generated at the time of acquisition, and income will be generated when the new crypto asset is sold or used.

In that case, the acquisition price will be 0 yen.

The same goes for corporate tax.

The acquisition cost of the newly acquired crypto asset as a result of a split (fork) is 0 yen, and it is considered that there is no amount of profit to be included when calculating taxable income.

[Related laws and regulations, etc.]
Income tax law 36
Corporate tax law 22

Our comments:

In Version 2, bits of language on corporate tax was added, but the content itself is basically the same as Version 1.

Not much change in Version 3 either, other than some words added to clarify that taxable income is not recognized at the time the crypto is received, but can be subject to taxable income recognition in the future when it is sold or converted into another asset.

There were no changes in Versions 4,5,6,7.

The comment below has been carried over from my commentary for Version1.

In the FAQ, it is stated that upon the fork, there is no market and the asset has no value, so the acquisition price is considered to be zero yen, and as a result, there is no income at the time of acquisition.

However, as the existing assumption is that, if an asset is acquired, the income amount is calculated based on the market value at the time of acquisition.

I consider applying this assumption to cryptocurrencies to be an issue in some cases.

Blockchain forks occur at certain frequencies due to how blockchains work.

For example when blocks are consecutively mined in a short period of time, this could lead to forks in the chain.

In the above example, the chain that is ultimately recognized as valid by the majority of nodes in the network is preserved, and the fork chain is discarded.

Therefore, new coins that have value do not arise from all forks.

However, many blockchains are open source and can be freely forked by anyone.

It is possible that a fork could occur without the taxpayer’s knowing.

The taxpayer could unknowingly acquire a cryptocurrency with value.

Also, even if a spot market did not exist at the time a new cryptocurrency was created, it is possible that a price for the cryptocurrency could be formed in a derivative market for the cryptocurrency.

As pointed out in the comments for FAQ 3, we believe that by taxing at the time of exchange for fiat currency or use, it simplifies the calculation of taxable income and protects taxpayers.

1-6 Acquisition of Crypto Asset Through Mining, Staking, Lending, etc.

Question

If crypto asset is obtained through mining, staking, lending, etc., how will it be treated from an income tax or corporate tax perspective?

Answer

Profit from acquiring crypto asset through mining, staking, lending, etc., is subject to income tax or corporate tax.

If one acquires crypto asset through mining, staking, lending, etc. (hereinafter, mining etc.), the amount of income is calculated by subtracting necessary expenses (costs incurred through mining etc.) from the amount of revenue (the market value of the crypto asset at the time it was acquired through mining etc.).

[Related laws and regulations, etc.]
Income tax law 27, 35, 36, 37
Corporate tax law 22, 22-2

Our comments:

Not much change in Version 2 from Version 1 other than the addition of treatment for corporate tax.

There were no significant changes in Versions 3,4,5.

In Version 6, staking and lending were added, but there were no changes in the Answer to the Question.

Staking and lending have various forms, so generalization may not be appropriate, but it is common for the staker or lender to receive tokens as rewards (often referred to as “yield”), for sending tokens to a smart contract and not moving them for a certain period of time.

Most of these services or products are marketed as decentralized, but in reality, they are often developed and operated by a small team and are highly centralized.

Mining does not require tokens, but staking and lending do.

Users that engage in staking and lending will purchase tokens with the expectation of future returns from the efforts of the development and operation by the team.

Therefore, in the United States, these services often lead to discussions of whether they fall under the category of securities.

Personally, I think that mining bitcoin, which is simply generating numbers randomly, and staking and lending are different in nature and substance.

The comment below has been carried over from my commentary for Version 1.

It seems like a reasonable conclusion at first glance, but upon further thought, there appears to be a few issues.

If one interprets receiving bitcoin (cryptocurrency) as payment for providing the service of mining, then yes, the received bitcoin would be considered income.

However, mining itself is not a service, and there is no organization like a company or individual that can be considered the recipient of the service.

Mining bitcoin is merely generating random numbers using a computer.

It is called mining as an analogy because it shares certain similarities as gold mining.

Gold mining companies and oil mining companies do not consider mining gold or oil itself as their business.

They consider selling the mined commodities as their business and income tax is also recognized not at the time of mining, but at the time of sale.

If we think of bitcoin mining in the same way as commodity mining, it seems reasonable to recognize taxable income at the time of sale or use, not at the time of mining.

1-7 Crypto Asset Transactions by Non-Residents and Foreign Entities

Question

I reside in the United States and sold my crypto asset to a Japanese crypto asset exchange.

In this case, do I need to file a tax return in Japan?

Answer

No, you do not need to file a tax return in Japan.

Under Japan’s income tax laws, residents are taxed on their worldwide income, while non-residents are only taxed on income sourced from Japan (domestic-source income).

Moreover, the following types of income are subject to tax on the disposition of assets that are subject to domestic-source income, subject to certain conditions (excluding income attributable to a permanent establishment):

(1) Income from the disposition of domestic real estate;
(2) Income from the disposition of rights or other interests in domestic real estate;
(3) Income from the cutting or disposition of domestic forest land;
(4) Income from the disposition of shares or other securities issued by domestic corporations under certain conditions;
(5) Income from the disposition of shares or other securities of real estate-related corporations; and
(6) Income from the disposition of domestic assets during the period in which a non-resident stays in Japan.

Therefore, income derived from the sale of crypto asset held by a non-resident to a Japanese crypto asset exchange is not subject to income tax in Japan.

The same applies to foreign entities; they are not required to file a tax return in Japan in this case.

(Note) Income derived from the sale of crypto asset held by non-residents or foreign entities to Japanese crypto asset exchanges is also not subject to withholding tax.

[Related Laws and Regulations]
Income tax law 161
Income tax law 212
Income tax order 281
Corporate tax law 138
Corporate tax order 178

Our comments:

This is a new item that was added in Version 7.

We have no particular comments but this got us thinking whether the tax authorities frequently receive questions like this.

Many Japanese cryptocurrency exchanges contract with companies known as LP or MM to provide liquidity on their exchange platforms.

Many of these LPs or MMs are foreign entities.

Since these LPs or MMs buy and sell cryptocurrencies on Japanese exchanges that have engaged them, it is understandable that they would want to obtain clarification from the authorities on whether these activities would lead to tax liability.

2 Income Tax

2-1 When to Recognize Income from Crypto Asset Transactions in Total Income

Question

In what year should the profit generated from crypto asset transactions be recognized as income?

Answer

In principle, it should be considered as income in the year in which the transfer of the crypto asset sold, etc. took place.

However, it is also possible to consider it as income in the year in which the contract for the sale, etc. of the crypto asset was entered.

Profit and loss generated from crypto asset transactions are generally classified as miscellaneous income (other miscellaneous income) (refer to “2-2 Income Classification of Crypto Asset”).

The timing at which such income should be considered as part of the total income is determined based on the nature of the income, in accordance with the timing at which other income should be considered as part of the total income.

Therefore, the timing at which income generated from crypto asset transactions should be recognized in total income is determined based on the nature of the income, in accordance with the timing at which income from transfer of assets is recognized.

[Related laws and regulations, etc.]
Income tax law 35, 36
Income tax basic disclosure 36-12、36-14

Our comments:

This is a new item that was added in Version 3.

We have no particular comments.

2-2 Income Classification of Crypto Asset

Question

Under Income Tax Law, what category of income will gains from crypto asset transactions be classified as?

Answer

In general, gains resulting from the use of crypto assets are classified as miscellaneous income (other miscellaneous income).

Gains and losses arising from crypto asset transactions are considered gain or loss recognized in relation to the relative relationship between domestic currency or foreign currency and therefore are generally classified as miscellaneous income (other miscellaneous income).

However, if the amount of income from crypto asset transactions in that year exceeds 3 million yen, it will be classified into the following income categories:

1. If there is record-keeping of accounting documents related to crypto asset transactions, it is generally classified as business income.
2. If there is no record-keeping of accounting documents related to cryptocurrency transactions, it is generally classified as miscellaneous income (miscellaneous income related to business).

Furthermore, if “the crypto asset transaction is performed in conjunction with acts that are the basis for various types of income such as business income”, for example, if the business income earner owns the crypto asset as a business asset, and is using the crypto asset as a means of payment when purchasing inventory etc., then it is classified as business income

[Related laws and regulations, etc.]
Income tax law 27, 35, 36

Our comments:

Not much change from Version 1 to Version 2, other than a few words here and there.

There were no significant changes in Versions 3,4,5.

However, there was a significant change in Version 7.

The essence of the content has not changed, so it’s more accurate to say that there were changes in the wording that were significant in nature.

To summarize the content of the FAQ before Version 7:

If profits are made from cryptocurrency transactions, it is generally considered “miscellaneous income”.

However, if cryptocurrency transactions are recognized as a business, it is considered “business income”.

There were no explicit criteria for determining whether a transaction constituted a business, so it was left to judgment of facts and circumstances, which left ambiguity and subjectiveness.

However, in Version 7, specific criteria for classification as “business income” was documented in actual wording.

This is huge.

Those requirements are:

• Keeping accounting documents
• Income amount (crypto gross sales) exceeding 3 million yen

This change should be considered as a change to broadly align tax rules that came out of the revision of the “Basic Directive on Income Tax” dated October 7, 2022, rather than a rule specifically designed for cryptocurrencies.

The purpose of the revision to this Basic Directive is to “clarify the approach to determining whether an income is classified as business income”.

The background to this is the recent trend of increasing side jobs for company employees.

We think what ended up happening is that cryptocurrency traders just happened to be at the receiving end of this favorable income classification criteria that arose from the government’s push to “reform the way of working”.

“Business income” is more advantageous for taxpayers in many ways than “miscellaneous income”.

It is recommended that those who are likely to meet the requirements of “business income” confirm that the above requirements are met during their tax year.

Note that the term “income amount” refers to the gross sale amount of crypto assets.

It does not refer to net profit, so in the case of bitcoin, selling around 1 BTC during the tax year would meet the income requirement.

According to the explanation of the Basic Directive on Income Tax Treatment of Miscellaneous Income (PDF/270KB), the requirement for keeping accounting documents is more important than the income requirement of exceeding 3 million yen in determining the classification as business income.

Even if the income amount is less than 3 million yen, if the requirement for keeping accounting documents is met, the business income classification will not be immediately denied.

However, clearing the quantitative threshold of exceeding 3 million yen provides more peace of mind in removing uncertainty.

2-3 ​​Necessary Expenses of Crypto Asset

Question

In the case of reporting income from the sale of crypto asset, what expenses are considered necessary business expenses?

Answer

Necessary expenses when calculating taxable income from the sale of crypto asset include, for example, the following costs

• Transfer cost of the crypto asset sold
• Transaction fees paid for the sale of the crypto asset

In addition, the cost of using the internet or smart phones, the cost of purchasing a computer, etc. can also be included in the necessary expenses, as long as the amount of such expenses is deemed to be directly necessary for the sale of the crypto asset.

In principle, income from the sale of crypto asset is classified as miscellaneous income (other miscellaneous income) (see “2-2 Income Classification of Crypto Asset”).

The amount that can be included in the necessary expenses is the transfer cost of the crypto asset and other expenses directly related to the sale of the crypto asset.

Please note the following items regarding necessary expenses.

(1) Regarding the usage fees for internet, smartphones, and other communication lines, they are generally paid in lump sum, without clear segregation of whether they were for cryptocurrency transactions or other uses.

However, in terms of such expenses, only when the usage fees for cryptocurrency transactions can be clearly separated, the clearly separated amount can be included as necessary expenses.

(2) For assets such as a personal computer that have a useful life of more than one year and exceed a certain monetary value, the necessary expenses should be divided over the entire useful life of the asset (such expenses are called “depreciation expenses”), rather than being expensed in a lump sum for the year.

If a cryptocurrency transaction is classified as business income or miscellaneous income (miscellaneous income related to business), the amount of expenses incurred for sales expenses, general administrative expenses, and other expenses related to the business that generates income in that year can be included as necessary expenses.

[Related laws and regulations, etc.]
Income tax law 37, 45, 48-2
Income tax law enforcement ordinance 96

Our comments:

This was a new item introduced in Version 2.

No significant changes in Versions 3,4,5,6.

Although there were some changes in the wording in Version 7, there seems to be no change in the conclusion that the following amounts can be included as necessary expenses:

(1) Direct expenses such as the transfer cost of cryptocurrencies and other expenses directly incurred when selling cryptocurrencies.

(2) Indirect expenses such as sales expenses, general administrative expenses, and other expenses related to the business that generates income in that year.

Judgment is required when determining what expenses can be included in necessary expenses.

The best approach would be to keep all your receipts during the year and consult with your tax accountant.

2-4 Cost Basis of the Transferred Crypto Asset

Question

I have continuously bought and sold the same type of crypto asset as follows.

What is the transfer cost for the sale of this crypto asset?

(Example)
I first purchased bitcoin on April 1 and subsequently bought and sold it several times as shown below.

The total amount of sales (quantity) for the year was 5,295,000 yen (5 BTC) and the total amount of purchases (quantity) was 4,037,800 yen (6.5 BTC)

(Breakdown)
・ On April 1, 4 BTC was purchased for 1,845,000 yen (on hand balance 4 BTC)
・ On June 20, 2 BTC was purchased for 1,650,000 yen (on hand balance 6 BTC)
・ On July 10, 2 BTC was sold for 2,400,000 yen (on hand balance 4 BTC)
・ On September 15, 0.5 BTC was purchased for 542,800 yen (on hand balance 4.5 BTC)
・ On November 30, 3 BTC was sold for 2,895,000 yen (on hand balance 1.5 BTC)

(Note) The above transactions do not take into account trading fees for crypto asset.

Answer:

In the above example, the total average method results in a transfer cost of 3,106,000 yen, and the moving average method results in a transfer cost of 3,080,200 yen.

When calculating the income from the sale of multiple crypto assets, it is necessary to calculate the transfer cost.

The transfer cost is calculated by subtracting the (3) valuation of crypto asset held at the end of the year (December 31) from the sum of (1) valuation of crypto asset held at the beginning of the year (January 1) from the previous year and (2) total acquisition cost of crypto asset acquired during the year for each type of crypto asset (for example, bitcoin, etc.).

This “valuation of crypto asset held at the end of the year” is obtained by multiplying “the acquisition cost per unit at the end of the year” by “the number of units held at the end of the year”, and “the acquisition cost per unit at the end of the year” is calculated using either the “total average method” or the “moving average method”.

In the above example, the transfer cost is as follows depending on the evaluation method:

Total average method: The method of calculating the “acquisition cost per unit at the end of the year” by dividing the sum of the valuation of a crypto asset held at the beginning of the year and the total acquisition cost of that crypto asset acquired during the year by the total quantity of that crypto asset.

Moving average method: The method of calculating the “acquisition cost per unit at the end of the year” by adding the acquisition cost of a crypto asset acquired at each acquisition point to the total acquisition cost of that crypto asset held at that acquisition point and dividing it by the total quantity of that crypto asset held at that acquisition point.

When using the total average method

The “acquisition cost per unit at the end of the year” is 621,200 yen, and the “valuation of crypto asset held at the end of the year” is 931,800 yen according to the following calculation.

Therefore, the transfer cost is 3,106,000 yen (4,037,800 yen – 931,800 yen).

<Calculation>

(1) Total acquisition cost of the same type (name) of crypto asset acquired during the year ÷
(2) Quantity of the same type (name) of crypto asset acquired during the year =
(3) Acquisition cost per unit at the end of the year

(Note) If there is crypto asset carried over from the previous year, add the value and quantity to 1 and 2 respectively.

(1) Total acquisition cost of bitcoin acquired during the year 4,037,800 yen
(2) Quantity of bitcoin acquired during the year 6.5BTC
(3) Acquisition cost per unit at the end of the year (1÷2) 621,200 yen
(4) Valuation of bitcoin held at the end of the year (3×1.5BTC) 931,800 yen

When using the moving average method

The “acquisition cost per unit at the end of the year” is 638,400 yen, and the “valuation of crypto asset held at the end of the year” is 957,600 yen according to the following calculation.

Therefore, the transfer cost is 3,080,200 yen (4,037,800 yen – 957,600 yen).

<Calculation>
When acquiring crypto assets of different types (names), revise the average unit price using the following calculation formula.

(1) Total book value of the same type (name) of crypto asset held at the acquisition point ÷
(2) Quantity of the same type (name) of crypto asset held at the acquisition point =
(3) Average unit price at the acquisition point

(Note)
1 If there is crypto asset carried over from the previous year, add the value and quantity to 1 and 2 respectively.

2 The “average unit price at the acquisition point” calculated from the closest date to December 31 of that year will be the “acquisition cost per unit at the end of the year”.

(1) Average unit price at acquisition point (April 1)

(1) Total book value of bitcoin held at acquisition point 1,845,000 yen

(2) Quantity of bitcoin held at acquisition point 4BTC

(3) Average unit price at acquisition point (1÷2) 461,250 yen

(2) Average unit price at acquisition point (June 20)

(1) Total book value of bitcoin held at acquisition point 3,495,000 yen

(461,250 yen × 4BTC) [book value of crypto asset held at acquisition] + 1,650,000 yen [acquisition cost on June 20th] = 3,495,000 yen

(2) Quantity of bitcoin held on the acquisition date 6 BTC

(3) Average acquisition price on the acquisition date (1 ÷ 2) 582,500 yen

(3) Average acquisition price on the acquisition date (September 15)

(1) Total book value of bitcoin held on the acquisition date 2,872,800 yen

(582,500 yen x 4 BTC) [book value of cryptocurrency held at the time of acquisition] + 542,800 yen [purchase amount on September 15th] = 2,872,800 yen

(2) Quantity of bitcoin held on the acquisition date 4.5 BTC

(3) Average acquisition price on the acquisition date (1 ÷ 2) 638,400 yen

(4) Unit acquisition price at the end of the year 638,400 yen

= Average acquisition price on September 15 638,400 yen

(5) Evaluation of bitcoin held at the end of the year

638,400 yen (unit acquisition price at the end of the year) x 1.5 BTC (quantity held at the end of the year) = 957,600 yen

To make calculating the income from the sale, including the transfer cost of crypto asset fairly simple, it is possible to create a “Crypto Asset Calculation Sheet (for the total average method or the moving average method)” based on the “Annual Trading Report” sent by the crypto asset exchange operator. (Refer to “2-8 Calculation of Taxable Income using the Annual Transaction Report”)

The “Crypto Asset Calculation Sheet (for the total average method or the moving average method)” can be found on the website of the National Tax Agency.

Link

[Related laws and regulations, etc.]
Income tax law 48-2
Income tax law enforcement ordinance 119-2

Our comments:

This is a new item introduced in Version 3.

I have no particular comments as it is only a basic explanation of the moving average and total average method.

2-5 Submission of Crypto Asset Measurement Method

Question

I recently acquired my first crypto asset, but I heard that I need to elect a method for evaluating it.

Can you tell me the specific steps in submitting an election?

Answer

In order to file your income tax return, it is necessary to submit a “Notice of Method of Evaluation of Crypto Asset for Income Tax” to the head of the tax office in the area where you are a taxpayer by the deadline for submitting your income tax return (generally March 15 of the following year) after you first acquired your crypto asset.

As stated in “2-4 Cost Basis of Crypto Asset,” the evaluation value of the crypto asset you own at the end of the year (December 31) is calculated using either the “Total Average Method” or the “Moving Average Method” as the basic calculation for determining the transfer price of crypto asset such as selling it.

These evaluation methods are selected for each type of crypto asset (name) and if you
(1) acquire a crypto asset for the first time or
(2) acquire a different type of crypto asset, you must submit a notice (Notice of Method of Evaluation of Crypto Asset for Income Tax) that includes the selected evaluation method and other necessary information to the head of the tax office in the area where you are a taxpayer by the deadline for submitting your income tax return (generally March 15 of the following year).

(Note)
(1) This treatment was implemented as a result of revisions to the Income Tax Law, etc. in 2019.

(2) If the Notice of Method of Evaluation is not submitted, the default evaluation method will be “Total Average Method”.

(3) An example of the Notice of Method of Evaluation of Crypto Asset for Income Tax is provided on the next page.

[Related Laws and Regulations]
Income tax law 48-2
Enforcement order of the income tax law 119-2, 119-3, 119-5
Cabinet order amending part of the enforcement order of the income tax law (No. 95 of 2019) Article 4

This form can be downloaded from the National Tax Agency’s website.

If you have multiple types of crypto asset and are unable to list them all in the “1 Evaluation Method” section of the form, please list the relevant items on a separate sheet and submit it along with the form.

Our comments:

This was a new item that was introduced in Version 3.

There was a significant change that was made in Version 3.

The general method to be taken when calculating acquisition cost was changed.

Until Version 2, the general method was moving average (total average method was permitted under the condition that it was continuously applied).

In Version 3, the general method was changed to total average method and moving average was made the exception.

In order to use the moving average method, one will now need to submit a declaration to the tax authorities.

This change was made regardless of the tax authorities previously claiming that the moving average method was “the appropriate method”.

As we have shared in our previous articles, the moving average method tends to be beneficial to the tax-payer, due to the rounding effect when calculating the cost basis.

Furthermore, the moving average method, in which the most recent prices are more likely to be reflected in the cost, is superior to the total average method from the perspective of accurate cost calculation.

This is a clear example of how policy is prioritized over accurate representation of transactions or theoretical arguments.

Whether or not it would be better to submit and elect using the moving average method would depend on various factors, and careful consideration should be given.
The fact that the cost basis calculation method election can be made on a coin by coin basis is noteworthy (i.e. choose total average method for bitcoin and moving average method for Doge).

2-6 When Changing the Method of Crypto Asset Measurement

Question

I submitted a “Notice of Method of Evaluation of Crypto Asset for Income Tax” electing the total average method as the evaluation method for crypto asset, but I am now considering changing the evaluation method to the moving average method.

Can you tell me the specific procedures for this change?

Answer

In order to change the evaluation method, it is necessary to submit an application for change of evaluation method (Notice of Method of Evaluation of Crypto Asset for Income Tax) to the head of the local tax office in the jurisdiction of the taxpayer, by March 15 of the year in which you wish to change the evaluation method, and to receive the approval of the change.

As mentioned in “2-5 Submission of Crypto Asset Measurement Method” submitting a “Notice of Method of Evaluation of Crypto Asset for Income Tax” is required in order to select either “total average method” or “moving average method” as the evaluation method for the evaluation of crypto asset held at the end of the year (December 31), which forms the basis for calculating the transfer price relating to the sale, etc. of crypto assets.

If you want to change this elected evaluation method (including the case where the evaluation method was “total average method” for those who did not notify the evaluation method), you need to submit an application letter (Notice of Change of Evaluation Method for Crypto Asset for Income Tax) to the head of the tax office in charge of the tax return location, by March 15 of the year you want to change, containing the designated matters, including the evaluation method you want to change.

Note:

1. If no notice of approval or rejection is received by December 31 of the year in which the application is submitted, the change will be deemed to have been approved.
2. If the change is made within a period of 3 years from the adoption of the previous evaluation method, or if the proposed evaluation method makes it difficult to calculate the income amount appropriately, the application may be rejected.
3. An example of the application for change of evaluation method can be found on the next page.

[Related Laws and Regulations]
Income tax law 48-2
Enforcement order of the income tax law 101, 119-2, 119-4
Income tax basic disclosure 47-16-2、48-2-3

This form can be downloaded from the National Tax Agency’s website.

If you are making changes to multiple types of crypto asset and are unable to list them all in the “1 Evaluation Method” section of the form, please list the relevant items on a separate sheet and submit it along with the form.

Our comments:

Until Version 2, the calculation method for the acquisition price was left to the judgment of the taxpayer.

However, from Version 3, the taxpayer will need to obtain approval in order to change the calculation method for the acquisition price.

Below are my comments carried over from Version 1.

In the FAQ, both the moving average method and the total average method (with the condition of continuous application) are permitted, and the moving average method is considered “appropriate”. (In Version 1 and 2, the authorities had stated that the moving average method was the “appropriate” method. Regardless, in Version 3, they changed the default method to total average method, even though it is an inferior method in terms of accuracy compared to moving average method.)

However, there are other methods of calculating cost that are considered appropriate besides the moving average method and the total average method.

The first-in, first-out method and the individual cost method are examples.

In the United States, the first-in, first-out method is the basis for calculating the acquisition cost of cryptocurrency.

The individual cost method is also permitted under the condition that transaction records are properly maintained and the cryptocurrency itself that was the subject to the transaction can be uniquely identified.

Cryptocurrencies using the UTXO (Unspent Transaction Output) model, such as Bitcoin, allow individual identification of the cryptocurrency that was the subject of the transaction. (Ethereum is account-based and does not have UTXO, so it is not possible to individually identify the ETH that was the subject of the transaction)

Since the assets that were the subject of the transaction can be individually identified, it should be said that the individual cost method most accurately represents the cost and is most appropriate as the cost calculation method.

bitcoin is an asset with completely new properties that have never existed before.

Instead of simply applying the framework for existing assets, it is better to discuss how to faithfully represent the actual substance of the transaction.

The other point of interest is the section where it says “fractions of less than 1 yen that occur in the acquisition cost calculation may be rounded up”

If the cost increases, the gain will be calculated less, so the conclusion is that rounding up the fraction is advantageous.

Whether the moving average or the total average is advantageous is case-by-case.

Except in cases where the result is clear, it seems best to adopt the moving average method, considering the benefits of fraction rounding.

2-7 When the Purchase Price or Sale Price of the Crypto Asset is Unknown

Question

I have traded crypto asset this year, but I have not kept a record of the transactions, so I do not know the acquisition cost or sale price of the crypto asset.

Is there a way to check these prices?

Answer

You can confirm the acquisition cost and sale price of crypto asset transactions according to the following categories:

1 Crypto asset transactions through domestic crypto asset exchanges

For crypto asset transactions after January 1, 2018, the National Tax Agency requests that crypto asset exchanges provide an “Annual Trading Report” containing the following information to individual taxpayers.

• Annual Purchase Quantity: The quantity of crypto asset purchased during the year
• Annual Purchase Amount: The amount of money spent on purchasing crypto asset during the year (acquisition cost)
• Annual Sale Quantity: The quantity of crypto asset sold during the year
• Annual Sale Amount: The amount of money received from selling crypto asset during the year

If you do not have an Annual Trading Report, please request a new one from the crypto asset exchange.

(Note) For transactions before 2018, an Annual Trading Report may not have been provided. In that case, please refer to the following category 2 to confirm the acquisition cost and sale price of crypto asset yourself.

2 Crypto asset transactions other than those in category 1 (transactions through foreign crypto asset exchanges, transactions between individuals)

To confirm the acquisition cost and sale price of individual cryptocurrencies, you can use the following methods, for example:

• Confirm the acquisition cost and sale price of crypto asset by checking the withdrawal status of the bank account used to purchase crypto asset and the deposit status of the bank account used to sell crypto asset.
• Confirm the acquisition cost and sale price of crypto asset by using the transaction history of crypto asset transactions and the transaction market published by the crypto asset exchange (Note).

(Note) In the case of transactions between individuals, use the transaction market of the crypto asset exchange that you mainly use.

If the correct amount is found after submitting the final tax return, please correct the content of the final tax return (request for a revision or correction).

In addition, it is permitted to consider the acquisition cost of the crypto asset sold as 5% of the selling price.

For example, if a crypto asset is sold for 5 million yen, the acquisition cost of that crypto asset can be deemed as 250,000 yen, which is 5% of the selling price.

[Related laws and regulations, etc.]
Income tax basic disclosure 48-2-4

Our comments:

This was a new item introduced in Version 2.

In Version 3, the 5% rule, which states that if the acquisition cost of cryptocurrency is unknown, it may be deemed as 5% of the selling price.

2-8 Calculation of Taxable Income using the Annual Transaction Report

Question

Crypto Asset exchange A and B sent the following annual transaction reports.

Please teach me how to calculate the amount of income from crypto asset using these annual transaction reports.

Answer

By inputting the red and blue portions of the annual transaction report into the “Calculation Sheet for Crypto Asset (using the total average cost method)” published on the National Tax Agency homepage, you can easily calculate the amount of income.

Link

In the above case, the amount of income from crypto asset is 2,189,000 yen.

Please refer to the next page for an example of calculating the “Calculation Sheet for Crypto Asset (using the total average cost method)”.

[Related laws and regulations, etc.]
–

Our comments:

This was a new item introduced in Version 2.

I have no particular comments.

2-9 Contents of the Annual Transaction Report

Question

An annual transaction report was sent from a crypto asset exchange, but what is recorded in this annual transaction report?

Answer

1. Beginning quantity for the year: The quantity of crypto asset holdings as of January 1 of that year
2. Purchased quantity during the year: The quantity of crypto asset purchases made during the year
3. Purchased amount during the year: The amount of money spent on crypto asset purchases during the year (acquisition cost)
4. Sold quantity during the year: The quantity of crypto asset sales made during the year
5. Sold amount during the year: The amount of money received from crypto asset sales during the year
6. Transfer-in quantity: The quantity of crypto asset received in the account other than purchases made during the year
7. Transfer-out quantity: The quantity of crypto asset paid out from the account other than sales made during the year
8. End-of-year quantity: The quantity of crypto asset holdings as of December 31 of that year
9. Total profit or loss: The total amount of profit or loss from crypto asset margin trading for the year
10. Transaction fee: The amount of transaction fees paid to the crypto asset exchange during the yea

* In cases where crypto asset sales, purchases, etc. are made using a foreign currency, the amount converted into yen based on the TTM of the telegraphic trading market at the time of the transaction is the basis for each item.

In the case of the following transactions, the contents of each column are as follows:

(1) In the case of receiving crypto asset from a crypto asset exchange for free
“Sold quantity during the year”: –
“Sold amount during the year”: The value (market value) of the crypto asset received
“Purchased quantity during the year”: The number of crypto asset received
“Purchased amount during the year”: The value (market value) of the crypto asset received”

(2) When settling with crypto asset

• If you converted the crypto asset to fiat currency and made the payment through a crypto asset exchange:
  “Annual Sale Quantity”: The quantity of crypto asset that was converted to fiat currency
  “Annual Sale Amount”: The value (market value) of the crypto asset that was converted to fiat currency
• If you made the payment directly with the crypto asset:
  “Transfer Out Quantity”: The quantity of crypto asset used for the payment

(3) If you exchanged crypto asset A for crypto asset B through a crypto asset exchange:
A crypto asset’s “Annual Sale Quantity”: The quantity of crypto asset A that was exchanged
A crypto asset’s “Annual Sale Amount”: The value (market value) of the crypto asset B that was obtained
B crypto asset’s “Annual Purchase Quantity”: The quantity of crypto asset B that was obtained
B crypto asset’s “Annual Purchase Amount”: The value (market value) of the crypto asset B that was obtained

Please note that the format of the annual trading report may vary depending on the crypto asset exchange.

[Related laws and regulations, etc.]
–

Our comments:

This is a new item introduced in Version 2.

I have no particular comments on this item.

2-10 ​​When Transferring Crypto Asset at Below Market Value (Zero Value)

Question

As in the following example, I sold crypto asset at the same price as the acquisition price, so there is no profit from the sale, but the sales amount was lower compared to the market price (market value) at that time.

Is it necessary to file a tax return even though there is no income other than the income from this sale?

(Example)

• I bought 1 BTC for 450,000 yen on April 9.
• I sold 1 BTC for 450,000 yen on May 20.

The exchange rate at the time of sale was 1 BTC = 1,000,000 yen.

(Note) Transaction fees for buying and selling crypto asset are not taken into account in the above example.

Answer

In the above example, for the calculation of miscellaneous income, the total income amount is calculated as 700,000 yen (equivalent to 70% of the market value), so it is necessary to report an income amount of 250,000 yen.

After April 1, 2019, when an individual transfers crypto asset to another individual or corporation by means of a transfer (Note 1) in consideration of a value that is significantly lower than the market value, it is necessary to include a portion of the difference between such value and the market value of such crypto asset that is considered a gift in essence (Note 2), at the time of such transfer in the total income amount for miscellaneous income, etc. (Note 3)

(Note)
1 “Transfer by means of a value that is significantly lower than the market value” refers to selling for less than 70% of the market value.

2 The amount “considered as a gift in essence” means the amount after subtracting the consideration amount from the equivalent of 70% of the market value.

3 In case an individual who acquired a crypto asset transfers it, the acquisition price of the crypto asset that serves as the basis of the calculation will be the total of the consideration and the amount considered as a gift, which is the difference between the price of the crypto asset at the time of acquisition and the amount of the consideration.

4 This applies to income tax from 2019 onwards.

In the above (example), the amount to be included in the total income is 840,000 yen because it meets the criteria of a low-value transfer.

(Calculation)
Determination of whether or not it falls under low-value transfer
(1) Sales price: 450,000 yen
(2) Amount equivalent to 70% of market value: 1,000,000 yen x 70% = 700,000 yen
(3) Because (1) < (2), the sales price is less than the amount equivalent to 70% of the market value, the transaction is deemed a low-value transfer.

Total Income Calculation
When a transaction is deemed a low-value transfer, the total income must include the actual sales price and the difference between the actual sales price and the amount equivalent to 70% of the market value.

450,000 yen [Actual sales price] + (700,000 yen – 450,000 yen) [Difference between actual sales price and the amount equivalent to 70% of the market value] = 700,000 yen [Total income]

Taxable Income Calculation
700,000 yen [Total income] – 450,000 yen [Transfer cost] = 250,000 yen [Taxable Income]

Also, on and after April 1, 2019, if crypto asset is transferred to other individuals or corporations through gifts (excluding death-related gifts) or inheritance (excluding specific inheritance for inheritors), the value (market value) of the crypto asset at the time of the gift or inheritance must be included in the total income for miscellaneous income, etc.

(Note)
1 If an individual acquires a crypto asset and transfers them, the acquisition cost of the crypto asset will be the value of the cryptocurrency asset at the time of gift or inheritance.

2 This applies to income tax from 2019 onwards.

3 If an individual acquires a crypto asset through inheritance, gift, or donation, they will be subject to inheritance tax or gift tax.

Please see “4-1 When Crypto Asset is Acquired Through Inheritance or Gift” for more information.

[Related Laws and Regulations]
Income tax law 40
Enforcement order of the income tax law 87
Income tax basic disclosure 40-2, 40-3

Our comments:

This was a new item that was added in Version 3.

We have no particular comments.

2-11 Treatment of Losses from Crypto Asset Transactions

Question

I incurred a loss in the amount of miscellaneous income through crypto asset trading.

Can this loss be used to offset other income such as salary income?

Answer

A loss incurred in the calculation of miscellaneous income cannot be used to offset other income.

Under the Income Tax Act, income that can be used to offset other income includes real estate income, business income, mountain forest income, and transfer income.

Since miscellaneous income does not fall under these categories of income, a loss incurred in the calculation of miscellaneous income cannot be netted with other income, even if there is such a loss.

[Related laws and regulations, etc.]
Income tax law 69

Our comments:

No significant changes from Versions 1,2,3,4.

While losses cannot from miscellaneous income can’t be used to offset income from other income categories, that changes if the income is classified as other than miscellaneous, such as business income or transfer income.

2-12 Crypto Asset Margin Trading

Question

Will crypto asset margin trading be subject to the separate taxation system for declaration, similar to foreign exchange margin trading (commonly known as FX)?

Answer

Income from margin trading of crypto asset is not subject to the separate reporting taxation (special taxation of miscellaneous income related to futures trading) specified in the Special Taxation Measures Act, so it will be subject to comprehensive taxation and must be reported.

Foreign exchange margin trading (so-called FX) falls under financial product futures trading under the Financial Instruments and Exchange Law, so it is subject to separate reporting taxation.

Though margin trading of crypto asset is considered futures trading of financial instruments etc. as does FX, it is excluded from separate reporting taxation under the Special Measures Act, and therefore, income from such transactions will be reported under comprehensive taxation.

[Related laws and regulations, etc.]
Income tax law 35
Special Tax Measures Act 41-14

Our comments:

The content is pretty much the same as Version 1,2,3.

The amendment to the Financial Instruments and Exchange Law has resulted in crypto asset derivatives falling under the purview of the law.

Previously, crypto exchanges only needed to register with the Financial Services Agency as required by the Payment Services Act, but now, registration as a Type 1 Financial Instruments Business Operator is necessary to provide services such as crypto margin trading and FX.

The comment below has been carried over from my commentary for Version 1,2,3.

I am personally opposed to special tax treatments in general.

Lowering the tax rate is never a bad thing, but tax exemptions that favor only a certain group of people are not fair.

2-13 Crypto Asset Margin Trading (2)

Question

Please tell me the method of calculating the amount of income in the case of the following crypto asset transactions based on credit.

(Example)
・ Went short 1BTC for 1,000,000 yen on September 1.
・ Went long 1BTC for 800,000 yen on September 24.

(Note) In the above transactions, fees for buying and selling crypto asset are not considered.

Answer

In the above example, the income amount is calculated as follows:

(Formula)
1,000,000 yen [selling price] – 800,000 yen (Note 1) [buying price] = 200,000 yen (Note 2)

(Note)
1 The transfer cost is the amount calculated by the specific identification method.
2 If there are other necessary expenses, the amount after deducting such expenses.

A crypto asset credit transaction is a buying and selling of crypto asset that is conducted based on credit from a crypto asset exchange operator.

In this method of crypto asset credit trading, when buying and selling crypto asset and then settling by buying and selling the same type of crypto asset, the income amount is the difference between the normal amount of consideration to be received by the transfer of crypto asset (selling price) (Note 1) and the consideration amount of the crypto asset at the time of buying (buying price) (Note 2).

In addition, income from crypto asset credit transactions is considered income for the year in which the transaction is settled.

(Note)
1 When a seller conducts a sale, the interest received from the crypto asset exchange operator is included in the sale price, and the so-called commodity loan fee paid to the crypto asset exchange operator is deducted from the sale price.

2 When a buyer conducts a purchase, the interest paid to the crypto asset exchange operator is included in the purchase price, and the so-called commodity loan fee received from the crypto asset exchange operator is deducted from the purchase price.

[Related Laws and Regulations]
Enforcement order of the income tax law 119-7
Income tax basic disclosure 36・37, Article 22

Our comments:

This was a new item that was added in Version 3.

We have no particular comments.

3 Corporate Tax

3-1 Crypto Asset Related

3-1-1 When to Recognize Profit From Transferring Crypto Asset

Question

When selling crypto asset, buying goods with crypto asset, or exchanging crypto asset, which fiscal year should the resulting transfer gains or losses be recorded in?

Answer

The transfer gains or losses resulting from selling, buying, or exchanging crypto asset should be recorded in the fiscal year in which the contract for the sale, purchase, or exchange of crypto asset was made (i.e., the date of the agreement).

For transactions involving the sale of crypto asset (1-1 Sales of Crypto Asset), the purchase of goods with crypto asset (1-2 Purchase of Goods with Crypto Asset), or the exchange of crypto asset (1-3 Crypto-to-crypto Trades), as they are all considered a transfer of crypto asset, the transfer gains or losses related to these transactions should be recorded in the fiscal year in which the agreement for the transfer was made (i.e., the date of the agreement).

[Related Laws and Regulations]
Corporate tax law 61

Our comments:

This was a new item that was added in Version 3.

The transfer loss and gain of cryptocurrency is stated as being recorded in the fiscal year of the contract date of the sale, etc.

However, in practice, the timing of the transfer of cryptocurrency and the contract date may be different.

If the transfer of cryptocurrency has not taken place and the payment has not been collected by the end of the fiscal year, it is expected to cause operational problems with only taxes being incurred.

Accounting should not only focus on the contract date, but also take into account the rights and obligations of the parties to the contract, and handle the transaction in a way that reflects the substance of the transaction.

The income recognition of transfer loss and gain of securities are also generally based on the contract date under tax law, but basing it off of delivery date is also allowed as an exception.

In our view, accounting and tax treatment that take into account the actual state of the transaction should be permitted.

3-1-2 Cost Basis of Transferred Crypto Asset

Question

Can you tell me about the transfer cost of crypto asset?

Answer

The transfer cost of crypto asset is calculated as follows:

Transfer cost = Book value per unit of crypto asset x Quantity of crypto asset transferred

The profit (loss) from the transfer of crypto asset is the difference between the consideration that is normally received for the transfer of that crypto asset and the transfer cost of that crypto asset.

This transfer cost is the amount obtained by multiplying the book value per unit of crypto asset (note) by the quantity of crypto asset transferred.

(Note) The calculation of the book value per unit is done by using either the moving average method or the total average method (the statutory evaluation method is the moving average method. If you use the overall average method, please notify the head of the local tax office, etc.).

This calculation method election is made for each crypto asset.

(Related laws and regulations)
Corporate tax law 61
Enforcement order of the corporate tax law 118-6

Our comments:

This was a new item that was added in Version 3.

In the case of personal income tax, the principle method of calculating the acquisition cost has changed from previously being the moving average method to the total average method in Version 3, as seen in Question 2-5.

For entities, the principle method is the moving average method, and the total average method is the exception that is permitted after submitting an application to the tax office.

At the present time, it is not known why the principle calculation methods are different for individuals and entities.

To read about our views on why moving average is preferable, please refer to comments on Questions 2-5 and 2-6.

3-1-3 Mark-to-market of Crypto Asset at Year-end

Question

Our company held crypto asset at year end.

Is there any tax treatment that is required at year end?

Answer

An entity must measure its crypto asset (those that are actively traded on a market(Note 1), referred to as “market crypto asset” in this question and excludes Specific Self-issued Crypto Assets (Note 2)) at the end of its fiscal year using the fair value method.

If the corporation holds market crypto assets on its own balance sheet, the difference between the fair value and the book value (referred to as the “mark-to-market gain or loss” in this question) must be included in the amount of profit or loss for that fiscal year.

The mark-to-market gain or loss will be reversed in the following fiscal year.

The fair value is calculated by multiplying the quantity of the market crypto asset by one of the following:

1. The final trading price of the market crypto asset as published by a price publisher on the last day of the fiscal year (if no such price is published on that day, the last trading price published before that day closest to the last day of the fiscal year)
2. The final exchange rate of the market crypto asset as published by a price publisher on the last day of the fiscal year multiplied by the final trading price of the other market crypto asset exchanged at that rate (if no such exchange rate is published on that day, the last exchange rate published before that day closest to the last day of the fiscal year)

(Note 1) A crypto asset with an active market is defined as the crypto asset that an entity holds that meets all of the following criteria:

1 The selling price and other information (*) is continuously published and has a significant impact on the determination of the selling price or exchange ratio of that crypto asset.
(*) Selling price and other information refers to the selling price or exchange ratio with other cryptocurrencies

2 There is a sufficient amount and frequency of transactions for the continuous publication of the selling price and other information mentioned in 1.

3 Meets one of the following requirements:

(a) The publication of the selling price and other information mentioned in 1 is done by the entity.

(b) The transactions mentioned in 2 are primarily not conducted by the entity on its own account.

(Note 2)
A “Specific Self-issued Crypto Asset” refers to a certain crypto asset issued by an entity and continuously held by that entity from the time of issuance, with certain restrictions or conditions on its transfer that have been in place continuously since that time.

The term “certain crypto assets” refers to crypto assets that continuously meet either of the following requirements (a or b):

a.There are technical measures in place to prevent the transfer of the crypto asset to others, meeting all of the following criteria:

1. A period during which the transfer is not allowed has been specified
2. The technical measures cannot be lifted only by certain individuals of the issuing entity (including those in a wholly controlling relationship with the entity), such as officers, employees, or others.

b.The crypto asset is held as trust property under a trust that meets all of the following requirements (limited to trusts subject to beneficiary taxation):

1. The trustee of the trust is solely a trust company, and the beneficiaries, etc., of the trust are only the entity that issued the crypto asset.
2. The trust contract specifies that the trustee will not transfer the assets and liabilities that belong to the trust property to anyone other than the trustee or the beneficiaries, etc.
3. The trust contract stipulates that the entity that issued the crypto asset cannot transfer the beneficiary rights of the trust or change the beneficiaries, etc., of the trust.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7, 118-8, 118-9
Corporate tax law implementation regulations 26-10

For Reference

In the Outline of Tax Revisions for Fiscal Year 2024 (approved by the Cabinet on December 22, 2023), the evaluation methods for crypto assets have been revised as follows. Details will be clarified later through laws and regulations.

Key Revisions:

For crypto assets held by entities that qualify as market crypto assets and have restrictions or other conditions on their transfer, the year-end valuation will be calculated based on one of the following evaluation methods chosen by the entity. (For self-issued crypto assets that have been continuously held since issuance, the valuation will be calculated using the method 1 below.) Additionally, necessary measures will be required.

1. Cost Method
2. Fair Value Method

Note 1: The “crypto assets with restrictions on transfer and other conditions” mentioned above refer to crypto assets that meet the following requirements:

1. There are technical measures in place to prevent the transfer to others, or certain restrictions on the transfer of the crypto asset are in place.
2. To have the restriction in item 1 above disclosed by the Japan Virtual and Crypto assets Exchange Association, the holder of the crypto asset, etc., must notify the crypto asset exchange operator that the restriction in item 1 is in place.

Note 2: The evaluation method above must be chosen for each type of crypto asset with restrictions on transfer and other conditions, and the choice must be reported to the director of the tax office having jurisdiction over the taxpayer’s location by the due date for filing the final tax return for the business year in which the crypto asset was acquired.
If no evaluation method is selected, the valuation amount for the crypto asset at year-end will be calculated using the cost method (evaluation method in item 1 above).

Our comments:

This was a new item that was added in Version 3.

A significant rule has been clarified that unrealized gains and losses on cryptocurrency held by entities will be subject to taxation.

The impact of this is huge.

For income tax on individuals, there is no taxation on unrealized gains (losses).

However, for corporate tax purposes, unrealized gains (losses) for cryptocurrencies are considered taxable, creating a significant gap in tax treatment between the two.

Unrealized gains (losses) have no cash backing, as they are not realized.

It will be difficult to make a convincing argument on why unrealized gains should be taxed.

Yes, I understand that the tax treatment is consistent with that for securities held for trading purposes.

But cryptocurrencies are not just held for trading purposes only.

Taxation on unrealized gains (losses), without considering the purpose of the asset, creates significant issues in two ways:

First, it hinders the business activities of businesses.

Businesses hold cryptocurrencies for various reasons.

One reason is to protect excess cash from inflation policies implemented by the government and central banks, and to preserve the financial strength of its balance sheet.

Another reason why corporations hold crypto assets is that it may be necessary for their business activities.

There are various situations, I’ll share a situation about a business that provides services using smart contracts as an example:

Smart contracts are programs executed on the blockchain.

Typically, cryptocurrencies are required to execute these programs.

Businesses that provide services using smart contracts need to execute the program on a daily basis, and therefore need to hold cryptocurrencies.

Businesses that hold cryptocurrencies for business reasons must hedge against the tax exposure that arise from mark-to-market taxation.

This can be done through purchasing derivative contracts, but it also increases costs, administrative burdens, and introduces additional counterparty risks.

The second significant issue is that it significantly reduces the efficiency of funds.

Profits should be reinvested to generate compound interest, but taxing unrealized gains greatly reduces the efficiency of funds.

It is generally considered to be not fair tax treatment to favor a certain entity structure over another, and creating that regulatory arbitrage may lead to distorted management decisions and unintended consequences.

Improving the efficiency of funds is crucial for economic growth, and as a result, it also increases tax revenues.

Taxing unrealized gains (and losses) is problematic from this point of view.

In Version 8, a new concept is introduced as reference information: “crypto assets with restrictions on transfer and other conditions”.

For “crypto assets with restrictions on transfer and other conditions”, the cost method can be applied.

The requirements include not being able to transfer the relevant crypto assets for at least one year and notifying the crypto asset exchange operator.

Methods for imposing transfer restrictions, such as technical lock-ups or multi-signature (multi-sig), are mentioned.

However, it is important to be cautious, as all of these methods could unnecessarily increase risks such as loss of assets due to bugs or errors.

One could also question the logical reason as to why the reporting to the crypto asset exchange operator is even necessary to begin with.

For securities, accounting and tax treatment is conducted according to purpose and intent and there is no requirement for lock-ups or notifications to brokerages.

It seems unreasonable and inconsistent to require lock-ups and notifications to exchange operators for crypto assets.

3-1-4 Crypto Assets That Trade In An Active Market

Question

What is considered a crypto asset with an active market for the purpose of mark-to-market measurement at year end?

Answer

A crypto asset with an active market refers to a crypto asset that is owned by an entity and meets all of the following criteria.

1. The trading price and other information (note) are continuously published, and they have a significant impact on determining the trading price or exchange ratio of the crypto asset.

Note: trading price and other information refers to the price of trading or the exchange ratio with other crypto assets.

2. Sufficient quantity and frequency of transactions are continuously carried out for the publication of the trading price and other information in 1.

3. Meets one of the following requirements:

A. The publication of trading price and other information in 1 is done by someone other than the entity.

B. The transactions in 2 are mainly those that were not carried out by the entity on its own account.

Whether a certain crypto asset trades in an active market depends on the type of crypto asset held, its past trading history, and the situation of the crypto asset exchange or sales platform on which it is traded.

This judgment must be made based on the actual condition of each crypto asset.

For example, if there is a significant difference in purchase and sale prices that can be obtained within a reasonable range among crypto asset exchanges or sales platforms, or if the price difference desired by the seller and buyer is significantly large, it is usually judged that the market is not active from the perspective of 1 and 2.

Also, the above third criteria is established in order to exclude such prices from the scope of fair market value from the perspective of corporation tax, because such prices, if they are created and manipulated by the person who publishes the purchase and sale prices etc. based on the transactions conducted mainly by himself/herself, can result in profit adjustments.

Therefore, in the case of a crypto asset exchange operator, if there are purchase and sale prices etc. other than those of the crypto asset exchange or sales platform operated by the operator for a certain crypto asset, that crypto asset will fall under the third criteria mentioned above.

Also, even if purchase and sale prices etc. of a certain crypto asset are published only on the crypto asset exchange or sales platform operated by the operator, if those prices are mainly based on transactions conducted by others (via intermediaries or agency), that crypto asset will fall under the third criteria mentioned above.

Even if the crypto asset trades in an active market, specific self-issued crypto assets are not subject to mark-to-market measurement at year end.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

Our comments:

Most crypto assets have low trading volume and do not have enough liquidity to be considered an active market from a traditional sense.

The trades that can be seen flickering on an exchange’s trading screen are mostly those that are placed but service providers called LPs (Liquidity Providers) or MMs (Market Makers).

If one tries to sell a large amount of coins that the market has no appetite for, the LP or MM will pull their orders, resulting in significant slippage, which will be a loss for the seller.

Among cryptocurrencies, BTC is the most liquid by far and arguably the only one that can be considered to have an active market.

But even with bitcoin, the Japanese market can only handle a few billion yen within a 2% spread.

In our view, it is reasonable to reflect an appropriate liquidity discount (DLOL) when performing mark-to-market adjustments at the end of the period.

3-1-5 Crypto Assets That Are Traded on DEXs

Question

Crypto asset A (we are not the issuer of this asset) owned by our company is listed on a DEX (decentralized exchange).

On this DEX, the exchange ratio between the crypto asset A and market crypto asset B is made clear by an automatic market maker, and based on this clear exchange ratio, trades of the exchange between the crypto asset A and the market crypto asset B are conducted at any time.

In this case, will the crypto asset A be the subject of mark-to-market at year end under corporate tax law?

Answer

If crypto asset A is a crypto asset that trends in an active market, it will be subject to mark-to-market at the end of the period.

Under corporate tax law, a crypto asset with an active market refers to a crypto asset that is owned by an entity and meets all of the following criteria.

1. The trading price and other information (Note) are continuously published, and they have a significant impact on determining the trading price or exchange ratio of the crypto asset.

Note: trading price and other information refers to the price of trading or the exchange ratio with other crypto assets.

2. Sufficient quantity and frequency of transactions are continuously carried out for the publication of the trading price and other information in 1.

3. Meets one of the following requirements:

A. The publication of trading price and other information in 1 is done by someone other than the entity.

B. The transactions in 2 are mainly those that were not carried out by the entity on its own account.

DEX, or decentralized exchange, is generally understood to be a trading platform without a central administrator.

The concept of a market is generally understood to include trading systems where buying and selling and exchanging can be done at any time.

In this case, the DEX in question has an exchange ratio for crypto assets that is made clear by an automatic market maker, and based on this clear exchange ratio, trades for the exchange of crypto assets are conducted at any time.

Therefore, this DEX can be considered within the scope of the market.

As such, as long as there are no special circumstances such as the exchange ratio published on this DEX being significantly different from that of other crypto asset exchanges, and as long as crypto asset exchange trades are continuously being settled on this DEX, the crypto assets traded on this DEX will be subject to mark-to-market at the end of the period as long as they meet the criteria 1-3 above.

Typically, in this case, the fair market value will be calculated by taking the final exchange ratio at the end of the fiscal year published by this DEX and multiplying it by the final trading price at the end of the fiscal year for the other crypto asset with an active market that is being exchanged at that exchange ratio.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7, 118-8

Our comments:

Same comments as that for FAQ3-1-4.

The liquidity of crypto assets that only trade on DEXs is usually very low.

In such cases there could be a significant deviation from the spot price that is displayed and the price at which a trade is actually settled.

The pricing mechanism used by most DEXs is called AMMs (Automatic Market Maker).

Due to the mechanism of AMMs, spreads will widen as the size of the trade gets larger.

Also, blockchain transactions are constantly being monitored by third parties and large transactions will be subject to front-running and will likely settle at unfavorable prices.

This is commonly known as a “sandwich attack” and is a type of MEV (Miner Extractable Value).

The same thing occurs in traditional finance due to high frequency traders, but in terms of the ratio of siphoned profits to transaction amount, the impact is significantly greater for DEX transactions.

When making mark-to-market adjustments at the end of the period based on DEX price information, it is reasonable to reflect not only liquidity discounts (DLOL) but also costs such as MEV.

3-1-6 Mark-to-Market of Crypto Assets that are Locked for Staking

Question

The company owns cryptocurrency A (we did not issue this cryptocurrency), which is currently locked-up (a mechanism that prevents the transfer of cryptocurrency to a different party) in order to obtain rewards through staking.

Under this lockup, the company is unable to transfer the cryptocurrency A until specified conditions are met.

In this case, will the locked up cryptocurrency A be subject to mark-to-market at year-end for corporate tax purposes and is it necessary to include the mark-to-market gain or loss in the amount of profit or loss?

Cryptocurrency A is listed on a cryptocurrency exchange, with sufficient quantity and frequency of trades, and the trading price is continuously published.

The company is not the operator of the exchange.

Answer

The crypto asset will be subject to mark-to-market at year-end under corporate tax law and the difference between the fair value and the book value of the crypto asset should be recorded as profit or loss at the end of the fiscal year.

When an entity holds a crypto asset (excluding specific self-issued crypto assets) that has an active market, it should evaluate the asset using the fair value method and record the difference between the fair value and the book value as the profit or loss of the fiscal year.

In this case, the crypto asset in question is subject to lock-up, meaning it can not be transferred during the lock-up period, however, it is possible to earn staking rewards during that period.

Also, the company bears the risk of future price fluctuations of the crypto asset, it is considered to have the crypto asset in its own account.

In addition, in this case, the crypto asset A meets the specified criteria such as being continuously traded on an exchange with prices being published, it is considered to be a crypto asset with an active market.

Therefore, the company should evaluate the crypto asset A using the fair value method at the end of the fiscal year and record the difference between the fair value and the book value as the profit or loss of that fiscal year.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

Our comments:

The conclusion that the crypto asset in question is subject to mark-to-market is predicated on the fact that there is an active market for the asset.

This is probably not a conclusion that most people currently staking cryptocurrencies will instinctively arrive at.

The reason is because it ignores the purpose or intent of holding the asset in the first place.

Let’s look at Ethereum as an example.

Ethereum previously used the PoW (Proof of Work) consensus mechanism like Bitcoin, where miners generated blocks.

However, in 2022, Ethereum transitioned to Proof of Stake (PoS), where validators are responsible for block generation.

To become a validator, one must stake 32 ETH.

If a company staked 32 ETH to contribute to the Ethereum network, and at the end of the year, the price of ETH has gone up, the company will have to sell some of their ETH to pay taxes.

And as a result, they will no longer have 32 ETH and would be disqualified from being a validator.

For some assets, there are different tax treatments depending on the purpose or intent of holding the asset.

Stocks are an example of such assets.

Shares held for trading purposes are subject to mark-to-market taxation, while investment purpose shares and subsidiary shares are not, as they are held to exert influence on the investee company, not for short-term trading.

In our view, crypto assets should also be treated in a similar manner, considering the purpose of holding them, in order to ensure consistency with existing tax treatment and also to prevent unintended consequences of tax hindering business practices.

3-1-7 Mark-to-market of Crypto Assets that are Being Lent

Question

Our company has lent crypto A (we are not the issuer of this crypto), which we own to earn usage fees.

Regarding this crypto asset A, we are unable to transfer it until the lending period ends.

In this case, will crypto asset A that our company is lending be subject to mark-to-market under corporate tax law and will it be necessary to include the mark-to-market gain or loss in the amount of profit or loss?

Crypto asset A is listed on a cryptocurrency exchange, with sufficient quantity and frequency of trading and continuous disclosure of trading prices.

Additionally, our company does not operate that cryptocurrency exchange.

Answer

The crypto asset will be subject to mark-to-market at year-end under corporate tax law and the difference between the fair value and the book value of the crypto asset should be recorded as profit or loss at the end of the fiscal year.

When an entity holds crypto assets (excluding specific self-issued crypto assets) for which an active market exists at the end of the fiscal year, the amount evaluated by the fair value method shall be the fair value at that time, and the difference between the fair value and the book value shall be included in the amount of profit or loss for that fiscal year.

In this case, while the entity has lent the crypto asset it owns, it is able to earn usage fees during the lending period.

Furthermore, as the entity bears the risk of future price fluctuations of this asset, it can be considered that the entity has the asset in its own account.

In addition, in this case, crypto asset A meets the specified criteria such as continuously disclosed trading prices, etc.

Therefore, it is considered a crypto asset with an active market, and it is necessary for the entity to include the difference between the fair value evaluated by the fair value method and the book value at the end of the fiscal year as the amount of profit or loss for that fiscal year.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

Our comments:

Same comments as the other sections.

When lending crypto for long durations, it will be prudent to consider tax planning and hedging strategies to avoid any unintended tax exposure at year end.

3-1-8 Mark-to-Market of Borrowed Crypto Assets

Question

Our company borrows cryptocurrency A from parties other than cryptocurrency exchange operators and earns revenue by lending it out or using it in other ways during the borrowing period.

In this case, will cryptocurrency A that our company has borrowed be subject to mark-to-market under corporate tax law and will it be necessary to include the mark-to-market gain or loss in the amount of profit or loss?

Additionally, cryptocurrency A is listed on a cryptocurrency exchange, with sufficient quantity and frequency of trading and continuous disclosure of trading prices.

Furthermore, our company does not operate that cryptocurrency exchange and also does not trade in cryptocurrency A on that exchange.

Answer

Cryptocurrency borrowed by the company may be subject to mark-to-market under corporate tax law, but it is not necessary to include the difference between the fair value and the book value in the amount of profit or loss.

When a company holds cryptocurrency with and active market at the end of a fiscal year, the fair value assessed under fair value method should be the fair value at that time, and if the company holds the cryptocurrency in its own account, the difference between the fair value and the book value should be included in the amount of profit or loss for that fiscal year.

The concept of “hold” here is a broad one that encompasses those that do not become the subject of ownership, and considering the fact that the company borrowing the cryptocurrency has the power of disposition of the borrowed cryptocurrency, it may be considered that the company holds the cryptocurrency.

In this case, cryptocurrency A satisfies the specified criteria such as continuous disclosure of trading prices, etc., and is a cryptocurrency with an active market, and if it is considered that the company holds cryptocurrency A, the fair value assessed under fair value method should be the fair value at that time.

However, considering that the company does not bear the risk of future price fluctuations of the cryptocurrency A that requires return, in general, it can not be said that the company holds the cryptocurrency A in its own account, therefore, the difference between the fair value and the book value does not need to be included in the amount of profit or loss for that fiscal year.

For reference

If your company sells crypto assets borrowed from a third party, this will constitute a crypto asset transaction on margin. If those assets are not repurchased by the end of the fiscal year in which the sale took place, the profit or loss equivalent calculated as if the repurchase had been made at that time will have to be recorded in profit or loss for that fiscal year, pursuant to FAQ 3-11 Crypto Asset Margin Trading.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

Our comments:

The reference information is concerning.

When borrowing in crypto and then converting it to cas or other assets, exposure still remains regarding the borrowed crypto.

Let’s look at some journal entries as an example:

Assumption: Crypto value at the time of borrowing is 100, crypto value at year end is 150

If the crypto if converted to yen at the same time it is borrowed:

1 Journal entry at the time of borrowing:

Crypto 100 Liability 100

2 Journal entry at the time of converting to yen:

Cash 100 Crypto 100

3 If the crypto value at the end of the term increases, the following journal entry is needed to increase the amount of the borrowed crypto liability:

Mark-to-market loss 50 Liability 50

As per FAQ 3-1-7, the lender will make the opposite journal entry and the liability (of the debtor) and asset (of the creditor) reconcile.

4 Lender’s journal entry

Asset 50 Mark-to-market gain 50

However, according to the FAQ, if the crypto is not bought back by the end of the period, the profit or loss equivalent calculated as if it had been bought back must be recorded as gain or loss.

The exact journal entries that are required are not clear at this time, but a possible one would be as follows:

5 Journal entry assuming the crypto is bought back at the end of the period:

Crypto 150 Gain from assumed buyback 150

In journal entry 3, a mark-to-market loss of 50 was recorded, resulting in a net profit of 100.

Entry 5 will be reversed when the buyback is actually made in future periods, and recognized as an expense at that time.

6 Journal entry when actually buying back the crypto (assuming the value of the crypto has further increased to 200):

Gain from assumed buyback 150 Crypto 150
Crypto 200 Cash 200

7 Journal entry for repayment of the loan at the same time:

Mark-to-market loss 50 Liability 50
Liability 200 Crypto 200

In summary,

When there is no need to deem a repurchase, the effect on annual taxable income in Years 1 and 2 are as follows:

Year 1: 50 loss
Year 2: 50 loss
Total: 100 loss

In the case where there is deemed repurchase, the effect on annual taxable income for Years 1 and 2 are as follows:

Year 1: 100 gain
Year 2: 200 loss
Total: 100 loss
The former is in line with the tax treatment of the lender.

For the second one where there is a deemed repurchase, the asset of the creditor and liability of the debtor will not reconcile, indicating an inconsistency in treatment for the lender and borrower.

The purpose of the requirement for deemed repurchase is unknown at this time.

Considering the inconsistency in the tax treatment of the lender and the borrower and the additional administrative procedures that will be required to perform the calculation and entry for the deemed repurchase, in our view, it seems that the accounting treatment that the FAQ is proposing is unnecessary and questionable.

We caught one typo in the FAQ; it refers to “FAQ 3-11 Crypto Asset Margin Trading” but the reference should be 3-1-13 instead of 3-11.

3-1-9 Crypto Assets that are Specific Self-issued Crypto Assets

Question

Our company has created four private keys for Crypto Asset A, which we issued and have continuously held since its issuance.

We have implemented a measure that requires three of these private keys to transfer the crypto asset, and this measure has been in place since its issuance.

Additionally, we have entrusted a document containing two of these private keys to our tax advisor and have signed a custodial agreement. (These two private keys are only documented on the entrusted paper.)

The contract stipulates a two-year custodial period, during which we cannot request the return of the entrusted private keys until the period expires.

There is an active market for Crypto Asset A, but is it necessary to perform a fair value assessment at the end of the fiscal year?

Our tax advisor is neither an officer nor an employee of our company or any related companies, nor does he have any familial or other private relationships with these individuals.

Answer

Since your Crypto Asset A qualifies as a specific self-issued crypto asset until the custody period for the private keys expires, it is not necessary to evaluate it at fair value at the end of your company’s fiscal year that falls within this custody period.

For crypto assets held by entities at the end of the fiscal year, which have an active market, the evaluation amount at that time should be based on the fair value method.

Additionally, if the entity holds such crypto assets on its own account, the difference between the evaluation amount and the book value must be included in the taxable income or deductible expenses for that fiscal year.

On the other hand, even for crypto asset with an active market, if an entity has issued and continuously held the crypto assets since issuance, and has implemented technical measures form the time of issuance to prevent transfer to others, meeting both of the following conditions (1 and 2), such crypto assets are considered specific self-issued crypto assets and are not subject to year-end fair value evaluation.

1. THere is a specified period during which the transfer is not allowed
2. The technical measures cannot be lifted by only the officers and employees (hereinafter referred to as “officers, etc.”) of the entity that issued the crypto asset (including any other entities with a wholly controlling relationship with that entity, hereinafter referred to as “issuing entity, etc.”) or other certain individuals (“), collectively referred to as “related parties”.

(*) Certain individuals refer to the following:

1. Relatives of the officers, etc., of the issuing entity, etc.
2. Individuals who are not legally married to the officers, etc., of the issuing entity, etc., but are in a de facto marriage-like relationship
3. Individuals other than those mentioned in (i) or (ii) who are financially dependent on the money or other assets received from the officers, etc., of the issuing corporation, etc.
4. Relatives of the individuals described in (ii) or (iii) who live together as part of the same household

Your company has entrusted a tax advisor, who is not a related party, with the custody of documents containing two of the private keys associated with Crypto Asset A.

Under the terms of the contract, the return of the entrusted private keys cannot be requested until the specified custody period expires.

Since Crypto Asset A cannot be transferred without three of the four private keys, and two of these keys can only be verified through the entrusted documents, during the custody period with the tax advisor, Crypto Asset A cannot be transferred solely by your company’s related parties.

Furthermore, the contract specifies a custody period of two years, during which the transfer of Crypto Asset A is not possible.

Therefore, the series of measures your company has taken with respect to Crypto Asset A satisfies both conditions (1 and 2) mentioned earlier.

Since these measures have been in place continuously from the time of issuance, Crypto Asset A qualifies as a specific-issued crypto asset and is not subject to fair value evaluation at the end of the period.

However, once the custody period for the private keys has expired, the condition outlined in item 1 will no longer be met, and Crypto Asset A will no longer qualify as a specific self-issued crypto asset.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7
Corporate tax law implementation regulations 26-10
Corporate tax basic notification 2-3-67-2

Our comments:

This is a new item introduced in Version 8.

A new concept called “specific self-issued crypto assets” has been introduced, allowing entities to adopt the cost method instead of fair value evaluation at the end of the period if they impose a lock-up of more than one year.

In the example, private keys are entrusted to a tax advisor, but if the tax advisor loses the keys, the crypto assets will be lost forever.

This is a very risky scheme and should be carefully pursued when there is an assumption that the assets can be reissued in case of accidents.

3-1-10 Crypto Assets Jointly Issued by Multiple Entities

Question

Our company plans to launch a joint project with multiple other entities.

In issuing a new crypto asset related to this project, a predetermined amount of the crypto asset will be allocated to each entity simultaneously upon issuance, according to an agreement among the joining participants.

Regarding the crypto assets allocated to our company at the time of issuance, will those with continuous transfer restrictions from the time of allocation be considered specific self-issued crypto assets?

Answer

Among the crypto asset allocated to your company, those that meet certain conditions from the time of allocation – specifically, those with continuous transfer restrictions or other conditions – qualify as specific self-issued crypto assets.

A crypto asset issued by a corporation and continuously held from the time of issuance, with continuous transfer restrictions or other conditions from that time, is considered a specific self-issued crypto asset.

These specific assets refer to crypto assets that meet either of the following requirements continuously from the time of issuance:

1. There are technical measures in place to prevent transfer to others, and these measures satisfy all the following conditions:
   1. A period during which transfers are not allowed is specified
   2. The technical measures cannot be lifted by only the officers, employees, or certain other individuals of the entity that issued the crypto asset (including entities in a wholly controlling relationship with the entity)
2. The crypto asset is held as trust property under a trust that meets all the following conditions (limited to taxable trusts for beneficiaries, etc.):
   1. The trustee of the trust is solely a trust company, and the beneficiaries,etc., of the trust are only the corporation that issued the crypto asset
   2. The trust agreement specifies that the trustee will not transfer the assets and liabilities belonging to the trust property to anyone other than the trustee or beneficiaries, etc.
   3. The trust agreement stipulates that the corporation that issued the crypto asset cannot transfer the beneficiary rights of the trust or change the beneficiaries, etc., of the trust

When multiple entities jointly conduct a business and jointly issue crypto assets related to that business, it is generally expected that the contract or agreement among the joint participants will specify the quantity of crypto assets allocated to each entity at the time of issuance.

In such cases, when multiple entities jointly conduct a business and jointly issue crypto assets, the allocation of a predetermined quantity to each entity at the time of issuance, as specified in the contract or agreement, can be regarded as each entity issuing the crypto assets for their own joint venture.

Therefore, the crypto assets allocated to your company in accordance with the contract or agreement among the joint participants, held continuously from the time of allocation and meeting either of the conditions (1 or 2) above from that time, would qualify as specific self-issued crypto assets.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7
Corporate tax law implementation regulations 26-10

Our comments:

This is a new item that was introduced in Version 8.

Same comment as that for FAQ3-1-9.

3-1-14 Crypto Asset Margin Trading

Question

Please tell me the method of calculating the amount of income in the case of the following crypto asset transactions based on credit.

(Example)

• Went short 1BTC for 1,000,000 yen on September 1.
• Went long 1BTC for 800,000 yen on September 24.

(Note) In the above transactions, fees for buying and selling crypto asset are not considered.

Answer

In the above example, the income amount is calculated as follows:

(Formula)
1,000,000 yen [selling price] – 800,000 yen (Note 1) [buying price] = 200,000 yen [income amount]

(Note)
1 The transfer cost is the amount calculated by the specific identification method.

A crypto asset margin trade refers to the buying and selling of crypto asset in which credit is provided by a crypto asset exchange operator (referred to in this question as a “crypto asset exchange operator”). This is defined in Article 2, Paragraph 7 of the Payment Services Act.

The transfer loss or gain amount of crypto asset in this method of crypto asset credit transaction is the difference between the amount of consideration that should normally be obtained by the transfer of crypto asset (selling price) (Note 2,4) and the amount of consideration related to the purchase of crypto asset (purchasing price) (Note 3,4) in the case of selling and then settling with the same type of crypto asset purchase.

(Note)
2 The amount equivalent to the interest received from crypto asset exchange operators is included in the selling price.

3 The buying commission fee and so-called borrowing fee paid to crypto asset exchange operators are included in the buying price.

4 With regard to 2 and 3 above, if they are included as income or expenses in the amount of profit or loss as they occur, with the condition of continuing application, such treatment may be permitted (however, excluding buying and selling commission fees).

When the opposite of the crypto asset credit transaction mentioned above is conducted, i.e. when crypto asset is bought and then the same type of crypto asset is sold and settled, the transfer loss and gain amount of crypto asset will be the difference between the amount of consideration that should be normally obtained by the transfer of crypto asset (selling price) (note 5, 7) and the amount of consideration related to the buying of crypto asset (buying price) (note 6, 7).

(Note)
5 The so-called borrowing fee received from third parties is included in the selling price.

6 The buying commission fee and amount equivalent to interest paid to

third parties are included in the buying price.

7 With regard to 5 and 6 above, if they are included as income or expenses in the amount of profit or loss as they occur, with the condition of continuing application, such treatment may be permitted (however, excluding buying and selling commission fees).

Also, so-called crypto asset FX trading and crypto asset futures trading are classified as derivative trading, not crypto asset credit trading.

[Related laws and regulations, etc.]
Corporate tax law 61, 61-5
Corporate Tax Law Enforcement Ordinance 118-6
Corporate tax basic notification 2-3-62

Our comments:

This was a new item that was added in Version 3.

No particular comments.

3-1-12 When to Recognize Profit From Crypto Asset Margin Trading

Question

In which fiscal year should the transfer gains or losses that occur as a result of crypto asset credit transactions be recorded?

Answer

They should be recorded in the fiscal year that the following day belongs to.

(1) For transactions in which crypto asset is sold and then subsequently bought to settle the transaction…the day the buy contract was entered to settle the transaction.

(2) For transactions in which crypto asset is bought and then subsequently sold to settle the transaction…the day the sell contract was entered to settle the transaction.

The timing of recognition stated in Answer (1) is an exception to the general rule stated in “3-1 When to Recognize Profit From Transferring Crypto Asset”, which requires entities to recognize gains or losses based on the contract date of the sell transaction.

For transactions where crypto asset is bought and then subsequently sold (Answer 2), the timing of recognition will be the fiscal year in which the contract for the sell transaction is entered, which is in accordance with the general rule stated in “3-1 When to Recognize Profit From Transferring Crypto Asset”.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate tax law implementation regulations 26-9
Corporate tax basic notification 2-1-21-14

Our comments:

This was a new item that was added in Version 3.

No particular comments.

3-1-13 Provisional Settlement Profit for Crypto Asset Margin Trading

Question

Our company conducts crypto asset credit transactions, but at the end of the fiscal year, there are some transactions that are not settled.

What treatment is necessary at the end of the fiscal year?

Answer

If a entity conducts crypto asset credit transactions and at the end of the fiscal year, there are some that are not settled, then the amount corresponding to the profit or loss calculated as if it were settled at the end of the fiscal year (hereinafter referred to as “provisional settlement profit or loss amount”) is to be included in the amount of profit or loss for that fiscal year.

The provisional settlement profit or loss amount is determined as follows, respectively, according to the following classification (limited to crypto asset related to un-settled crypto asset credit transactions at the end of the fiscal year):

(1) In the case of going short crypto asset through credit transactions:

The amount of consideration related to the sale – (the fair value of the crypto asset at the end of the period × the quantity of the crypto asset)

(2) In the case of going long crypto asset through credit transactions:

(the fair value of the crypto asset at the end of the period × the quantity of the crypto asset) – the amount of consideration related to the purchase

The provisional settlement profit or loss is reversed in the following fiscal year.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-11
Corporate tax law implementation regulations 26-10

Our comments:

This was a new item that was added in Version 3.

The topic in question is similar to the one in Question 3-3 where unrealized losses on the cryptocurrency held by entities at the end of the fiscal year are subject to taxation.

We believe there are similar drawbacks with the taxation of unrealized gains/losses from credit transactions.

3-2 Electronic Payment Method Related

3-2-1 Tax Implications When Acquiring Electronic Payment Methods

Question

Our company acquired an electronic payment method through payment.

What is the acquisition cost for tax purposes?

Answer

The value based on the face amount of the electronic payment method is considered the acquisition cost for tax purposes.

Electronic payment methods are issued at a price linked to the value of legal currency, and they are promised to be redeemed at the same value based on the face amount.

They are deemed to have a nature similar to demand deposits and are considered a type of monetary claim.

In accounting, when electronic payment methods are acquired, they are recorded as assets on the delivery date at a value based on their face amount.

If there is a difference between the amount of money paid for the acquisition of the electronic payment method and the value based on their face amount, this difference is treated as a gain or loss.

Therefore, for tax purposes as well, the acquisition cost of electronic payment instruments is based on their face amount.

If there is a difference between the amount of money paid and the value based on the face amount of the acquired electronic payments instruments, the amount that is less than the face amount or exceeds the face amount must be included in the calculation of the income or loss for the fiscal year in which the electronic payment instruments were acquired.
Furthermore, if the amount exceeding the value based on the face amount qualifies as a donation, a certain deduction limit applies to the donation amount.

[Related laws and regulations, etc.]
Corporate tax law 22-4, 37

Our comments:

This was a new item that was added in Version 8.

No particular comments.

3-2-2 Tax Implications When Transferring Electronic Payment Methods

Question

Our company transferred an electronic payment method to a third party.

What are the tax implications?

Answer

When electronic payment methods are transferred to a third party, if there is a difference between the amount received from the third party and the book value of the electronic payment instruments, the gain or loss on the transfer must be included in the calculation of income or loss for the fiscal year in which the transfer occurred.

Specifically, if the amount received from the third party exceeds the book value of the electronic payment instruments, the excess amount must be included in taxable income.

Conversely, if the amount received from the third party is less than the book value of the electronic payment method, the shortfall shall be included as a deductible expense.

Furthermore, if the amount below the book value qualifies as a donation, a certain deduction limit applies to the donation amount.

[Related laws and regulations, etc.]
Corporate tax law 22-4, 22-2, 37

Our comments:

This was a new item that was added in Version 8.

No particular comments.

3-2-3 Year-end Tax Implications of Electronic Payment Methods

Question

Our company holds an electronic payment method but is it subject to year-end fair value measurement?

Answer

There is no need to evaluate electronic payment methods held at the end of the fiscal year at fair value.

Additionally, the allowance for doubtful accounts related to electronic payment methods held at the end of the fiscal year cannot be included as a deductible expense in the calculation of taxable income unless these instruments qualify as individually evaluated monetary claims.

Electronic payment instruments are issued at a price linked to the value of legal currency and are promised to be redeemed at the same value as their face amount or have similar characteristics.

They are considered similar in nature to demand deposits and are regarded as monetary claims.

Monetary claims are not subject to fair value evaluation at the end of the fiscal year for tax purposes.

Therefore, there is no need to evaluate electronic payment instruments held at the end of the fiscal year at fair value.

Moreover, entities that meet certain criteria, such as having capital of 100 million yen or less, are allowed to include the allowance for doubtful accounts related to certain monetary claims as deductible expense in calculating taxable income.

In this context, claims similar to deposits or entrusted money are not considered collectively evaluated monetary claims (monetary claims such as accounts receivable, loans, and similar claims subject to allowance for doubtful accounts based on the bad debt experience rate). Since electronic payment instruments do not qualify as collectively evaluated monetary claims, unless the electronic payment instruments held by the corporation at the end of the fiscal year qualify as individually evaluated monetary claims (where a loss is expected on part of the claim due to reasons such as a deferment of payment based on the approval of a reorganization plan), the allowance for doubtful accounts related to these electronic payment instruments cannot be included as a deductible expense in calculating taxable income.

[Related laws and regulations, etc.]
Corporate tax law 52-1-2
Corporate tax basic circular 11-2-18

Our comments:

This was a new item that was added in Version 8.

No particular comments.

3-2-4 Tax Implications of Foreign Currency Denominated Electronic Payment Methods

Question

Our company has foreign currency denominated electronic payment method.

How is this converted into yen at the end of the period?

Answer

For foreign currency-denominated electronic payment methods, you can choose either the end-of-period exchange rate method or the historical exchange rate method for conversion at the end of the fiscal year.

If no conversion method is selected for the end of the period, the historical exchange rate method will be applied by default.

Electronic payment methods are issued at a price linked to the value of legal currency and are promised to be redeemed at the same value as their face amount or possess similar characteristics.

They are considered similar in nature to demand deposits and are regarded as monetary claims.

In terms of taxation, foreign currency-denominated electronic payment instruments are classified as foreign currency-denominated claims other than short-term foreign currency-denominated claims.

For foreign currency-denominated claims other than short-term foreign currency-denominated claims, you can choose either the end-of-period exchange rate method or the historical exchange rate method for conversion at the end of the fiscal year.

However, since the statutory conversion method defaults to the historical exchange rate method if no conversion method is selected for the end of the period, if you choose to use the end-of-period exchange rate method, you must file a notification using the “Notification Form for the End-of-Period Exchange Rate Method for Foreign Currency-Denominated Assets, etc.” or apply for approval of charges using the “Application for Approval to Change the End-of-Period Exchange Rate Method for Foreign Currency-Denominated Asset, etc.”

[Related laws and regulations, etc.]
Corporate tax law 61-9
The implementing order for corporate tax law 122-4 ~ 122-7

Our comments:
This was a new item that was added in Version 8.

No particular comments.

4 Inheritance Tax and Gift Tax

4-1 When Crypto Asset is Acquired Through Inheritance or Gift

Question:

What is the tax treatment for crypto asset acquired through inheritance or gift?

Answer:

Inheritance tax or gift tax will be imposed when crypto asset is acquired through inheritance, bequest, or gift from the inherited person, etc.

The Inheritance Tax Law provides that an individual will be subject to inheritance tax or gift tax when economic assets with a value that can be estimated in money are acquired through inheritance, bequest, or gift.

As for crypto asset, it is specified in the Payment Services Act as an “asset with a value that can be used to settle a debt to an unspecified person”, so if crypto asset is acquired through inheritance, bequest, or gift from the inherited person, etc., inheritance tax or gift tax will be imposed.

(Note) Taxation of individuals that gifted crypto asset
If an individual transfers crypto assets through a donation (excluding donations made as a result of death) or inheritance (excluding specific inheritances given to an heir), they must include the value (market value) of the crypto asset at the time of the donation or inheritance in their total income for the calculation of the income tax.

For more information, see “When Transferring Crypto Asset at Below Market Value (Zero Value)”

[Related laws and regulations, etc.]
Inheritance Tax Law 2, 2-2
Inheritance Tax Law Basic Understanding 11-2-1

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

I have no further comments regarding the tax treatment.

However, what is more important is to prepare carefully in advance before something happens.

If you keep your bitcoin on a domestic exchange, the transfer to your family will be smooth if your family knows the existence of the account.

It is not so easy in the case of a foreign exchange.

Furthermore, self-custody should be the default for bitcoin.

Leaving your bitcoin on an exchange is not recommended unless you are a trader.

If an exchange is hacked, you won’t get your bitcoin back.

And exchanges have been hacked and will be hacked in the future.

It is important to prepare for the worst case scenario, and ensure your family is informed of the storage location of wallets and how to use them, so that they can access your bitcoin in case something happens to you.

4-2 How to Measure Crypto Asset Acquired Through Inheritance or Gift

Question

How can I measure crypto asset that I have acquired through inheritance or gift?

Answer

Crypto asset with an active market is measured based on the trading price at the time of the taxable event published by a crypto asset exchange where the taxpayer is trading.

Regarding the valuation method for crypto asset, since there is no provision in the valuation directive, it will be valued in accordance with the valuation method specified in the Valuation Directive 5 (Valuation of assets without specified valuation method) based on the objective exchange value established by active trading in which a certain market price is established.

In this case, for crypto asset with an active market(Note 1), the trading price at the time of taxable event published by a crypto asset exchange where the taxpayer is trading(Notes 2, 3, 4) will be used for valuation, similar to foreign currency.

For crypto asset without an active market, individual valuation will be conducted taking into consideration the content and characteristics, trading realities, etc. of the crypto asset(Note 5) as an objective exchange value cannot be established due to the lack of an established market price.

(Note)

1 “An active market” refers to a situation where sufficient quantity and frequency of transactions are carried out at a crypto asset exchange or a crypto asset sales venue, and price information is consistently provided.

2 “Trading price at the time of taxable event published by a crypto asset exchange” includes the transaction price recorded on a balance certificate provided by a crypto asset exchange in response to a request from a taxpayer.

3 In the case where both the purchase price and the selling price are published at a crypto asset exchange (crypto asset sales venue), it is not a problem using the selling price of the taxpayer.

4 If the taxpayer is conducting transactions with multiple crypto asset exchanges, it is not a problem to evaluate based on the transaction price at the time of taxable event published by the selected crypto asset exchange by the taxpayer.

5 For example, methods of evaluation such as considering actual transaction price and expert opinion can be considered.

[Related laws and regulations, etc.]
Valuation Directive 4-3, 5

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

An active market is defined as a market where there is a sufficient quantity and frequency of trades, but this definition is not very helpful because “sufficient” is not defined.

When looking at the trading screen of an exchange, the screen seems to be active with flashing prices, but most of the trades are actually made by liquidity providers.

When selling a large amount of cryptocurrency, the price will drop significantly.

bitcoin is the only cryptocurrency with enough liquidity to sell a large amount without affecting the market price.

When valuing cryptocurrency, it may be a good idea to consider a liquidity discount or consult with a valuation expert, if the amount is significant.

5 Income Tax Withholding

5-1 Payment of Salary, etc. Using Crypto Asset

Question

Our company has decided to pay a part of our monthly salaries in a crypto asset that can be traded on exchanges, following a request from our employees.

How should we handle the withholding tax on this salary?

(Example)
On October 10, we paid 200,000 JPY in cash to an employee for their September salary and also paid part of the salary in a crypto asset (valued at 50,000 JPY at the time of payment) that the company owns.

Answer

The total amount of the employee’s salary is 250,000 JPY, consisting of 200,000 JPY in cash and 50,000 JPY in crypto asset.

Therefore, the total salary of 250,000 JPY should be used to calculate the withholding tax.

Salaries are usually paid in cash, but in cases like the one you mentioned, where a separate agreement is made in the employment contract to pay part of the salary in crypto asset, the value of the crypto asset payment should also be considered as part of the income from salary.

Therefore, as the withholding tax obligor, your company should calculate the withholding tax on the total salary, including the value of the crypto asset payment.

Note that for non-cash benefits-in-kind, the economic benefit should be evaluated, but in the case of crypto asset, the value at the time of payment should be used for evaluation.

[Related laws and regulations, etc.]
Income tax law 28, 36, 183

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

It is common to receive salary in bitcoin but the amount to be received is still denominated in fiat.
However, there are also bitcoiners who set their compensation denominated in bitcoin.

For example, hourly rate = 0.01 BTC, regardless of bitcoin price in USD.

As more people use bitcoin to measure the value of goods, bitcoin will become more accepted as a currency and not just an investment asset.

6 Consumption Tax

6-1 Treatment of Consumption Tax When Transferring Crypto Asset

Question

Our company has transferred (sold) our crypto asset through a domestic crypto asset exchange. Can you explain the consumption tax consequences in this case?

Answer

The transfer of crypto asset through a domestic crypto asset exchange is not subject to consumption tax.

According to the Consumption Tax Law, the transfer of payment means and similar items is tax-exempt.

The transfer of crypto asset through a domestic crypto asset exchange is classified as the transfer of such payment means, and is therefore tax-exempt.

In addition, when filing a fixed tax return under general taxation, the tax base ratio is calculated based on the taxable sales, tax-exempt sales, and non-taxable sales for the relevant tax period, but the transfer of crypto asset that falls under the category of payment means does not need to be included in the calculation of the tax base ratio for non-taxable sales.

(Reference)

1. Fees paid to a crypto asset exchange as commission for the sale and purchase of crypto asset are considered as the consideration for the service of intermediation, and are subject to consumption tax.In the case of using the individual correspondence method for reporting consumption tax for the fees incurred for the purchase of crypto asset for the purpose of buying and selling crypto asset, the tax on the purchase for tax purposes (i.e., tax-excluded sales corresponding to tax-included purchase) corresponds only to purchases other than transfer of taxable assets, etc.
2. The transfer of crypto asset made domestically before June 2017 is subject to consumption tax.If a business operator subject to consumption tax has no choice but to record the name of the other party or the like in the books and request documents in order to apply for a deduction of the amount of tax on the purchase for tax purposes with regard to the purchase of crypto asset made domestically before June 2017 through an intermediary such as a crypto asset exchange, the books should be recorded to show the reason and the name of the intermediary.
3. For transfers of electronic payment methods conducted within Japan on or after June 1, 2023, the same applies as mentioned above: these transfers are considered transfers of payment instruments, etc., and are therefore exempt from consumption tax.Additionally, when calculating the taxable sales ratio, there is no need to include the sales amount of such exempt transactions in the calculation of non-taxable sales.

[Related laws and regulations, etc.]
Consumption tax law 6-1, 30, Table 1-2 (Supplementary Table 1-2)
Consumption Tax Act Enforcement Ordinance 9-4, 48-2, 49

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

I am really glad that the transfer of cryptocurrency is not subject to sales tax.

bitcoin is often referred to as digital gold because of its similarities with the metal.

Transfer (selling) of gold is subject to consumption tax.

This creates a difference between the price in Japan and the market price overseas.

If you buy gold overseas and sell it in Japan, you will earn a profit equal to the consumption tax.

In the case of gold, you will be taxed by customs when you bring it into Japan, but cryptocurrency is borderless.

We do not know how the price difference with foreign countries will affect price discovery of bitcoin in the long run, but it is good that there are fewer factors that could hinder natural price formation, even if only for a short period of time.

More importantly, bitcoin’s goal is to become the money of the future.

If sales tax was charged on transfers, maintaining transaction records would become too complicated and it would not function as a means of exchange.

It is fortunate that the authorities have settled on bitcoin being tax-exempt for consumption tax, in this respect.

6-2 Fees Received from Crypto Lending

Question

Our company entered into and concluded a crypto asset lending transaction agreement with a domestic crypto asset exchange operator and lent out crypto asset that we owned.

We received a certain rate of the amount of the lent crypto asset as a usage fee after one year when the contract period expired.

According to the usage regulations set by the crypto asset exchange operator, our company is to lend crypto asset to the exchange operator and after the contract period has expired, the same and equivalent crypto asset must be returned from the exchange operator to our company and the usage fee will be paid to our company.

Please let us know the tax treatment regarding consumption tax in this case.

Answer

The lending of crypto asset as consideration for the usage fee is subject to consumption tax.

As specified in the usage regulations set by the crypto asset exchange, the transaction in question is considered “lending of assets” as the business operator receives compensation after the expiration of the contract period, and the lent crypto asset is returned by the exchange in the same type and equivalent crypto asset.

Furthermore, the transaction in question does not fall under the non-taxable transactions listed in the second supplementary table of the Consumption Tax Law, which includes the transfer of means of payment or its equivalent (crypto asset), lending of money as consideration for interest, and lending of securities.

Therefore, the lending of crypto asset as consideration for the usage fee is subject to consumption tax.

[Related laws and regulations, etc.]
Consumption tax law 2-1-8, 4-1, 6-1, Supplementary Table 2
Consumption Tax Act Enforcement Ordinance 9-4

Our comments:

This is a new item that appeared in Version 5.

It was most likely added as a response to the recent trend of lending crypto to earn yield, commonly in the form known as lending.

Intuitively, the yield on “lending” seems similar to interest on loans or deposits.

However, the FAQ categorizes it as “usage fee” instead of interest because the tax authorities do not consider crypto to be money, and therefore “crypto lending” is different from lending money.

In the US, the SEC also claims that crypto yield products are not money loans but securities.

We strongly advise users to exercise caution before participating in lending.

The borrower of the crypto that the user is lending out needs to earn a higher yield than what they are paying out to the user.

That is risky business, considering the relatively high yield that these products are promising.

Lending crypto can result in the worst-case scenario of not getting your coins back.

Not your keys, not your coins applies to lending, as it applies to leaving coins on exchanges.

One shouldn’t be doing either.

7 Statutory Declaration

7-1 Whether to Include Crypto Asset in the Property and Debt Statement

Question

I have crypto asset held at crypto asset exchanges in Japan and overseas.

Do I have to include crypto asset in the Property and Debt Statement?

Answer

If you have crypto asset on December 31, it will be necessary to record it in the Property and Debt Statement.

The location of the crypto asset exchange where crypto asset is deposited does not affect whether or not it should be recorded in the Property and Debt Statement.

Please record by type of crypto asset (such as bitcoin) and by purpose (personal or business).

(Note) The location of crypto asset refers to the address (if you do not have an address, the residence) of the person who has the property, as stipulated in Article 3, Item 6 and Article 2 of the Remittance and Other Statements Regulations.

[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 6-2-1
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 12-2-8
Remittance and Other Statements Regulations12-3-6, 15-1-2, Supplementary Table 3

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

Other than that it is better to keep bitcoin off of exchanges as much as possible, I have no particular comments.

For your information, the requirements for submitting a Property and Debt Statement are as follows:

Those who need to submit a Property and Debt Statement are those who are required to submit a tax return or those who are eligible to submit a tax refund application (only in cases where the total amount of tax for that year exceeds the total of the dividend deduction and the special deductions for year-end adjustments for housing loans, etc.), and meet either of the following conditions:

1 The total amount of various income except for retirement income for the year exceeds JPY 20 million.

The total amount of various income includes the total amount of income after deducting special deductions in cases where there is income subject to separate taxation.

However, this does not include the carried-over deductions for (1) carry-over of net losses or miscellaneous losses, (2) carry-over of transfer losses in cases of replacement of residential properties, (3) carry-over of transfer losses for specific residential properties, (4) carry-over of transfer losses for listed shares, etc., (5) carry-over of transfer losses for shares issued by specific small and medium-sized companies, and (6) carry-over of losses for settlement of differences, etc. in futures trading, after the application of these deductions.

2 On December 31 of that year, you have assets with a total value of JPY 300 million or more or foreign-out special assets with a total value of JPY 100 million or more (assets acquired through inheritance or inheritance in the year of inheritance start can be excluded from the determination of the total value).

Here, “property value” refers to the total value of property value, not the amount subtracted from the property value by the amount of debt.

In addition, “Assets Subject to Special Cases for Moving Abroad” refers to the rights referred to in subparagraph 1 or 2 of paragraph 2 of Article 60 of the Income Tax Act or paragraph 3 of the same Article for unpaid credit transactions, etc.

(Note) For the Property and Debt Statement from the 5th year of the Reiwa era, in addition to the above, residents who have assets with a total value of JPY 1 billion or more as of December 31 of that year are also subject.

Link

7-2 How to Record the Value of Crypto Asset in the Property and Debt Statement

Question

How do I record the value of crypto asset in my Property and Debt Statement?

Answer

Regarding the value of crypto asset, it will be recorded as the current market price as of December 31 of that year.

An active market for cryptocurrencies(Note 1) exists and a certain market price is established through active trading, and since the objective exchange value is made clear, the trading price(Note 2, 3, 4) published by the crypto asset exchange with whom the party submitting the Property and Debt Statement is conducting transactions shall be recorded as the market price as of December 31 of that year.

(Note)

1. “An active market exists” refers to the case where sufficient quantity and frequency of transactions are conducted on a crypto asset exchange or sales platform, and price information is continuously provided.
2. “The trading price as of December 31 of that year published by the crypto asset exchange” includes the trading price recorded on the balance certificate provided in response to the request of the party submitting the Property and Debt Statement.
3. If the purchase price and selling price are published on the crypto asset exchange (sales platform), it is acceptable to record the selling price of the crypto asset to the crypto asset exchange by the party submitting the Property and Debt Statement.
4. If the party submitting the Property and Debt Statement is conducting transactions with multiple crypto asset exchanges, it is acceptable to record the trading price as of December 31 of that year published by the crypto asset exchange chosen by the party submitting the Property and Debt Statement.

If it is difficult to determine the fair value, it is acceptable to record an estimated value based on the acquisition cost, sales example prices, or other reasonable methods, according to the condition of the assets as of December 31 of that year.

In this case, the estimated value of crypto assets can be calculated using methods such as the following examples:

1. The selling and purchasing actual price as of December 31 of that year (if there is no selling and purchasing actual price as of December 31 of that year, the selling and purchasing actual price within that year on the nearest date prior to December 31 of that year), among which the selling and purchasing actual price deemed appropriate
2. If there is no value obtained in 1, the transfer price in the case of transferring the crypto asset from January 1 of the following year to the deadline for submitting the property and debt schedule
3. If there is no value obtained in 1 or 2, the acquisition price.

[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 6-2-4
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 12-2-3
Remittance and Other Statements Regulations12-5, 15-4

Our comments:

This is a new item that was added in Version 2.

I have no particular comments.

7-3 Whether to Include Crypto Asset in the Foreign Property Statement

Question

I hold crypto asset on a foreign crypto asset exchange.

Do I have to include the crypto asset in the Foreign Property Statement?

Answer:

No, crypto asset does not have to be included in the Foreign Property Statement.

According to the provisions of Article 12, Paragraph 3, Item 6 of the Regulations on Property and Debt Statement for Foreign Transfers, etc., crypto asset falls under the category of property whose location is determined by the place of residence (if the party does not have a place of residence, their place of residence) of the party possessing the property.

In addition, the Foreign Property Statement is to be submitted by resident individuals (individuals who have a place of residence in Japan or who have continuously had a place of residence for more than one year, excluding non-permanent residents).

Therefore, crypto asset held on a foreign crypto asset exchange by a resident individual is not considered “property located abroad” and will not be included in the foreign property and debt schedule.

See “7-1 Whether to Include Crypto Asset in the Property and Debt Statement” for details.

[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 5
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 10-7
Remittance and Other Statements Regulations12-3-6

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

I don’t have any particular comments other than that it is generally better to not keep bitcoin on exchanges as much as possible.

For more information on the requirement to submit a Foreign Property Statement, see below.

Requirement to submit

The parties required to submit a Foreign Property Statement are “resident individuals other than non-permanent residents” who have foreign property (excluding property acquired by inheritance abroad at the beginning of the year of succession) whose total value exceeds 50 million yen as of December 31 of that year.

Here, “resident individual” and “non-permanent resident” refer to those defined in the Income Tax Act, and the determination of whether an individual is a resident is based on their circumstances as of December 31 of that year.

According to the Income Tax Act, a “resident individual” refers to an individual who has a place of residence in Japan or has continuously had a place of residence for more than one year, and a “non-permanent resident” refers to a resident individual who does not have Japanese nationality and has a total period of residence or place of residence in Japan of five years or less within the past ten years.

Applicable Assets

The foreign property held as of December 31 of that year is the subject matter.

“Foreign property” refers to “property located abroad,” and the determination of whether property is “located abroad” is made on a case-by-case basis based on the circumstances as of December 31 of that year.

In addition, the “value” of foreign property is determined based on the “market price” or “estimated value” equivalent to the market price as of December 31 of that year, and the conversion into Japanese

Link to tax answer

Summary

The changes in Version 8 were mostly year-end valuation items which were previously released by the NTA in a different FAQ.

Below are my comments from Version 3.

However, the following two changes that were made in Version 3 are a huge concern:

1. For individuals, the principle cost calculation method has been changed from moving average method to the total average method (related to FAQ1-3)
2. For entities, the unrealized gains or losses from holding cryptocurrency and cryptocurrency margin trading positions at the end of the period have become taxable (related to FAQ22 and FAQ25)

The change from the moving average method to the total average method is a concern, not because of the quantitative impact, but because it is not based on any theoretical foundation and the fact that fundamental concepts like this can easily be changed on a whim is very concerning.

The mark-to-market of cryptocurrency held by entities and taxation on unrealized gains and losses will be a significant issue for companies that conduct business using cryptocurrency.

But the change to Question 2-2 in Version 7 that laid out explicit criteria regarding the classification of business income was a breath of fresh air in that this was a change that could actually be beneficial to the taxpayer.

Even if the change was not directed at making bitcoin or crypto more user friendly, and even if it was an unintended effect of other government policies (diversifying ways of working), a benefit to the average taxpayer is a step in the right direction.

The comment below has been carried over from my closing summary for Version 1 and 2 with some additions.

bitcoin is an unique asset that has properties that have never existed before.

To make Bitcoin more understandable, existing things are used as analogies.

While analogies are useful in making things easier to understand, they do not necessarily accurately represent reality.

bitcoin is called a “coin”, but there is no physical coin and there is no issuer or administrator.

When we say that bitcoin is “sent” or “exchanged”, nothing physically moves.

People store bitcoin on “wallets”, but there is no bitcoin in the wallet itself.

If we apply analogies directly to accounting and tax calculation, there is a risk of failing to faithfully represent reality.

In this FAQ, I think that the following items in particular should be reconsidered to faithfully represent reality:

• Crypto-to-crypto Trades => Change to taxable when exchanged for fiat;
• Acquisition of Cryptocurrency Through Forks=> Change to taxable when exchanged for fiat or used;
• Acquisition of Cryptocurrency Through Mining => Change to taxable when exchanged for fiat or used;
• Income Classification of Cryptocurrency => Change to transfer income being the default;
• Permit cost calculation methods that faithfully represent economic reality
• Unrealized gains/losses excluded from taxation

Taxing when exchanging for legal currency more accurately represents reality and has the following effects:

• Simplifying taxable income calculation (benefit for both taxpayers and authorities);
• Improving tax capture rate and efficiency (benefit for authorities);
• Encouraging research, application, and improvement of new technology (benefit for the whole country)

The post Japanese Tax Authorities Releases FAQ (Ver8) on Crypto Taxes appeared first on Japan Professional Alliance.

On December 22, 2022, the National Tax Agency (NTA) published a guidance titled “Tax Treatment of Crypto Assets (Information)”.

This is the seventh time (the first was in 2017) that the NTA has officially expressed its views on calculating taxes for cryptocurrency in an FAQ format.

We have been commenting on changes from the previous year’s FAQ every year since 2018.

But not much changed in recent years so our comments also remained pretty much the same each year.

This year there was a significant change and we’re pretty excited.

No change in the departments within the NTA that are involved

This is a comparison of the National Tax Agency’s divisions listed on the cover of the FAQ:

In Version 2, the number of divisions increased from one in Version1 to six.

There were no changes in Versions 3,4,5,6,7.

There probably won’t be significant changes here going forward, but we’ll keep updating the table for information purposes.

No change in title

The title of the FAQ changed in Version 2 due to the expansion of the scope of the FAQ from individual income tax.

In Version4, “Cryptocurrency” was changed to “Crypto Asset”.

Number of FAQ items increased by 1 to 34 items

With Version 3, Corporate Tax was added as a section with new FAQ items.

The number of FAQ items increased from 21 in Version 2 to 32 in Version 3 due to the expansion of the scope of the FAQ.

There were no additional items in Version4.

There was one addition in Version5.

There were no additions in Version6.

There was one addition in Version7.

In Version7, the FAQ items are divided into the following seven sections:

1. Income Tax and Corporate Tax
2. Income Tax
3. Corporate Tax
4. Inheritance Tax and Gift Tax
5. Income Tax Withholding
6. Consumption Tax
7. Statutory Declaration

With this in mind, here are the items covered in Version7 of the FAQ:

The reason why this FAQ is labeled as “information” is because it is not a law or regulation, but rather the view of the NTA.

Although it is not a law, the tax authorities in Japan will refer to this document when verifying the validity of tax calculations regarding crypto.

In practice, I expect various accounting and tax treatments to be based on this FAQ.

This hasn’t changed from Version 1.

Our comments will be inserted using blue text, and the rest is the original content of the FAQ.

The official document can be obtained at the following link:

暗号資産に関する税務上の取扱い及び計算書について（令和4年12月）

1 Income Tax and Corporate Tax

1-1 Sale of Crypto Asset

Question

Please tell me how to calculate taxable income from the following Crypto Asset transaction.

(Example)
On April 2, I bought 4BTC for JPY 4,000,000.
On April 20, I sold 0.2BTC for JPY 210,000.

(Note) The above transaction does not take into account the transaction fees for buying and selling Crypto Asset.
Answer
In the above example, income is calculated by the following formula:

JPY 210,000 [transfer price] – ( (JPY4,000,000 ÷ 4BTC) [acquisition price per BTC(Note 1)] x 0.2BTC [bitcoin sold] ) [transfer cost] = JPY 10,000 [income](Note 2)

(Note 1)
The amount calculated by either the total average method or the moving average method (if not selected, the total average method for individuals and the moving average method for corporations).

(Note 2)
If there are other necessary expenses, the amount will be the amount minus the amount of those necessary expenses.

When selling (converting to Japanese yen) the crypto asset you hold, income is the difference between the selling price of the crypto asset and the acquisition price of the crypto asset sold.

[Related laws and regulations, etc.]
Income tax law 36, 37, 48-2
​​The implementing order for income tax law 119-2, 119-5
Corporate tax law 61
The implementing order for corporate tax law 118-6

Our comments:

I have no particular comments regarding the method of calculating the profit when converting cryptocurrency to Fiat (legal tender). (Same comment as Version1)

However, there was a significant change that was made in Version 3.

The general method to be taken when calculating acquisition cost was changed.

Until Version 2, the general method was moving average (total average method was permitted under the condition that it was continuously applied).

In Version 3, the general method was changed to total average method and moving average was made the exception.

In order to use the moving average method, one will now need to submit a declaration to the tax authorities.

This change was made regardless of the tax authorities previously claiming that the moving average method was “the appropriate method”.

This is a clear example of how policy is prioritized over accurate representation of transactions or theoretical arguments.

As we have shared in our previous articles, the moving average method tends to be beneficial to the tax-payer, due to the rounding effect when calculating the cost basis.

We will be touching more on this later in “2-5 Submission of Cryptocurrency Measurement Method”.

They changed the wording from BTC to bitcoin in Version 2 but for some reason they brought back BTC in Version 3.

They also fudged around with the related laws and regulations that were referenced.

In Version 1, transaction fees explicitly included in the acquisition cost.

However, in Version 2 they changed that to “transaction fees are not taken into account”.

Version 3 is the same in that regard.

The handling of fees incurred when acquiring cryptocurrency is covered in “1-4 Acquisition Cost of Crypto Asset”.

1-2 Purchase of Goods with Crypto Asset

Question

Please tell me how to calculate taxable income from the following crypto asset transaction.

(Example)
April 2 Purchased 4BTC for 4,000,000 yen.
October 5 Paid 0.3BTC to purchase goods worth 403,000 yen (including consumption tax).
The exchange rate at the time of transaction was 1 BTC = 1,350,000.

(Note) The above transaction does not take into account the transaction fees for buying and selling crypto asset.

Answer

In the above example, income is calculated according to the following formula:

403,000 yen [goods price (=transfer price of bitcoin] – ( (4,000,000 yen ÷ 4BTC) [acquisition cost per 1BTC] (Note 1) × 0.3 BTC [bitcoin paid] ) [transfer cost] = 103,000 yen (Note 2) [income]

(Note)
(1) The amount calculated by either the total average method or the moving average method (if not selected, the total average method for individuals and the moving average method for corporations).

(2) If there are other necessary expenses, the amount will be the amount minus the amount of those necessary expenses.

If you use the crypto asset you hold for payment when purchasing goods, this means that you transferred the crypto asset you hold, and the difference between the transfer price of that crypto asset and the acquisition cost of that crypto asset will be the income.

[Related laws and regulations, etc.]
Income tax law 36, 37, 48-2
​​The implementing order for income tax law 119-2, 119-5
Corporate tax law 61
The implementing order for corporate tax law 118-6

Our comments:

I have no particular comments regarding the method of profit calculation.

Change was made in Version 2 which stated that “transaction fees are not taken into account”, whereas Version 1 explicitly included transaction fees in the calculation example.

This change is the same as in “1-1 Sales of Crypto Asset”.

The comment below has been carried over from my commentary for Version 1.

It is not practical to calculate profit and loss every time one pays using bitcoin regularly in their daily lives.

Yes, it is true that the same tax rules apply to the use of foreign currencies.

But few people calculate and report exchange gains and losses when using foreign currencies during their holiday vacations in foreign countries.

We believe that a de minimis rule is necessary to exempt transactions below a certain amount.

1-3 Crypto-to-crypto Trades

Question

Please tell me how to calculate taxable income from the following crypto asset transaction.

(Example)
On April 2, I purchased 4 bitcoin (A) for 4,000,000 yen.

On November 2, I used 1 BTC to purchase 40 XRP.

The market value of XRP at the time of transaction was 1 XRP = 30,000 yen.

(Note)
1 The above transaction does not take into account the transaction fees for buying and selling crypto asset.

2 The above transaction is not considered as a case where the crypto asset is obtained temporarily and only as necessary.

Answer

(30,000 yen x 40XRP) [purchase price of XRP (=transfer price of bitcoin)] – ( (4,000,000 yen / 4BTC) [price per bitcoin (Note 1)] x 1BTC [bitcoin paid] ) [transfer cost] = 200,000 yen(Note 2) [income]

(Note)
(1) The amount calculated by either the total average method or the moving average method (if not selected, the total average method for individuals and the moving average method for corporations).

(2) If there are other necessary expenses, the amount will be the amount minus the amount of those necessary expenses.

If you use your own crypto asset to purchase another crypto asset B, you are purchasing crypto asset B with crypto asset A.

Therefore, taxable income from transferring crypto asset A shall be calculated in a way similar to “1-2 Purchase of Goods with crypto asset”.

[Related laws and regulations, etc.]
Income tax law 36, 37, 48-2
​​The implementing order for income tax law 119-2, 119-5
Corporate tax law 61
The implementing order for corporate tax law 118-6

Our comments:

Here too, a change has been made to “not take into account” the transaction fees when Version 1 was updated to Version 2.

The handling of fees incurred when acquiring cryptocurrency is covered in “1-4 Acquisition Cost of Crypto Asset”.

The comment below has been carried over from my commentary for Version 1.

I have no particular comments on the calculation method for profits related to crypto-to-crypto trades.

I believe most countries consider crypto-to-crypto exchanges as a taxable event.

However, I think a little more effort could have been made in the following two points.

First, it is often unrealistic or difficult to calculate gains and losses for each crypto-to-crypto exchange transaction.

In the case of listed stocks or FX, a transaction occurs and is completed within one brokerage account.

In this case, the calculation of trading gains and losses is easy and can be easily checked in most cases in the service provider’s user account information.

Even if one is using multiple accounts, one can generally determine the overall gain and loss by simply totaling the gains and losses of each account.

However, in the case of cryptocurrencies, one can freely send cryptocurrency between exchanges.

If one sends cryptocurrency purchased from one exchange to another exchange, the receiving exchange does not know the acquisition cost of the cryptocurrency.

Since there is no information on the acquisition cost, it is impossible for the receiving exchange to calculate gains and losses.

Therefore, it is not possible to determine the overall gain and loss by simply summing up the gain and loss data for each exchange if one is using multiple exchanges.

If one has a small number of transactions or is just using a few exchanges, one can use a spreadsheet to try to calculate gains and losses.

As the number of transactions or exchanges used increases, it becomes unrealistic or difficult to perform such calculations.

The second reason is a little more conceptual.

When exchanging one asset for another, the assumption is that it goes through yen once.

If there is a price difference between the assets being exchanged, a gain or loss is realized.

This is easy to understand when thinking of selling Apple stock to buy Google stock (both listed stocks).

One can’t trade AAPL with GOOG directly, they first sell AAPL for fiat, recognize any gain or loss at this point, and use that fiat to buy GOOG.

The thing with cryptocurrency is that BTC and ETH can be traded directly.

In most cases, users do not have the intention of realizing gains or losses when making these transactions.

Generally speaking, cryptocurrency does not give its holders any rights or represent any obligations, unlike financial products or fiat currencies .

In simple terms, holding cryptocurrency means holding a random string of characters called a Private Key.

Exchanging cryptocurrency for cryptocurrency is simply exchanging one string of characters for another.

It is similar to a person with an orange exchanging it for a person with an apple.

Even if the tax law is strictly applied in such a case, it may be subject to taxation.

But from a technical perspective, it seems awkward to me that merely exchanging a string of random letters would be considered a taxable event (this is akin to generating taxable events when exchanging email).

From a practical perspective and a conceptual perspective, I think it is appropriate to tax cryptocurrency when exchanged for fiat.

1-4 Acquisition Cost of Crypto Asset

Question

I purchased crypto asset on a Japanese exchange and paid a transaction fee. In this case, what is the acquisition cost of the purchased crypto asset?

(Example)
On October 2, I purchased 2BTC for JPY 2,000,000. Transaction fee was JPY 550 (including consumption tax).

Answer

The acquisition cost of the acquired crypto asset in the above example is the purchase price of JPY 2,000,000 plus the transaction fee of JPY 550, totaling JPY 2,000,550.

The acquisition cost of crypto asset will be as follows, depending on the method of acquisition.

The acquisition cost includes transaction fees and any other expenses that were required in acquiring the crypto asset.

1. When obtained (purchased) by paying a consideration: The amount of the consideration paid at the time of purchase
2. When obtained by gift or inheritance (excluding the cases described in 3 below): The value (market value) at the time of the gift or inheritance.
3. When obtained by gift on owner’s death, inheritance, or specific inheritance: The amount evaluated by the method chosen by the donor at the time of the donor’s death (the evaluation value of the crypto asset possessed by the donor at the time of death).
4. Otherwise: The value (market value) at the time of acquisition.

(Note) ‘Otherwise’ refers to, for example, cases where crypto asset is obtained through exchange, mining, or fork, and in such cases, the acquisition value is the value (market value) at the time of acquisition.

Furthermore, when a crypto asset is obtained through a fork, the acquisition value is 0 yen (refer to “1-5 Acquisition of Cryptocurrency Through Forks”).”

Reference: For a corporation that is a taxable business entity (applying the tax-excluded accounting method) and conducts the above example transaction, what is the acquisition cost of the purchased crypto asset?

The acquisition cost of the crypto asset in the above example is JPY2,000,500 (Note 1, 2).

(Note)

1. Under Consumption Tax Law, the transfer of crypto asset and other payment methods is not subject to taxation, but the transaction fee paid to a crypto asset exchange operator as a commission for the transaction is considered a consideration for providing services related to the brokerage, and is subject to consumption tax.
2. If the person conducting the transaction in this case is a taxable enterprise under the Consumption Tax Law and applies the tax-excluded accounting method, the amount of consumption tax and other taxes included in the transaction fee (JPY 50 = JPY 500 x 10/110) and the amount of the consideration for the taxable transaction (JPY 500 = JPY 500 – JPY 50) are divided, and the acquisition price of the purchased crypto asset is the sum of the amount of the consideration for the taxable transaction (JPY 2,000,500 = JPY 2,000,000 + JPY 500).

[Related laws and regulations, etc.]

Income tax law 36, 37, 40
​​The implementing order for income tax law 119-6
Corporate tax law 61
The implementing order for corporate tax law 118-5
Accounting Circular 2

Our comments:

In Version 1, information was provided on the calculation of acquisition cost using the moving average method and the total average method.

In Version 2, the focus of the question has changed to the handling of transaction fees when acquiring cryptocurrencies.

The treatment of including transaction fees incurred when acquiring cryptocurrency in the acquisition price has not changed from Version 1.

The new information being provided in Version 2 was regarding the handling of consumption tax.

Not changed in Version 3 other than reflecting the increase in consumption tax from 8% to 10% in the illustrative example.

There were no changes in Versions 4,5,6,7.

The acquisition cost should be calculated by extracting the consumption tax part from the transaction fees, but it will become quite complicated if the transaction data from the exchange is not formatted to accommodate this.

If you actually start calculating the acquisition cost, you will quickly realize that the handling of transaction fees is complex.

Transaction fees are displayed in various formats in the transaction data depending on the exchange.

(Examples)
fees are generated separately from the order amount
fees are deducted from the order amount
fees are incurred in the base currency
fees are incurred in the trade currency
fees are displayed as negative (rebate)
fees are displayed as rewards in an exchange token

It will be very tedious to sort through each of these scenarios and build logic to calculate total gains and losses.

1-5 Acquisition of Crypto Assets Through Forks

Question

If one acquires a new crypto asset that was born as a result of a chain fork, will this acquisition generate taxable income under individual income tax or corporate tax?

Answer

If one acquires a new crypto asset through a split (fork) of an existing crypto asset, no taxable income will arise.

Under the Income Tax Act, when acquiring something with economic value, the income amount is calculated based on the market value at the time of acquisition.

However, regarding the new crypto asset acquired as a result of a chain fork mentioned in the above question, it is considered that there was no trading market at the time of the fork and the crypto asset did not have value at that time.

Therefore, no income will be generated at the time of acquisition, and income will be generated when the new crypto asset is sold or used.

In that case, the acquisition price will be 0 yen.

The same goes for corporate tax.

The acquisition cost of the newly acquired crypto asset as a result of a split (fork) is 0 yen, and it is considered that there is no amount of profit to be included when calculating taxable income.

[Related laws and regulations, etc.]
Income tax law 36
Corporate tax law 22

Our comments:

In Version 2, bits of language on corporate tax was added, but the content itself is basically the same as Version 1.

Not much change in Version 3 either, other than some words added to clarify that taxable income is not recognized at the time the crypto is received, but can be subject to taxable income recognition in the future when it is sold or converted into another asset.

There were no changes in Versions 4,5,6,7.

The comment below has been carried over from my commentary for Version1.

In the FAQ, it is stated that upon the fork, there is no market and the asset has no value, so the acquisition price is considered to be zero yen, and as a result, there is no income at the time of acquisition.

However, as the existing assumption is that, if an asset is acquired, the income amount is calculated based on the market value at the time of acquisition.

I consider applying this assumption to cryptocurrencies to be an issue in some cases.

Blockchain forks occur at certain frequencies due to how blockchains work.

For example when blocks are consecutively mined in a short period of time, this could lead to forks in the chain.

In the above example, the chain that is ultimately recognized as valid by the majority of nodes in the network is preserved, and the fork chain is discarded.

Therefore, new coins that have value do not arise from all forks.

However, many blockchains are open source and can be freely forked by anyone.

It is possible that a fork could occur without the taxpayer’s knowing.

The taxpayer could unknowingly acquire a cryptocurrency with value.

Also, even if a spot market did not exist at the time a new cryptocurrency was created, it is possible that a price for the cryptocurrency could be formed in a derivative market for the cryptocurrency.

As pointed out in the comments for FAQ 3, we believe that by taxing at the time of exchange for fiat currency or use, it simplifies the calculation of taxable income and protects taxpayers.

1-6 Acquisition of Crypto Asset Through Mining, Staking, Lending, etc.

Question

If crypto asset is obtained through mining, staking, lending, etc., how will it be treated from an income tax or corporate tax perspective?

Answer

Profit from acquiring crypto asset through mining, staking, lending, etc., is subject to income tax or corporate tax.

If one acquires crypto asset through mining, staking, lending, etc. (hereinafter, mining etc.), the amount of income is calculated by subtracting necessary expenses (costs incurred through mining etc.) from the amount of revenue (the market value of the crypto asset at the time it was acquired through mining etc.).

[Related laws and regulations, etc.]
Income tax law 27, 35, 36, 37
Corporate tax law 22, 22-2

Our comments:

Not much change in Version 2 from Version 1 other than the addition of treatment for corporate tax.

There were no significant changes in Versions 3,4,5.

In Version 6, staking and lending were added, but there were no changes in the Answer to the Question.

Staking and lending have various forms, so generalization may not be appropriate, but it is common for the staker or lender to receive tokens as rewards (often referred to as “yield”), for sending tokens to a smart contract and not moving them for a certain period of time.

Most of these services or products are marketed as decentralized, but in reality, they are often developed and operated by a small team and are highly centralized.

Mining does not require tokens, but staking and lending do.

Users that engage in staking and lending will purchase tokens with the expectation of future returns from the efforts of the development and operation by the team.

Therefore, in the United States, these services often lead to discussions of whether they fall under the category of securities.

Personally, I think that mining bitcoin, which is simply generating numbers randomly, and staking and lending are different in nature and substance.

The comment below has been carried over from my commentary for Version 1.

It seems like a reasonable conclusion at first glance, but upon further thought, there appears to be a few issues.

If one interprets receiving bitcoin (cryptocurrency) as payment for providing the service of mining, then yes, the received bitcoin would be considered income.

However, mining itself is not a service, and there is no organization like a company or individual that can be considered the recipient of the service.

Mining bitcoin is merely generating random numbers using a computer.

It is called mining as an analogy because it shares certain similarities as gold mining.

Gold mining companies and oil mining companies do not consider mining gold or oil itself as their business.

They consider selling the mined commodities as their business and income tax is also recognized not at the time of mining, but at the time of sale.

If we think of bitcoin mining in the same way as commodity mining, it seems reasonable to recognize taxable income at the time of sale or use, not at the time of mining.

1-7 Crypto Asset Transactions by Non-Residents and Foreign Entities

Question

I reside in the United States and sold my crypto asset to a Japanese crypto asset exchange.

In this case, do I need to file a tax return in Japan?

Answer

No, you do not need to file a tax return in Japan.

Under Japan’s income tax laws, residents are taxed on their worldwide income, while non-residents are only taxed on income sourced from Japan (domestic-source income).

Moreover, the following types of income are subject to tax on the disposition of assets that are subject to domestic-source income, subject to certain conditions (excluding income attributable to a permanent establishment):

(1) Income from the disposition of domestic real estate;
(2) Income from the disposition of rights or other interests in domestic real estate;
(3) Income from the cutting or disposition of domestic forest land;
(4) Income from the disposition of shares or other securities issued by domestic corporations under certain conditions;
(5) Income from the disposition of shares or other securities of real estate-related corporations; and
(6) Income from the disposition of domestic assets during the period in which a non-resident stays in Japan.

Therefore, income derived from the sale of crypto asset held by a non-resident to a Japanese crypto asset exchange is not subject to income tax in Japan.

The same applies to foreign entities; they are not required to file a tax return in Japan in this case.

(Note) Income derived from the sale of crypto asset held by non-residents or foreign entities to Japanese crypto asset exchanges is also not subject to withholding tax.

[Related Laws and Regulations]
Income tax law 161
Income tax law 212
Income tax order 281
Corporate tax law 138
Corporate tax order 178

Our comments:

This is a new item that was added in Version 7.

We have no particular comments but this got us thinking whether the tax authorities frequently receive questions like this.

Many Japanese cryptocurrency exchanges contract with companies known as LP or MM to provide liquidity on their exchange platforms.

Many of these LPs or MMs are foreign entities.

Since these LPs or MMs buy and sell cryptocurrencies on Japanese exchanges that have engaged them, it is understandable that they would want to obtain clarification from the authorities on whether these activities would lead to tax liability.

2 Income Tax

2-1 When to Recognize Income from Crypto Asset Transactions in Total Income

Question

In what year should the profit generated from crypto asset transactions be recognized as income?

Answer

In principle, it should be considered as income in the year in which the transfer of the crypto asset sold, etc. took place.

However, it is also possible to consider it as income in the year in which the contract for the sale, etc. of the crypto asset was entered.

Profit and loss generated from crypto asset transactions are generally classified as miscellaneous income (other miscellaneous income) (refer to “2-2 Income Classification of Crypto Asset”).

The timing at which such income should be considered as part of the total income is determined based on the nature of the income, in accordance with the timing at which other income should be considered as part of the total income.

Therefore, the timing at which income generated from crypto asset transactions should be recognized in total income is determined based on the nature of the income, in accordance with the timing at which income from transfer of assets is recognized.

[Related laws and regulations, etc.]
Income tax law 35, 36
Income tax basic disclosure 36-12、36-14

Our comments:

This is a new item that was added in Version 3.

We have no particular comments.

2-2 Income Classification of Crypto Asset

Question

Under Income Tax Law, what category of income will gains from crypto asset transactions be classified as?

Answer

In general, gains resulting from the use of crypto assets are classified as miscellaneous income (other miscellaneous income).

Gains and losses arising from crypto asset transactions are considered gain or loss recognized in relation to the relative relationship between domestic currency or foreign currency and therefore are generally classified as miscellaneous income (other miscellaneous income).

However, if the amount of income from crypto asset transactions in that year exceeds 3 million yen, it will be classified into the following income categories:

• If there is record-keeping of accounting documents related to crypto asset transactions, it is generally classified as business income.
• If there is no record-keeping of accounting documents related to cryptocurrency transactions, it is generally classified as miscellaneous income (miscellaneous income related to business).

Furthermore, if “the crypto asset transaction is performed in conjunction with acts that are the basis for various types of income such as business income”, for example, if the business income earner owns the crypto asset as a business asset, and is using the crypto asset as a means of payment when purchasing inventory etc., then it is classified as business income

[Related laws and regulations, etc.]
Income tax law 27, 35, 36

Our comments:

Not much change from Version 1 to Version 2, other than a few words here and there.

There were no significant changes in Versions 3,4,5.

However, there was a significant change in Version 7.

The essence of the content has not changed, so it’s more accurate to say that there were changes in the wording that were significant in nature.

To summarize the content of the FAQ before Version 7:

If profits are made from cryptocurrency transactions, it is generally considered “miscellaneous income”.

However, if cryptocurrency transactions are recognized as a business, it is considered “business income”.

There were no explicit criteria for determining whether a transaction constituted a business, so it was left to judgment of facts and circumstances, which left ambiguity and subjectiveness.

However, in Version 7, specific criteria for classification as “business income” was documented in actual wording.

This is huge.

Those requirements are:

• Keeping accounting documents
• Income amount (crypto gross sales) exceeding 3 million yen

This change should be considered as a change to broadly align tax rules that came out of the revision of the “Basic Directive on Income Tax” dated October 7, 2022, rather than a rule specifically designed for cryptocurrencies.

The purpose of the revision to this Basic Directive is to “clarify the approach to determining whether an income is classified as business income”.

The background to this is the recent trend of increasing side jobs for company employees.

We think what ended up happening is that cryptocurrency traders just happened to be at the receiving end of this favorable income classification criteria that arose from the government’s push to “reform the way of working”.

“Business income” is more advantageous for taxpayers in many ways than “miscellaneous income”.

It is recommended that those who are likely to meet the requirements of “business income” confirm that the above requirements are met during their tax year.

Note that the term “income amount” refers to the gross sale amount of crypto assets.

It does not refer to net profit, so in the case of bitcoin, selling around 1 BTC during the tax year would meet the income requirement.

According to the explanation of the Basic Directive on Income Tax Treatment of Miscellaneous Income (PDF/270KB), the requirement for keeping accounting documents is more important than the income requirement of exceeding 3 million yen in determining the classification as business income.

Even if the income amount is less than 3 million yen, if the requirement for keeping accounting documents is met, the business income classification will not be immediately denied.

However, clearing the quantitative threshold of exceeding 3 million yen provides more peace of mind in removing uncertainty.

2-3 ​​Necessary Expenses of Crypto Asset

Question

In the case of reporting income from the sale of crypto asset, what expenses are considered necessary business expenses?

Answer

Necessary expenses when calculating taxable income from the sale of crypto asset include, for example, the following costs

• Transfer cost of the crypto asset sold
• Transaction fees paid for the sale of the crypto asset

In addition, the cost of using the internet or smart phones, the cost of purchasing a computer, etc. can also be included in the necessary expenses, as long as the amount of such expenses is deemed to be directly necessary for the sale of the crypto asset.

In principle, income from the sale of crypto asset is classified as miscellaneous income (other miscellaneous income) (see “2-2 Income Classification of Crypto Asset”).

The amount that can be included in the necessary expenses is the transfer cost of the crypto asset and other expenses directly related to the sale of the crypto asset.

Please note the following items regarding necessary expenses.

(1) Regarding the usage fees for internet, smartphones, and other communication lines, they are generally paid in lump sum, without clear segregation of whether they were for cryptocurrency transactions or other uses.

However, in terms of such expenses, only when the usage fees for cryptocurrency transactions can be clearly separated, the clearly separated amount can be included as necessary expenses.

(2) For assets such as a personal computer that have a useful life of more than one year and exceed a certain monetary value, the necessary expenses should be divided over the entire useful life of the asset (such expenses are called “depreciation expenses”), rather than being expensed in a lump sum for the year.

If a cryptocurrency transaction is classified as business income or miscellaneous income (miscellaneous income related to business), the amount of expenses incurred for sales expenses, general administrative expenses, and other expenses related to the business that generates income in that year can be included as necessary expenses.

[Related laws and regulations, etc.]
Income tax law 37, 45, 48-2
Income tax law enforcement ordinance 96

Our comments:

This was a new item introduced in Version 2.

No significant changes in Versions 3,4,5,6.

Although there were some changes in the wording in Version 7, there seems to be no change in the conclusion that the following amounts can be included as necessary expenses:

(1) Direct expenses such as the transfer cost of cryptocurrencies and other expenses directly incurred when selling cryptocurrencies.

(2) Indirect expenses such as sales expenses, general administrative expenses, and other expenses related to the business that generates income in that year.

Judgment is required when determining what expenses can be included in necessary expenses.

The best approach would be to keep all your receipts during the year and consult with your tax accountant.

2-4 Cost Basis of the Transferred Crypto Asset

Question

I have continuously bought and sold the same type of crypto asset as follows.

What is the transfer cost for the sale of this crypto asset?

(Example)
I first purchased bitcoin on April 1 and subsequently bought and sold it several times as shown below.

The total amount of sales (quantity) for the year was 5,295,000 yen (5 BTC) and the total amount of purchases (quantity) was 4,037,800 yen (6.5 BTC)

(Breakdown)
・ On April 1, 4 BTC was purchased for 1,845,000 yen (on hand balance 4 BTC)
・ On June 20, 2 BTC was purchased for 1,650,000 yen (on hand balance 6 BTC)
・ On July 10, 2 BTC was sold for 2,400,000 yen (on hand balance 4 BTC)
・ On September 15, 0.5 BTC was purchased for 542,800 yen (on hand balance 4.5 BTC)
・ On November 30, 3 BTC was sold for 2,895,000 yen (on hand balance 1.5 BTC)

(Note) The above transactions do not take into account trading fees for crypto asset.

Answer:

In the above example, the total average method results in a transfer cost of 3,106,000 yen, and the moving average method results in a transfer cost of 3,080,200 yen.

When calculating the income from the sale of multiple crypto assets, it is necessary to calculate the transfer cost.

The transfer cost is calculated by subtracting the (3) valuation of crypto asset held at the end of the year (December 31) from the sum of (1) valuation of crypto asset held at the beginning of the year (January 1) from the previous year and (2) total acquisition cost of crypto asset acquired during the year for each type of crypto asset (for example, bitcoin, etc.).

This “valuation of crypto asset held at the end of the year” is obtained by multiplying “the acquisition cost per unit at the end of the year” by “the number of units held at the end of the year”, and “the acquisition cost per unit at the end of the year” is calculated using either the “total average method” or the “moving average method”.

In the above example, the transfer cost is as follows depending on the evaluation method:

Total average method: The method of calculating the “acquisition cost per unit at the end of the year” by dividing the sum of the valuation of a crypto asset held at the beginning of the year and the total acquisition cost of that crypto asset acquired during the year by the total quantity of that crypto asset.

Moving average method: The method of calculating the “acquisition cost per unit at the end of the year” by adding the acquisition cost of a crypto asset acquired at each acquisition point to the total acquisition cost of that crypto asset held at that acquisition point and dividing it by the total quantity of that crypto asset held at that acquisition point.

When using the total average method

The “acquisition cost per unit at the end of the year” is 621,200 yen, and the “valuation of crypto asset held at the end of the year” is 931,800 yen according to the following calculation.

Therefore, the transfer cost is 3,106,000 yen (4,037,800 yen – 931,800 yen).

<Calculation>

(1) Total acquisition cost of the same type (name) of crypto asset acquired during the year ÷
(2) Quantity of the same type (name) of crypto asset acquired during the year =
(3) Acquisition cost per unit at the end of the year

(Note) If there is crypto asset carried over from the previous year, add the value and quantity to 1 and 2 respectively.

(1) Total acquisition cost of bitcoin acquired during the year 4,037,800 yen
(2) Quantity of bitcoin acquired during the year 6.5BTC
(3) Acquisition cost per unit at the end of the year (1÷2) 621,200 yen
(4) Valuation of bitcoin held at the end of the year (3×1.5BTC) 931,800 yen

When using the moving average method

The “acquisition cost per unit at the end of the year” is 638,400 yen, and the “valuation of crypto asset held at the end of the year” is 957,600 yen according to the following calculation.

Therefore, the transfer cost is 3,080,200 yen (4,037,800 yen – 957,600 yen).

<Calculation>
When acquiring crypto assets of different types (names), revise the average unit price using the following calculation formula.

(1) Total book value of the same type (name) of crypto asset held at the acquisition point ÷
(2) Quantity of the same type (name) of crypto asset held at the acquisition point =
(3) Average unit price at the acquisition point

(Note)
1 If there is crypto asset carried over from the previous year, add the value and quantity to 1 and 2 respectively.

2 The “average unit price at the acquisition point” calculated from the closest date to December 31 of that year will be the “acquisition cost per unit at the end of the year”.

(1) Average unit price at acquisition point (April 1)

(1) Total book value of bitcoin held at acquisition point 1,845,000 yen
(2) Quantity of bitcoin held at acquisition point 4BTC
(3) Average unit price at acquisition point (1÷2) 461,250 yen

(2) Average unit price at acquisition point (June 20)

(1) Total book value of bitcoin held at acquisition point 3,495,000 yen
(461,250 yen × 4BTC) [book value of crypto asset held at acquisition] + 1,650,000 yen [acquisition cost on June 20th] = 3,495,000 yen
(2) Quantity of bitcoin held on the acquisition date 6 BTC
(3) Average acquisition price on the acquisition date (1 ÷ 2) 582,500 yen

(3) Average acquisition price on the acquisition date (September 15)

(1) Total book value of bitcoin held on the acquisition date 2,872,800 yen
(582,500 yen x 4 BTC) [book value of cryptocurrency held at the time of acquisition] + 542,800 yen [purchase amount on September 15th] = 2,872,800 yen
(2) Quantity of bitcoin held on the acquisition date 4.5 BTC
(3) Average acquisition price on the acquisition date (1 ÷ 2) 638,400 yen

(4) Unit acquisition price at the end of the year 638,400 yen
= Average acquisition price on September 15 638,400 yen

(5) Evaluation of bitcoin held at the end of the year
638,400 yen (unit acquisition price at the end of the year) x 1.5 BTC (quantity held at the end of the year) = 957,600 yen

To make calculating the income from the sale, including the transfer cost of crypto asset fairly simple, it is possible to create a “Crypto Asset Calculation Sheet (for the total average method or the moving average method)” based on the “Annual Trading Report” sent by the crypto asset exchange operator. (Refer to “2-8 Calculation of Taxable Income using the Annual Transaction Report”)

The “Crypto Asset Calculation Sheet (for the total average method or the moving average method)” can be found on the website of the National Tax Agency.

Link

[Related laws and regulations, etc.]
Income tax law 48-2
Income tax law enforcement ordinance 119-2

Our comments:

This is a new item introduced in Version 3.

I have no particular comments as it is only a basic explanation of the moving average and total average method.

2-5 Submission of Crypto Asset Measurement Method

Question

I recently acquired my first crypto asset, but I heard that I need to elect a method for evaluating it.

Can you tell me the specific steps in submitting an election?

Answer

In order to file your income tax return, it is necessary to submit a “Notice of Method of Evaluation of Crypto Asset for Income Tax” to the head of the tax office in the area where you are a taxpayer by the deadline for submitting your income tax return (generally March 15 of the following year) after you first acquired your crypto asset.

As stated in “2-4 Cost Basis of Crypto Asset,” the evaluation value of the crypto asset you own at the end of the year (December 31) is calculated using either the “Total Average Method” or the “Moving Average Method” as the basic calculation for determining the transfer price of crypto asset such as selling it.

These evaluation methods are selected for each type of crypto asset (name) and if you
(1) acquire a crypto asset for the first time or
(2) acquire a different type of crypto asset, you must submit a notice (Notice of Method of Evaluation of Crypto Asset for Income Tax) that includes the selected evaluation method and other necessary information to the head of the tax office in the area where you are a taxpayer by the deadline for submitting your income tax return (generally March 15 of the following year).

(Note)
(1) This treatment was implemented as a result of revisions to the Income Tax Law, etc. in 2019.

(2) If the Notice of Method of Evaluation is not submitted, the default evaluation method will be “Total Average Method”.

(3) An example of the Notice of Method of Evaluation of Crypto Asset for Income Tax is provided on the next page.

[Related Laws and Regulations]
Income tax law 48-2
Enforcement order of the income tax law 119-2, 119-3, 119-5
Cabinet order amending part of the enforcement order of the income tax law (No. 95 of 2019) Article 4

This form can be downloaded from the National Tax Agency’s website.

If you have multiple types of crypto asset and are unable to list them all in the “1 Evaluation Method” section of the form, please list the relevant items on a separate sheet and submit it along with the form.

Our comments:

This was a new item that was introduced in Version 3.

There was a significant change that was made in Version 3.

The general method to be taken when calculating acquisition cost was changed.

Until Version 2, the general method was moving average (total average method was permitted under the condition that it was continuously applied).

In Version 3, the general method was changed to total average method and moving average was made the exception.

In order to use the moving average method, one will now need to submit a declaration to the tax authorities.

This change was made regardless of the tax authorities previously claiming that the moving average method was “the appropriate method”.

As we have shared in our previous articles, the moving average method tends to be beneficial to the tax-payer, due to the rounding effect when calculating the cost basis.

Furthermore, the moving average method, in which the most recent prices are more likely to be reflected in the cost, is superior to the total average method from the perspective of accurate cost calculation.

This is a clear example of how policy is prioritized over accurate representation of transactions or theoretical arguments.

Whether or not it would be better to submit and elect using the moving average method would depend on various factors, and careful consideration should be given.
The fact that the cost basis calculation method election can be made on a coin by coin basis is noteworthy (i.e. choose total average method for bitcoin and moving average method for Doge).

2-6 When Changing the Method of Crypto Asset Measurement

Question

I submitted a “Notice of Method of Evaluation of Crypto Asset for Income Tax” electing the total average method as the evaluation method for crypto asset, but I am now considering changing the evaluation method to the moving average method.

Can you tell me the specific procedures for this change?

Answer

In order to change the evaluation method, it is necessary to submit an application for change of evaluation method (Notice of Method of Evaluation of Crypto Asset for Income Tax) to the head of the local tax office in the jurisdiction of the taxpayer, by March 15 of the year in which you wish to change the evaluation method, and to receive the approval of the change.

As mentioned in “2-5 Submission of Crypto Asset Measurement Method” submitting a “Notice of Method of Evaluation of Crypto Asset for Income Tax” is required in order to select either “total average method” or “moving average method” as the evaluation method for the evaluation of crypto asset held at the end of the year (December 31), which forms the basis for calculating the transfer price relating to the sale, etc. of crypto assets.

If you want to change this elected evaluation method (including the case where the evaluation method was “total average method” for those who did not notify the evaluation method), you need to submit an application letter (Notice of Change of Evaluation Method for Crypto Asset for Income Tax) to the head of the tax office in charge of the tax return location, by March 15 of the year you want to change, containing the designated matters, including the evaluation method you want to change.

Note:

1. If no notice of approval or rejection is received by December 31 of the year in which the application is submitted, the change will be deemed to have been approved.
2. If the change is made within a period of 3 years from the adoption of the previous evaluation method, or if the proposed evaluation method makes it difficult to calculate the income amount appropriately, the application may be rejected.
3. An example of the application for change of evaluation method can be found on the next page.

[Related Laws and Regulations]
Income tax law 48-2
Enforcement order of the income tax law 101, 119-2, 119-4
Income tax basic disclosure 47-16-2、48-2-3

This form can be downloaded from the National Tax Agency’s website.

If you are making changes to multiple types of crypto asset and are unable to list them all in the “1 Evaluation Method” section of the form, please list the relevant items on a separate sheet and submit it along with the form.

Our comments:

Until Version 2, the calculation method for the acquisition price was left to the judgment of the taxpayer.

However, from Version 3, the taxpayer will need to obtain approval in order to change the calculation method for the acquisition price.

Below are my comments carried over from Version 1.

In the FAQ, both the moving average method and the total average method (with the condition of continuous application) are permitted, and the moving average method is considered “appropriate”. (In Version 1 and 2, the authorities had stated that the moving average method was the “appropriate” method. Regardless, in Version 3, they changed the default method to total average method, even though it is an inferior method in terms of accuracy compared to moving average method.)

However, there are other methods of calculating cost that are considered appropriate besides the moving average method and the total average method.

The first-in, first-out method and the individual cost method are examples.

In the United States, the first-in, first-out method is the basis for calculating the acquisition cost of cryptocurrency.

The individual cost method is also permitted under the condition that transaction records are properly maintained and the cryptocurrency itself that was the subject to the transaction can be uniquely identified.

Cryptocurrencies using the UTXO (Unspent Transaction Output) model, such as Bitcoin, allow individual identification of the cryptocurrency that was the subject of the transaction. (Ethereum is account-based and does not have UTXO, so it is not possible to individually identify the ETH that was the subject of the transaction)

Since the assets that were the subject of the transaction can be individually identified, it should be said that the individual cost method most accurately represents the cost and is most appropriate as the cost calculation method.

bitcoin is an asset with completely new properties that have never existed before.

Instead of simply applying the framework for existing assets, it is better to discuss how to faithfully represent the actual substance of the transaction.

The other point of interest is the section where it says “fractions of less than 1 yen that occur in the acquisition cost calculation may be rounded up”

If the cost increases, the gain will be calculated less, so the conclusion is that rounding up the fraction is advantageous.

Whether the moving average or the total average is advantageous is case-by-case.

Except in cases where the result is clear, it seems best to adopt the moving average method, considering the benefits of fraction rounding.

2-7 When the Purchase Price or Sale Price of the Crypto Asset is Unknown

Question

I have traded crypto asset this year, but I have not kept a record of the transactions, so I do not know the acquisition cost or sale price of the crypto asset.

Is there a way to check these prices?

Answer

You can confirm the acquisition cost and sale price of crypto asset transactions according to the following categories:

1 Crypto asset transactions through domestic crypto asset exchanges

For crypto asset transactions after January 1, 2018, the National Tax Agency requests that crypto asset exchanges provide an “Annual Trading Report” containing the following information to individual taxpayers.

• Annual Purchase Quantity: The quantity of crypto asset purchased during the year
• Annual Purchase Amount: The amount of money spent on purchasing crypto asset during the year (acquisition cost)
• Annual Sale Quantity: The quantity of crypto asset sold during the year
• Annual Sale Amount: The amount of money received from selling crypto asset during the year

If you do not have an Annual Trading Report, please request a new one from the crypto asset exchange.

(Note) For transactions before 2018, an Annual Trading Report may not have been provided. In that case, please refer to the following category 2 to confirm the acquisition cost and sale price of crypto asset yourself.

2 Crypto asset transactions other than those in category 1 (transactions through foreign crypto asset exchanges, transactions between individuals)

To confirm the acquisition cost and sale price of individual cryptocurrencies, you can use the following methods, for example:

• Confirm the acquisition cost and sale price of crypto asset by checking the withdrawal status of the bank account used to purchase crypto asset and the deposit status of the bank account used to sell crypto asset.
• Confirm the acquisition cost and sale price of crypto asset by using the transaction history of crypto asset transactions and the transaction market published by the crypto asset exchange (Note).

(Note) In the case of transactions between individuals, use the transaction market of the crypto asset exchange that you mainly use.

If the correct amount is found after submitting the final tax return, please correct the content of the final tax return (request for a revision or correction).

In addition, it is permitted to consider the acquisition cost of the crypto asset sold as 5% of the selling price.

For example, if a crypto asset is sold for 5 million yen, the acquisition cost of that crypto asset can be deemed as 250,000 yen, which is 5% of the selling price.

[Related laws and regulations, etc.]
Income tax basic disclosure 48-2-4

Our comments:

This was a new item introduced in Version 2.

In Version 3, the 5% rule, which states that if the acquisition cost of cryptocurrency is unknown, it may be deemed as 5% of the selling price.

2-8 Calculation of Taxable Income using the Annual Transaction Report

Question

Crypto Asset exchange A and B sent the following annual transaction reports.

Please teach me how to calculate the amount of income from crypto asset using these annual transaction reports.

Answer

By inputting the red and blue portions of the annual transaction report into the “Calculation Sheet for Crypto Asset (using the total average cost method)” published on the National Tax Agency homepage, you can easily calculate the amount of income.

Link

In the above case, the amount of income from crypto asset is 2,189,000 yen.

Please refer to the next page for an example of calculating the “Calculation Sheet for Crypto Asset (using the total average cost method)”.

[Related laws and regulations, etc.]
–

Our comments:

This was a new item introduced in Version 2.

I have no particular comments.

2-9 Contents of the Annual Transaction Report

Question

An annual transaction report was sent from a crypto asset exchange, but what is recorded in this annual transaction report?

Answer

1. Beginning quantity for the year: The quantity of crypto asset holdings as of January 1 of that year
2. Purchased quantity during the year: The quantity of crypto asset purchases made during the year
3. Purchased amount during the year: The amount of money spent on crypto asset purchases during the year (acquisition cost)
4. Sold quantity during the year: The quantity of crypto asset sales made during the year
5. Sold amount during the year: The amount of money received from crypto asset sales during the year
6. Transfer-in quantity: The quantity of crypto asset received in the account other than purchases made during the year
7. Transfer-out quantity: The quantity of crypto asset paid out from the account other than sales made during the year
8. End-of-year quantity: The quantity of crypto asset holdings as of December 31 of that year
9. Total profit or loss: The total amount of profit or loss from crypto asset margin trading for the year
10. Transaction fee: The amount of transaction fees paid to the crypto asset exchange during the year

* In cases where crypto asset sales, purchases, etc. are made using a foreign currency, the amount converted into yen based on the TTM of the telegraphic trading market at the time of the transaction is the basis for each item.

In the case of the following transactions, the contents of each column are as follows:

(1) In the case of receiving crypto asset from a crypto asset exchange for free
“Sold quantity during the year”: –
“Sold amount during the year”: The value (market value) of the crypto asset received
“Purchased quantity during the year”: The number of crypto asset received
“Purchased amount during the year”: The value (market value) of the crypto asset received”

(2) When settling with crypto asset

• If you converted the crypto asset to fiat currency and made the payment through a crypto asset exchange:
  “Annual Sale Quantity”: The quantity of crypto asset that was converted to fiat currency
  “Annual Sale Amount”: The value (market value) of the crypto asset that was converted to fiat currency
• If you made the payment directly with the crypto asset:
  “Transfer Out Quantity”: The quantity of crypto asset used for the payment

(3) If you exchanged crypto asset A for crypto asset B through a crypto asset exchange:
A crypto asset’s “Annual Sale Quantity”: The quantity of crypto asset A that was exchanged
A crypto asset’s “Annual Sale Amount”: The value (market value) of the crypto asset B that was obtained
B crypto asset’s “Annual Purchase Quantity”: The quantity of crypto asset B that was obtained
B crypto asset’s “Annual Purchase Amount”: The value (market value) of the crypto asset B that was obtained

Please note that the format of the annual trading report may vary depending on the crypto asset exchange.

[Related laws and regulations, etc.]
–

Our comments:

This is a new item introduced in Version 2.

I have no particular comments on this item.

2-10 ​​When Transferring Crypto Asset at Below Market Value (Zero Value)

Question

As in the following example, I sold crypto asset at the same price as the acquisition price, so there is no profit from the sale, but the sales amount was lower compared to the market price (market value) at that time.

Is it necessary to file a tax return even though there is no income other than the income from this sale?

(Example)
I bought 1 BTC for 450,000 yen on April 9.
I sold 1 BTC for 450,000 yen on May 20.

The exchange rate at the time of sale was 1 BTC = 1,000,000 yen.

(Note) Transaction fees for buying and selling crypto asset are not taken into account in the above example.

Answer

In the above example, for the calculation of miscellaneous income, the total income amount is calculated as 700,000 yen (equivalent to 70% of the market value), so it is necessary to report an income amount of 250,000 yen.

After April 1, 2019, when an individual transfers crypto asset to another individual or corporation by means of a transfer (Note 1) in consideration of a value that is significantly lower than the market value, it is necessary to include a portion of the difference between such value and the market value of such crypto asset that is considered a gift in essence (Note 2), at the time of such transfer in the total income amount for miscellaneous income, etc. (Note 3)

(Note)
1 “Transfer by means of a value that is significantly lower than the market value” refers to selling for less than 70% of the market value.

2 The amount “considered as a gift in essence” means the amount after subtracting the consideration amount from the equivalent of 70% of the market value.

3 In case an individual who acquired a crypto asset transfers it, the acquisition price of the crypto asset that serves as the basis of the calculation will be the total of the consideration and the amount considered as a gift, which is the difference between the price of the crypto asset at the time of acquisition and the amount of the consideration.

4 This applies to income tax from 2019 onwards.

In the above (example), the amount to be included in the total income is 840,000 yen because it meets the criteria of a low-value transfer.

(Calculation)
Determination of whether or not it falls under low-value transfer
(1) Sales price: 450,000 yen
(2) Amount equivalent to 70% of market value: 1,000,000 yen x 70% = 700,000 yen
(3) Because (1) < (2), the sales price is less than the amount equivalent to 70% of the market value, the transaction is deemed a low-value transfer.

Total Income Calculation
When a transaction is deemed a low-value transfer, the total income must include the actual sales price and the difference between the actual sales price and the amount equivalent to 70% of the market value.

450,000 yen [Actual sales price] + (700,000 yen – 450,000 yen) [Difference between actual sales price and the amount equivalent to 70% of the market value] = 700,000 yen [Total income]

Taxable Income Calculation
700,000 yen [Total income] – 450,000 yen [Transfer cost] = 250,000 yen [Taxable Income]

Also, on and after April 1, 2019, if crypto asset is transferred to other individuals or corporations through gifts (excluding death-related gifts) or inheritance (excluding specific inheritance for inheritors), the value (market value) of the crypto asset at the time of the gift or inheritance must be included in the total income for miscellaneous income, etc.

(Note)
1 If an individual acquires a crypto asset and transfers them, the acquisition cost of the crypto asset will be the value of the cryptocurrency asset at the time of gift or inheritance.

2 This applies to income tax from 2019 onwards.

3 If an individual acquires a crypto asset through inheritance, gift, or donation, they will be subject to inheritance tax or gift tax.

Please see “4-1 When Crypto Asset is Acquired Through Inheritance or Gift” for more information.

[Related Laws and Regulations]
Income tax law 40
Enforcement order of the income tax law 87
Income tax basic disclosure 40-2, 40-3

Our comments:

This was a new item that was added in Version 3.

We have no particular comments.

2-11 Treatment of Losses from Crypto Asset Transactions

Question

I incurred a loss in the amount of miscellaneous income through crypto asset trading.

Can this loss be used to offset other income such as salary income?

Answer

A loss incurred in the calculation of miscellaneous income cannot be used to offset other income.

Under the Income Tax Act, income that can be used to offset other income includes real estate income, business income, mountain forest income, and transfer income.

Since miscellaneous income does not fall under these categories of income, a loss incurred in the calculation of miscellaneous income cannot be netted with other income, even if there is such a loss.

[Related laws and regulations, etc.]
Income tax law 69

Our comments:

No significant changes from Versions 1,2,3,4.

While losses cannot from miscellaneous income can’t be used to offset income from other income categories, that changes if the income is classified as other than miscellaneous, such as business income or transfer income.

2-12 Crypto Asset Margin Trading

Question

Will crypto asset margin trading be subject to the separate taxation system for declaration, similar to foreign exchange margin trading (commonly known as FX)?

Answer

Income from margin trading of crypto asset is not subject to the separate reporting taxation (special taxation of miscellaneous income related to futures trading) specified in the Special Taxation Measures Act, so it will be subject to comprehensive taxation and must be reported.

Foreign exchange margin trading (so-called FX) falls under financial product futures trading under the Financial Instruments and Exchange Law, so it is subject to separate reporting taxation.

Though margin trading of crypto asset is considered futures trading of financial instruments etc. as does FX, it is excluded from separate reporting taxation under the Special Measures Act, and therefore, income from such transactions will be reported under comprehensive taxation.

[Related laws and regulations, etc.]
Income tax law 35
Special Tax Measures Act 41-14

Our comments:

The content is pretty much the same as Version 1,2,3.

The amendment to the Financial Instruments and Exchange Law has resulted in crypto asset derivatives falling under the purview of the law.

Previously, crypto exchanges only needed to register with the Financial Services Agency as required by the Payment Services Act, but now, registration as a Type 1 Financial Instruments Business Operator is necessary to provide services such as crypto margin trading and FX.

The comment below has been carried over from my commentary for Version 1,2,3.

I am personally opposed to special tax treatments in general.

Lowering the tax rate is never a bad thing, but tax exemptions that favor only a certain group of people are not fair.

2-13 Crypto Asset Margin Trading (2)

Question

Please tell me the method of calculating the amount of income in the case of the following crypto asset transactions based on credit.

(Example)
・ Went short 1BTC for 1,000,000 yen on September 1.
・ Went long 1BTC for 800,000 yen on September 24.

(Note) In the above transactions, fees for buying and selling crypto asset are not considered.

Answer

In the above example, the income amount is calculated as follows:

(Formula)
1,000,000 yen [selling price] – 800,000 yen (Note 1) [buying price] = 200,000 yen (Note 2)

(Note)
1 The transfer cost is the amount calculated by the specific identification method.
2 If there are other necessary expenses, the amount after deducting such expenses.

A crypto asset credit transaction is a buying and selling of crypto asset that is conducted based on credit from a crypto asset exchange operator.

In this method of crypto asset credit trading, when buying and selling crypto asset and then settling by buying and selling the same type of crypto asset, the income amount is the difference between the normal amount of consideration to be received by the transfer of crypto asset (selling price) (Note 1) and the consideration amount of the crypto asset at the time of buying (buying price) (Note 2).

In addition, income from crypto asset credit transactions is considered income for the year in which the transaction is settled.

(Note)
1 When a seller conducts a sale, the interest received from the crypto asset exchange operator is included in the sale price, and the so-called commodity loan fee paid to the crypto asset exchange operator is deducted from the sale price.

2 When a buyer conducts a purchase, the interest paid to the crypto asset exchange operator is included in the purchase price, and the so-called commodity loan fee received from the crypto asset exchange operator is deducted from the purchase price.

[Related Laws and Regulations]
Enforcement order of the income tax law 119-7
Income tax basic disclosure 36・37, Article 22

Our comments:

This was a new item that was added in Version 3.

We have no particular comments.

3 Corporate Tax

3-1 When to Recognize Profit From Transferring Crypto Asset

Question

When selling crypto asset, buying goods with crypto asset, or exchanging crypto asset, which fiscal year should the resulting transfer gains or losses be recorded in?

Answer

The transfer gains or losses resulting from selling, buying, or exchanging crypto asset should be recorded in the fiscal year in which the contract for the sale, purchase, or exchange of crypto asset was made (i.e., the date of the agreement).

For transactions involving the sale of crypto asset (1-1 Sales of Crypto Asset), the purchase of goods with crypto asset (1-2 Purchase of Goods with Crypto Asset), or the exchange of crypto asset (1-3 Crypto-to-crypto Trades), as they are all considered a transfer of crypto asset, the transfer gains or losses related to these transactions should be recorded in the fiscal year in which the agreement for the transfer was made (i.e., the date of the agreement).

[Related Laws and Regulations]
Corporate tax law 61

Our comments:

This was a new item that was added in Version 3.

The transfer loss and gain of cryptocurrency is stated as being recorded in the fiscal year of the contract date of the sale, etc.

However, in practice, the timing of the transfer of cryptocurrency and the contract date may be different.

If the transfer of cryptocurrency has not taken place and the payment has not been collected by the end of the fiscal year, it is expected to cause operational problems with only taxes being incurred.

Accounting should not only focus on the contract date, but also take into account the rights and obligations of the parties to the contract, and handle the transaction in a way that reflects the substance of the transaction.

The income recognition of transfer loss and gain of securities are also generally based on the contract date under tax law, but basing it off of delivery date is also allowed as an exception.

In our view, accounting and tax treatment that take into account the actual state of the transaction should be permitted.

3-2 Cost Basis of Transferred Crypto Asset

Question

Can you tell me about the transfer cost of crypto asset?

Answer

The transfer cost of crypto asset is calculated as follows:

Transfer cost = Book value per unit of crypto asset x Quantity of crypto asset transferred

The profit (loss) from the transfer of crypto asset is the difference between the consideration that is normally received for the transfer of that crypto asset and the transfer cost of that crypto asset.

This transfer cost is the amount obtained by multiplying the book value per unit of crypto asset (note) by the quantity of crypto asset transferred.

(Note) The calculation of the book value per unit is done by using either the moving average method or the total average method (the statutory evaluation method is the moving average method. If you use the overall average method, please notify the head of the local tax office, etc.).

This calculation method election is made for each crypto asset.

(Related laws and regulations)
Corporate tax law 61
Enforcement order of the corporate tax law 118-6

Our comments:

This was a new item that was added in Version 3.

In the case of personal income tax, the principle method of calculating the acquisition cost has changed from previously being the moving average method to the total average method in Version 3, as seen in Question 2-5.

For entities, the principle method is the moving average method, and the total average method is the exception that is permitted after submitting an application to the tax office.

At the present time, it is not known why the principle calculation methods are different for individuals and entities.

To read about our views on why moving average is preferable, please refer to comments on Questions 2-5 and 2-6.

3-3 Mark-to-market of Crypto Asset at Year-end

Question

Our company held crypto asset at year end.

Is there any tax treatment that is required at year end?

Answer

An entity must measure its crypto asset (those that are actively traded on a market, referred to as “market crypto asset” in this question) at the end of its fiscal year using the fair value method.

If the corporation holds market crypto assets on its own balance sheet, the difference between the fair value and the book value (referred to as the “mark-to-market gain or loss” in this question) must be included in the amount of profit or loss for that fiscal year.

The mark-to-market gain or loss will be reversed in the following fiscal year.

The fair value is calculated by multiplying the quantity of the market crypto asset by one of the following:

• The final trading price of the market crypto asset as published by a price publisher on the last day of the fiscal year (if no such price is published on that day, the last trading price published before that day closest to the last day of the fiscal year)
• The final exchange rate of the market crypto asset as published by a price publisher on the last day of the fiscal year multiplied by the final trading price of the other market crypto asset exchanged at that rate (if no such exchange rate is published on that day, the last exchange rate published before that day closest to the last day of the fiscal year)

(Note) A crypto asset with an active market is defined as the crypto asset that an entity holds that meets all of the following criteria:

1 The selling price and other information (Note 3) is continuously published and has a significant impact on the determination of the selling price or exchange ratio of that crypto asset.
(Note 3) Selling price and other information refers to the selling price or exchange ratio with other cryptocurrencies

2 There is a sufficient amount and frequency of transactions for the continuous publication of the selling price and other information mentioned in 1.

3 Meets one of the following requirements:

(a) The publication of the selling price and other information mentioned in 1 is done by the entity.

(b) The transactions mentioned in 2 are primarily not conducted by the entity on its own account.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7, 118-8, 118-9

Our comments:

This was a new item that was added in Version 3.

A significant rule has been clarified that unrealized gains and losses on cryptocurrency held by entities will be subject to taxation.

The impact of this is huge.

For income tax on individuals, there is no taxation on unrealized gains (losses).

However, for corporate tax purposes, unrealized gains (losses) for cryptocurrencies are considered taxable, creating a significant gap in tax treatment between the two.

Unrealized gains (losses) have no cash backing, as they are not realized.

It will be difficult to make a convincing argument on why unrealized gains should be taxed.

Yes, I understand that the tax treatment is consistent with that for securities held for trading purposes.

But cryptocurrencies are not just held for trading purposes only.

Taxation on unrealized gains (losses), without considering the purpose of the asset, creates significant issues in two ways:

First, it hinders the business activities of businesses.

Businesses hold cryptocurrencies for various reasons.

One reason is to protect excess cash from inflation policies implemented by the government and central banks, and to preserve the financial strength of its balance sheet.

Another reason why corporations hold crypto assets is that it may be necessary for their business activities.

There are various situations, I’ll share a situation about a business that provides services using smart contracts as an example:

Smart contracts are programs executed on the blockchain.

Typically, cryptocurrencies are required to execute these programs.

Businesses that provide services using smart contracts need to execute the program on a daily basis, and therefore need to hold cryptocurrencies.

Businesses that hold cryptocurrencies for business reasons must hedge against the tax exposure that arise from mark-to-market taxation.

This can be done through purchasing derivative contracts, but it also increases costs, administrative burdens, and introduces additional counterparty risks.

The second significant issue is that it significantly reduces the efficiency of funds.

Profits should be reinvested to generate compound interest, but taxing unrealized gains greatly reduces the efficiency of funds.

It is generally considered to be not fair tax treatment to favor a certain entity structure over another, and creating that regulatory arbitrage may lead to distorted management decisions and unintended consequences.

Improving the efficiency of funds is crucial for economic growth, and as a result, it also increases tax revenues.

Taxing unrealized gains (and losses) is problematic from this point of view.

3-4 Crypto Asset Margin Trading

Question

Please tell me the method of calculating the amount of income in the case of the following crypto asset transactions based on credit.

(Example)
Went short 1BTC for 1,000,000 yen on September 1.
Went long 1BTC for 800,000 yen on September 24.

(Note) In the above transactions, fees for buying and selling crypto asset are not considered.

Answer

In the above example, the income amount is calculated as follows:

(Formula)
1,000,000 yen [selling price] – 800,000 yen (Note 1) [buying price] = 200,000 yen [income amount]

(Note)
1 The transfer cost is the amount calculated by the specific identification method.

A crypto asset margin trade refers to the buying and selling of crypto asset in which credit is provided by a crypto asset exchange operator (referred to in this question as a “crypto asset exchange operator”). This is defined in Article 2, Paragraph 7 of the Payment Services Act.

The transfer loss or gain amount of crypto asset in this method of crypto asset credit transaction is the difference between the amount of consideration that should normally be obtained by the transfer of crypto asset (selling price) (Note 2,4) and the amount of consideration related to the purchase of crypto asset (purchasing price) (Note 3,4) in the case of selling and then settling with the same type of crypto asset purchase.

(Note)
2 The amount equivalent to the interest received from crypto asset exchange operators is included in the selling price.

3 The buying commission fee and so-called borrowing fee paid to crypto asset exchange operators are included in the buying price.

4 With regard to 2 and 3 above, if they are included as income or expenses in the amount of profit or loss as they occur, with the condition of continuing application, such treatment may be permitted (however, excluding buying and selling commission fees).

When the opposite of the crypto asset credit transaction mentioned above is conducted, i.e. when crypto asset is bought and then the same type of crypto asset is sold and settled, the transfer loss and gain amount of crypto asset will be the difference between the amount of consideration that should be normally obtained by the transfer of crypto asset (selling price) (note 5, 7) and the amount of consideration related to the buying of crypto asset (buying price) (note 6, 7).

(Note)
5 The so-called borrowing fee received from crypto asset exchange operators is included in the selling price.

6 The buying commission fee and amount equivalent to interest paid to crypto asset exchange operators are included in the buying price.

7 With regard to 5 and 6 above, if they are included as income or expenses in the amount of profit or loss as they occur, with the condition of continuing application, such treatment may be permitted (however, excluding buying and selling commission fees).

Also, so-called crypto asset FX trading and crypto asset futures trading are classified as derivative trading, not crypto asset credit trading.

[Related laws and regulations, etc.]
Corporate tax law 61, 61-5
Corporate Tax Law Enforcement Ordinance 118-6
Corporate tax law implementation regulations 27-7
Corporate tax basic notification 2-3-62

Our comments:

This was a new item that was added in Version 3.

No particular comments.

3-5 When to Recognize Profit From Crypto Asset Margin Trading

Question

In which fiscal year should the transfer gains or losses that occur as a result of crypto asset credit transactions be recorded?

Answer

They should be recorded in the fiscal year that the following day belongs to.

(1) For transactions in which crypto asset is sold and then subsequently bought to settle the transaction…the day the buy contract was entered to settle the transaction.

(2) For transactions in which crypto asset is bought and then subsequently sold to settle the transaction…the day the sell contract was entered to settle the transaction.

The timing of recognition stated in Answer (1) is an exception to the general rule stated in “3-1 When to Recognize Profit From Transferring Crypto Asset”, which requires entities to recognize gains or losses based on the contract date of the sell transaction.

For transactions where crypto asset is bought and then subsequently sold (Answer 2), the timing of recognition will be the fiscal year in which the contract for the sell transaction is entered, which is in accordance with the general rule stated in “3-1 When to Recognize Profit From Transferring Crypto Asset”.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate tax law implementation regulations 26-9
Corporate tax basic notification 2-1-21-14

Our comments:

This was a new item that was added in Version 3.

No particular comments.

3-6 Provisional Settlement Profit for Crypto Asset Margin Trading

Question

Our company conducts crypto asset credit transactions, but at the end of the fiscal year, there are some transactions that are not settled.

What treatment is necessary at the end of the fiscal year?

Answer

If a entity conducts crypto asset credit transactions and at the end of the fiscal year, there are some that are not settled, then the amount corresponding to the profit or loss calculated as if it were settled at the end of the fiscal year (hereinafter referred to as “provisional settlement profit or loss amount”) is to be included in the amount of profit or loss for that fiscal year.

The provisional settlement profit or loss amount is determined as follows, respectively, according to the following classification (limited to crypto asset related to un-settled crypto asset credit transactions at the end of the fiscal year):

(1) In the case of going short crypto asset through credit transactions:

The amount of consideration related to the sale – (the fair value of the crypto asset at the end of the period × the quantity of the crypto asset)

(2) In the case of going long crypto asset through credit transactions:

(the fair value of the crypto asset at the end of the period × the quantity of the crypto asset) – the amount of consideration related to the purchase

The provisional settlement profit or loss is reversed in the following fiscal year.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-11
Corporate tax law implementation regulations 26-10

Our comments:

This was a new item that was added in Version 3.

The topic in question is similar to the one in Question 3-3 where unrealized losses on the cryptocurrency held by entities at the end of the fiscal year are subject to taxation.

We believe there are similar drawbacks with the taxation of unrealized gains/losses from credit transactions.

4 Inheritance Tax and Gift Tax

4-1 When Crypto Asset is Acquired Through Inheritance or Gift

Question:

What is the tax treatment for crypto asset acquired through inheritance or gift?

Answer:

Inheritance tax or gift tax will be imposed when crypto asset is acquired through inheritance, bequest, or gift from the inherited person, etc.

The Inheritance Tax Law provides that an individual will be subject to inheritance tax or gift tax when economic assets with a value that can be estimated in money are acquired through inheritance, bequest, or gift.

As for crypto asset, it is specified in the Payment Services Act as an “asset with a value that can be used to settle a debt to an unspecified person”, so if crypto asset is acquired through inheritance, bequest, or gift from the inherited person, etc., inheritance tax or gift tax will be imposed.

(Note) Taxation of individuals that gifted crypto asset
If an individual transfers crypto assets through a donation (excluding donations made as a result of death) or inheritance (excluding specific inheritances given to an heir), they must include the value (market value) of the crypto asset at the time of the donation or inheritance in their total income for the calculation of the income tax.

For more information, see “When Transferring Crypto Asset at Below Market Value (Zero Value)”

[Related laws and regulations, etc.]
Inheritance Tax Law 2, 2-2
Inheritance Tax Law Basic Understanding 11-2-1

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

I have no further comments regarding the tax treatment.

However, what is more important is to prepare carefully in advance before something happens.

If you keep your bitcoin on a domestic exchange, the transfer to your family will be smooth if your family knows the existence of the account.

It is not so easy in the case of a foreign exchange.

Furthermore, self-custody should be the default for bitcoin.

Leaving your bitcoin on an exchange is not recommended unless you are a trader.

If an exchange is hacked, you won’t get your bitcoin back.

And exchanges have been hacked and will be hacked in the future.

It is important to prepare for the worst case scenario, and ensure your family is informed of the storage location of wallets and how to use them, so that they can access your bitcoin in case something happens to you.

4-2 How to Measure Crypto Asset Acquired Through Inheritance or Gift

Question

How can I measure crypto asset that I have acquired through inheritance or gift?

Answer

Crypto asset with an active market is measured based on the trading price at the time of the taxable event published by a crypto asset exchange where the taxpayer is trading.

Regarding the valuation method for crypto asset, since there is no provision in the valuation directive, it will be valued in accordance with the valuation method specified in the Valuation Directive 5 (Valuation of assets without specified valuation method) based on the objective exchange value established by active trading in which a certain market price is established.

In this case, for crypto asset with an active market(Note 1), the trading price at the time of taxable event published by a crypto asset exchange where the taxpayer is trading(Notes 2, 3, 4) will be used for valuation, similar to foreign currency.

For crypto asset without an active market, individual valuation will be conducted taking into consideration the content and characteristics, trading realities, etc. of the crypto asset(Note 5) as an objective exchange value cannot be established due to the lack of an established market price.

(Note)

1 “An active market” refers to a situation where sufficient quantity and frequency of transactions are carried out at a crypto asset exchange or a crypto asset sales venue, and price information is consistently provided.

2 “Trading price at the time of taxable event published by a crypto asset exchange” includes the transaction price recorded on a balance certificate provided by a crypto asset exchange in response to a request from a taxpayer.

3 In the case where both the purchase price and the selling price are published at a crypto asset exchange (crypto asset sales venue), it is not a problem using the selling price of the taxpayer.

4 If the taxpayer is conducting transactions with multiple crypto asset exchanges, it is not a problem to evaluate based on the transaction price at the time of taxable event published by the selected crypto asset exchange by the taxpayer.

5 For example, methods of evaluation such as considering actual transaction price and expert opinion can be considered.

[Related laws and regulations, etc.]
Valuation Directive 4-3, 5

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

An active market is defined as a market where there is a sufficient quantity and frequency of trades, but this definition is not very helpful because “sufficient” is not defined.

When looking at the trading screen of an exchange, the screen seems to be active with flashing prices, but most of the trades are actually made by liquidity providers.

When selling a large amount of cryptocurrency, the price will drop significantly.

bitcoin is the only cryptocurrency with enough liquidity to sell a large amount without affecting the market price.

When valuing cryptocurrency, it may be a good idea to consider a liquidity discount or consult with a valuation expert, if the amount is significant.

5 Income Tax Withholding

5-1 Payment of Salary, etc. Using Crypto Asset

Question

Our company has decided to pay a part of our monthly salaries in a crypto asset that can be traded on exchanges, following a request from our employees.

How should we handle the withholding tax on this salary?

(Example)
On October 10, we paid 200,000 JPY in cash to an employee for their September salary and also paid part of the salary in a crypto asset (valued at 50,000 JPY at the time of payment) that the company owns.

Answer

The total amount of the employee’s salary is 250,000 JPY, consisting of 200,000 JPY in cash and 50,000 JPY in crypto asset.

Therefore, the total salary of 250,000 JPY should be used to calculate the withholding tax.

Salaries are usually paid in cash, but in cases like the one you mentioned, where a separate agreement is made in the employment contract to pay part of the salary in crypto asset, the value of the crypto asset payment should also be considered as part of the income from salary.

Therefore, as the withholding tax obligor, your company should calculate the withholding tax on the total salary, including the value of the crypto asset payment.

Note that for non-cash benefits-in-kind, the economic benefit should be evaluated, but in the case of crypto asset, the value at the time of payment should be used for evaluation.

[Related laws and regulations, etc.]
Income tax law 28, 36, 183

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

It is common to receive salary in bitcoin but the amount to be received is still denominated in fiat.
However, there are also bitcoiners who set their compensation denominated in bitcoin.

For example, hourly rate = 0.01 BTC, regardless of bitcoin price in USD.

As more people use bitcoin to measure the value of goods, bitcoin will become more accepted as a currency and not just an investment asset.

6 Consumption Tax

6-1 Treatment of Consumption Tax When Transferring Crypto Asset

Question

Our company has transferred (sold) our crypto asset through a domestic crypto asset exchange. Can you explain the consumption tax consequences in this case?

Answer

The transfer of crypto asset through a domestic crypto asset exchange is not subject to consumption tax.

According to the Consumption Tax Law, the transfer of payment means and similar items is tax-exempt.

The transfer of crypto asset through a domestic crypto asset exchange is classified as the transfer of such payment means, and is therefore tax-exempt.

In addition, when filing a fixed tax return under general taxation, the tax base ratio is calculated based on the taxable sales, tax-exempt sales, and non-taxable sales for the relevant tax period, but the transfer of crypto asset that falls under the category of payment means does not need to be included in the calculation of the tax base ratio for non-taxable sales.

(Reference)
Fees paid to a crypto asset exchange as commission for the sale and purchase of crypto asset are considered as the consideration for the service of intermediation, and are subject to consumption tax.

In the case of using the individual correspondence method for reporting consumption tax for the fees incurred for the purchase of crypto asset for the purpose of buying and selling crypto asset, the tax on the purchase for tax purposes (i.e., tax-excluded sales corresponding to tax-included purchase) corresponds only to purchases other than transfer of taxable assets, etc.

The transfer of crypto asset made domestically before June 2017 is subject to consumption tax.

If a business operator subject to consumption tax has no choice but to record the name of the other party or the like in the books and request documents in order to apply for a deduction of the amount of tax on the purchase for tax purposes with regard to the purchase of crypto asset made domestically before June 2017 through an intermediary such as a crypto asset exchange, the books should be recorded to show the reason and the name of the intermediary.

[Related laws and regulations, etc.]
Consumption tax law 6-1, 30, Table 1-2 (Supplementary Table 1-2)
Consumption Tax Act Enforcement Ordinance 9-4, 48-2, 49

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

I am really glad that the transfer of cryptocurrency is not subject to sales tax.

bitcoin is often referred to as digital gold because of its similarities with the metal.

Transfer (selling) of gold is subject to consumption tax.

This creates a difference between the price in Japan and the market price overseas.

If you buy gold overseas and sell it in Japan, you will earn a profit equal to the consumption tax.

In the case of gold, you will be taxed by customs when you bring it into Japan, but cryptocurrency is borderless.

We do not know how the price difference with foreign countries will affect price discovery of bitcoin in the long run, but it is good that there are fewer factors that could hinder natural price formation, even if only for a short period of time.

More importantly, bitcoin’s goal is to become the money of the future.

If sales tax was charged on transfers, maintaining transaction records would become too complicated and it would not function as a means of exchange.

It is fortunate that the authorities have settled on bitcoin being tax-exempt for consumption tax, in this respect.

6-2 Fees Received from Crypto Lending

Question

Our company entered into and concluded a crypto asset lending transaction agreement with a domestic crypto asset exchange operator and lent out crypto asset that we owned.

We received a certain rate of the amount of the lent crypto asset as a usage fee after one year when the contract period expired.

According to the usage regulations set by the crypto asset exchange operator, our company is to lend crypto asset to the exchange operator and after the contract period has expired, the same and equivalent crypto asset must be returned from the exchange operator to our company and the usage fee will be paid to our company.

Please let us know the tax treatment regarding consumption tax in this case.

Answer

The lending of crypto asset as consideration for the usage fee is subject to consumption tax.

As specified in the usage regulations set by the crypto asset exchange, the transaction in question is considered “lending of assets” as the business operator receives compensation after the expiration of the contract period, and the lent crypto asset is returned by the exchange in the same type and equivalent crypto asset.

Furthermore, the transaction in question does not fall under the non-taxable transactions listed in the first supplementary table of the Consumption Tax Law, which includes the transfer of means of payment (crypto asset), lending of money as consideration for interest, and lending of securities.

Therefore, the lending of crypto asset as consideration for the usage fee is subject to consumption tax.

[Related laws and regulations, etc.]
Consumption tax law 2-1-8, 4-1, 6-1, Supplementary Table 1
Consumption Tax Act Enforcement Ordinance 9-4

Our comments:

This is a new item that appeared in Version 5.

It was most likely added as a response to the recent trend of lending crypto to earn yield, commonly in the form known as lending.

Intuitively, the yield on “lending” seems similar to interest on loans or deposits.

However, the FAQ categorizes it as “usage fee” instead of interest because the tax authorities do not consider crypto to be money, and therefore “crypto lending” is different from lending money.

In the US, the SEC also claims that crypto yield products are not money loans but securities.

We strongly advise users to exercise caution before participating in lending.

The borrower of the crypto that the user is lending out needs to earn a higher yield than what they are paying out to the user.

That is risky business, considering the relatively high yield that these products are promising.

Lending crypto can result in the worst-case scenario of not getting your coins back.

Not your keys, not your coins applies to lending, as it applies to leaving coins on exchanges.

One shouldn’t be doing either.

7 Statutory Declaration

7-1 Whether to Include Crypto Asset in the Property and Debt Statement

Question

I have crypto asset held at crypto asset exchanges in Japan and overseas.

Do I have to include crypto asset in the Property and Debt Statement?

Answer

Yes, crypto asset is subject to inclusion in the Property and Debt Statement.

If you have crypto asset as of December 31, it will be necessary to record it in the Property and Debt Statement.

Please record it by type of crypto asset (such as bitcoin), purpose, and location in the Property and Debt Statement.

The location of the crypto asset exchange where crypto asset is deposited does not affect whether or not it should be recorded in the Property and Debt Statement.

(Note) The location of crypto asset refers to the address (if you do not have an address, the residence) of the person who has the property, as stipulated in Article 3, Item 6 and Article 2 of the Remittance and Other Statements Regulations.

[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 6-2-1
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 12-2-8
Remittance and Other Statements Regulations12-3-6, 15-1-2, Supplementary Table 3

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

Other than that it is better to keep bitcoin off of exchanges as much as possible, I have no particular comments.

For your information, the requirements for submitting a Property and Debt Statement are as follows:

Those who need to submit a Property and Debt Statement are those who are required to submit a tax return or those who are eligible to submit a tax refund application (only in cases where the total amount of tax for that year exceeds the total of the dividend deduction and the special deductions for year-end adjustments for housing loans, etc.), and meet either of the following conditions:

1 The total amount of various income except for retirement income for the year exceeds JPY 20 million.

The total amount of various income includes the total amount of income after deducting special deductions in cases where there is income subject to separate taxation.

However, this does not include the carried-over deductions for (1) carry-over of net losses or miscellaneous losses, (2) carry-over of transfer losses in cases of replacement of residential properties, (3) carry-over of transfer losses for specific residential properties, (4) carry-over of transfer losses for listed shares, etc., (5) carry-over of transfer losses for shares issued by specific small and medium-sized companies, and (6) carry-over of losses for settlement of differences, etc. in futures trading, after the application of these deductions.

2 On December 31 of that year, you have assets with a total value of JPY 300 million or more or foreign-out special assets with a total value of JPY 100 million or more (assets acquired through inheritance or inheritance in the year of inheritance start can be excluded from the determination of the total value).

Here, “property value” refers to the total value of property value, not the amount subtracted from the property value by the amount of debt.

In addition, “Assets Subject to Special Cases for Moving Abroad” refers to the rights referred to in subparagraph 1 or 2 of paragraph 2 of Article 60 of the Income Tax Act or paragraph 3 of the same Article for unpaid credit transactions, etc.

(Note) For the Property and Debt Statement from the 5th year of the Reiwa era, in addition to the above, residents who have assets with a total value of JPY 1 billion or more as of December 31 of that year are also subject.

Link to tax answer

7-2 How to Record the Value of Crypto Asset in the Property and Debt Statement

Question

How do I record the value of crypto asset in my Property and Debt Statement?

Answer

Regarding the value of crypto asset, if there is an active market, the transaction price published by the crypto asset exchange conducting the transaction for which the Property and Debt Statement is submitted will be recorded as the current market price as of December 31 of that year.

Also, if it is difficult to determine the market price, the estimated price will be recorded based on a reasonable method using the acquisition price or trading example price of the crypto asset as of December 31 of that year according to the situation of the crypto asset.

An active market for cryptocurrencies(Note 1) exists and a certain market price is established through active trading, and since the objective exchange value is made clear, the trading price(Note 2, 3, 4) published by the crypto asset exchange with whom the party submitting the Property and Debt Statement is conducting transactions shall be recorded as the market price as of December 31 of that year.

(Note)

“An active market exists” refers to the case where sufficient quantity and frequency of transactions are conducted on a crypto asset exchange or sales platform, and price information is continuously provided.

“The trading price as of December 31 of that year published by the crypto asset exchange” includes the trading price recorded on the balance certificate provided in response to the request of the party submitting the Property and Debt Statement.

If the purchase price and selling price are published on the crypto asset exchange (sales platform), it is acceptable to record the selling price of the crypto asset to the crypto asset exchange by the party submitting the Property and Debt Statement.

If the party submitting the Property and Debt Statement is conducting transactions with multiple crypto asset exchanges, it is acceptable to record the trading price as of December 31 of that year published by the crypto asset exchange chosen by the party submitting the Property and Debt Statement.

Furthermore, if it is difficult to calculate the value of a property listed on the Property and Debt Statement based on its market price, it is acceptable to calculate and record an estimated value.

The estimated value of a crypto asset refers to the value calculated using methods such as the following:

1. The selling and purchasing actual price as of December 31 of that year (if there is no selling and purchasing actual price as of December 31 of that year, the selling and purchasing actual price within that year on the nearest date prior to December 31 of that year), among which the selling and purchasing actual price deemed appropriate
2. If there is no value obtained in 1, the transfer price in the case of transferring the crypto asset from January 1 of the following year to the deadline for submitting the property and debt schedule
3. If there is no value obtained in 1 or 2, the acquisition price.

[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 6-2-4
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 12-2-3
Remittance and Other Statements Regulations12-5, 15-4

Our comments:

This is a new item that was added in Version 2.

I have no particular comments.

7-3 Whether to Include Crypto Asset in the Foreign Property Statement

Question

I hold crypto asset on a foreign crypto asset exchange.

Do I have to include the crypto asset in the Foreign Property Statement?

Answer:

No, crypto asset does not have to be included in the Foreign Property Statement.

According to the provisions of Article 12, Paragraph 3, Item 6 of the Regulations on Property and Debt Statement for Foreign Transfers, etc., crypto asset falls under the category of property whose location is determined by the place of residence (if the party does not have a place of residence, their place of residence) of the party possessing the property.

In addition, the Foreign Property Statement is to be submitted by resident individuals (individuals who have a place of residence in Japan or who have continuously had a place of residence for more than one year, excluding non-permanent residents).

Therefore, crypto asset held on a foreign crypto asset exchange by a resident individual is not considered “property located abroad” and will not be included in the foreign property and debt schedule.

See “7-1 Whether to Include Crypto Asset in the Property and Debt Statement” for details.

[Related laws and regulations, etc.]
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade 5
Law Concerning the Declaration, Etc. of Foreign Exchange and Foreign Trade Administrative Order 10-7
Remittance and Other Statements Regulations12-3-6

Our comments:

This is a new item that was introduced in Version 2.

The comment below has been carried over from my commentary for Version 2.

I don’t have any particular comments other than that it is generally better to not keep bitcoin on exchanges as much as possible.

For more information on the requirement to submit a Foreign Property Statement, see below.

Requirement to submit
The parties required to submit a Foreign Property Statement are “resident individuals other than non-permanent residents” who have foreign property (excluding property acquired by inheritance abroad at the beginning of the year of succession) whose total value exceeds 50 million yen as of December 31 of that year.

Here, “resident individual” and “non-permanent resident” refer to those defined in the Income Tax Act, and the determination of whether an individual is a resident is based on their circumstances as of December 31 of that year.

According to the Income Tax Act, a “resident individual” refers to an individual who has a place of residence in Japan or has continuously had a place of residence for more than one year, and a “non-permanent resident” refers to a resident individual who does not have Japanese nationality and has a total period of residence or place of residence in Japan of five years or less within the past ten years.

Applicable Assets
The foreign property held as of December 31 of that year is the subject matter.

“Foreign property” refers to “property located abroad,” and the determination of whether property is “located abroad” is made on a case-by-case basis based on the circumstances as of December 31 of that year.

In addition, the “value” of foreign property is determined based on the “market price” or “estimated value” equivalent to the market price as of December 31 of that year, and the conversion into Japanese

Link to tax answer

Summary

In recent years, decentralized finance (DeFi) applications using blockchains have emerged and the types of transactions have become much more diverse and complex.

The FAQ has also changed with the times to adapt to these changes.

However, from the eyes of the taxpayer, changes to the FAQ were mostly unfavorable in terms of tax treatment.

Below are my comments from Version 3.

However, the following two changes that were made in Version 3 are a huge concern:

1. For individuals, the principle cost calculation method has been changed from moving average method to the total average method (related to FAQ1-3)
2. For entities, the unrealized gains or losses from holding cryptocurrency and cryptocurrency margin trading positions at the end of the period have become taxable (related to FAQ22 and FAQ25)

The change from the moving average method to the total average method is a concern, not because of the quantitative impact, but because it is not based on any theoretical foundation and the fact that fundamental concepts like this can easily be changed on a whim is very concerning.

The mark-to-market of cryptocurrency held by entities and taxation on unrealized gains and losses will be a significant issue for companies that conduct business using cryptocurrency.

But the change to Question 2-2 in Version 7 that laid out explicit criteria regarding the classification of business income was a breath of fresh air in that this was a change that could actually be beneficial to the taxpayer.

Even if the change was not directed at making bitcoin or crypto more user friendly, and even if it was an unintended effect of other government policies (diversifying ways of working), a benefit to the average taxpayer is a step in the right direction.

The comment below has been carried over from my closing summary for Version 1 and 2 with some additions.

bitcoin is an unique asset that has properties that have never existed before.

To make Bitcoin more understandable, existing things are used as analogies.

While analogies are useful in making things easier to understand, they do not necessarily accurately represent reality.

bitcoin is called a “coin”, but there is no physical coin and there is no issuer or administrator.

When we say that bitcoin is “sent” or “exchanged”, nothing physically moves.

People store bitcoin on “wallets”, but there is no bitcoin in the wallet itself.

If we apply analogies directly to accounting and tax calculation, there is a risk of failing to faithfully represent reality.

In this FAQ, I think that the following items in particular should be reconsidered to faithfully represent reality:

• Crypto-to-crypto Trades => Change to taxable when exchanged for fiat;
• Acquisition of Cryptocurrency Through Forks=> Change to taxable when exchanged for fiat or used;
• Acquisition of Cryptocurrency Through Mining => Change to taxable when exchanged for fiat or used;
• Income Classification of Cryptocurrency => Change to transfer income being the default;
• Permit cost calculation methods that faithfully represent economic reality
• Unrealized gains/losses excluded from taxation

Taxing when exchanging for legal currency more accurately represents reality and has the following effects:

• Simplifying taxable income calculation (benefit for both taxpayers and authorities);
• Improving tax capture rate and efficiency (benefit for authorities);
• Encouraging research, application, and improvement of new technology (benefit for the whole country)

The post Japanese Tax Authorities Releases FAQ (Ver7) on Crypto Taxes appeared first on Japan Professional Alliance.

On January 20, 2023, the National Tax Agency (NTA) published a guidance titled “Year End Mark-to-Market Treatment of Cryptocurrencies Held by Entities (Information)”.

The NTA has been releasing Crypto Tax FAQs every year since 2017.

This FAQ (M-t-M FAQ) is unique in that it covers only corporation tax, specifically, topics over year end mark-to-market measurements.

Table of Contents

There are six topics covered in this M-t-M FAQ.

Can’t help but notice terms that caught on around the year 2020 such as DEXs and staking.

The reason why this FAQ is labeled as “information” is because it is not a law or regulation, but rather the view of the NTA.

Although it is not a law, the tax authorities in Japan will refer to this document when verifying the validity of tax calculations regarding crypto.

In practice, I expect various accounting and tax treatments to be based on this FAQ.

This hasn’t changed from Version 1.

Our comments will be inserted using blue text, and the rest is the original content of the FAQ.

The official document can be obtained at the following link:

法人が保有する暗号資産に係る期末時価評価の取扱いについて（情報）

1 Year end mark-to-market of crypto assets

Question

Our company held crypto assets as of year end.

Is there any tax treatment that is required at year end?

Answer

An entity must measure its crypto assets (those that are actively traded on a market, referred to as “market crypto assets” in this question) at the end of its fiscal year using the fair value method.

If the corporation holds market crypto assets on its own balance sheet, the difference between the fair value and the book value (referred to as the “mark-to-market gain or loss” in this question) must be included in the amount of profit or loss for that fiscal year.

The mark-to-market gain or loss will be reversed in the following fiscal year.

The fair value is calculated by multiplying the quantity of the market crypto asset by one of the following:

1. The final trading price of the market crypto asset as published by a price publisher on the last day of the fiscal year (if no such price is published on that day, the last trading price published before that day closest to the last day of the fiscal year)
2. The final exchange rate of the market crypto asset as published by a price publisher on the last day of the fiscal year multiplied by the final trading price of the other market crypto asset exchanged at that rate (if no such exchange rate is published on that day, the last exchange rate published before that day closest to the last day of the fiscal year)

(Note) A crypto asset with an active market is defined as the cryptocurrency that an entity holds that meets all of the following criteria:

1 The selling price and other information (Note 3) is continuously published and has a significant impact on the determination of the selling price or exchange ratio of that crypto asset.
(Note 3) Selling price and other information refers to the selling price or exchange ratio with other crypto assets

2 There is a sufficient amount and frequency of transactions for the continuous publication of the selling price and other information mentioned in 1.

3 Meets one of the following requirements:

(a) The publication of the selling price and other information mentioned in 1 is done by the entity.

(b) The transactions mentioned in 2 are primarily not conducted by the entity on its own account.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7, 118-8, 118-9

For reference

In the tax system revision for fiscal year 2023 (decided by the cabinet on December 23, 2022), it is stated that the following changes will be made to the method of measuring crypto assets, including the scope of assets for which mark-to-market gains and losses are calculated using the fair value method.

The details of these changes will be clarified in future legislation.

1 Exclude crypto assets that meet the following criteria from the scope of assets for which mark-to-market gains and losses are calculated using the fair value method at the end of the fiscal year:

A assets that an entity has continuously held since issuance,
B assets that have been continuously subject to transfer restrictions since issuance through either:
(a) technical measures that prevent transfer to others, or
(b) being held as trust assets that meet certain requirements.

2 The acquisition cost of self-issued crypto assets will be considered the cost incurred for issuance.

Our comments:

The mark-to-market measurement of crypto assets held by entities first appeared as a FAQ item in the “Tax Treatment Crypto Currencies (Information)” (Version 3) published by the National Tax Agency on December 20, 2019.

For income tax on individuals, there is no taxation on unrealized gains (losses).

However, for corporate tax purposes, unrealized gains (losses) for crypto assets are considered taxable, creating a significant gap in tax treatment between the two.

Unrealized gains (losses) have no cash backing, as they are not realized.

It will be difficult to make a convincing argument on why unrealized gains should be taxed.

Yes, I understand that the tax treatment is consistent with that for securities held for trading purposes.

But crypto assets are not just held for trading purposes only.

Taxation on unrealized gains (losses), without considering the purpose of the asset, creates significant issues in two ways:

First, it hinders the business activities of businesses.

Businesses hold crypto assets for various reasons.

One reason is to protect excess cash from inflation policies implemented by the government and central banks, and to preserve the financial strength of its balance sheet.

Companies such as Microstrategy, Square, and Tesla hold bitcoin for this purpose.

Another reason why corporations hold crypto assets is that it may be necessary for their business activities.

There are various situations, but here are two examples:

The first example is a business that provides services using smart contracts.

Smart contracts are programs executed on the blockchain.

Typically, crypto assets are required to execute these programs.

Businesses that provide services using smart contracts need to execute the program on a daily basis, and therefore need to hold crypto assets.

Here is the second example.

The emergence of the Lightning Network has greatly reduced the time and cost of sending bitcoin.

Now, it is possible to send bitcoin to anywhere in the world almost instantly and at minimal cost, even in units less than one yen.

This has led to the emergence of micro-payments, services that rely on billing and paying per second.

With the advent of these services, creators now have alternative ways to generate revenue other than through advertising.

To use these services, one must continue to hold a certain amount of crypto assets.

Businesses that hold crypto assets for business reasons must hedge against the tax exposure that arise from mark-to-market taxation.

This can be done through purchasing derivative contracts, but it also increases costs, administrative burdens, and introduces additional counterparty risks.

The second significant issue is that it significantly reduces the efficiency of funds.

Profits should be reinvested to generate compound interest, but taxing unrealized gains greatly reduces the efficiency of funds.

It is generally considered to be not fair tax treatment to favor a certain entity structure over another, and creating that regulatory arbitrage may lead to distorted management decisions and unintended consequences.

Improving the efficiency of funds is crucial for economic growth, and as a result, it also increases tax revenues.

Taxing unrealized gains (and losses) is problematic from this point of view.

2 Crypto assets that are subject to mark-to-market that trade in an active market

Question

What is considered a crypto asset with an active market for the purpose of mark-to-market measurement at year end?

Answer

A crypto asset with an active market refers to a crypto asset that is owned by an entity and meets all of the following criteria.

1. The trading price and other information (note) are continuously published, and they have a significant impact on determining the trading price or exchange ratio of the crypto asset.

Note: trading price and other information refers to the price of trading or the exchange ratio with other crypto assets.

2. Sufficient quantity and frequency of transactions are continuously carried out for the publication of the trading price and other information in 1.

3. Meets one of the following requirements:

A. The publication of trading price and other information in 1 is done by someone other than the entity.

B. The transactions in 2 are mainly those that were not carried out by the entity on its own account.

Whether a certain crypto asset trades in an active market depends on the type of crypto asset held, its past trading history, and the situation of the crypto asset exchange or sales platform on which it is traded.

This judgment must be made based on the actual condition of each crypto asset.

For example, if there is a significant difference in purchase and sale prices that can be obtained within a reasonable range among crypto asset exchanges or sales platforms, or if the price difference desired by the seller and buyer is significantly large, it is usually judged that the market is not active from the perspective of 1 and 2.

Also, the above third criteria is established in order to exclude such prices from the scope of fair market value from the perspective of corporation tax, because such prices, if they are created and manipulated by the person who publishes the purchase and sale prices etc. based on the transactions conducted mainly by himself/herself, can result in profit adjustments.

Therefore, in the case of a crypto asset exchange operator, if there are purchase and sale prices etc. other than those of the crypto asset exchange or sales platform operated by the operator for a certain crypto asset, that crypto asset will fall under the third criteria mentioned above.

Also, even if purchase and sale prices etc. of a certain crypto asset are published only on the crypto asset exchange or sales platform operated by the operator, if those prices are mainly based on transactions conducted by others (via intermediaries or agency), that crypto asset will fall under the third criteria mentioned above.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

Our comments:

Most cryptocurrencies have low trading volume and do not have enough liquidity to be considered an active market.

The trades that can be seen flickering on an exchange’s trading screen are mostly those that are placed by service providers called LPs (Liquidity Providers) or MMs (Market Makers).

If one tries to sell a large amount of coins that the market has no appetite for, the LP or MM will cancel their order, resulting in significant slippage, which will be a loss for the seller.

Among cryptocurrencies, BTC is the most liquid by far.

But even with bitcoin, the Japanese market can only handle a few billion yen within a 2% spread.

In our view, it is reasonable to reflect an appropriate liquidity discount (DLOL) when performing mark-to-market adjustments at the end of the period.

3 Crypto assets that are traded on DEXs

Question

The crypto asset A owned by our company is listed on a DEX (decentralized exchange).

On this DEX, the exchange ratio between the crypto asset A and market crypto asset B is made clear by an automatic market maker, and based on this clear exchange ratio, trades of the exchange between the crypto asset A and the market crypto asset B are conducted at any time.

In this case, will the crypto asset A be the subject of mark-to-market at year end under corporate tax law?

Answer

If crypto asset A is a crypto asset that trends in an active market, it will be subject to mark-to-market at the end of the period.

Under corporate tax law, a crypto asset with an active market refers to a crypto asset that is owned by an entity and meets all of the following criteria.

1. The trading price and other information (note) are continuously published, and they have a significant impact on determining the trading price or exchange ratio of the crypto asset.

Note: trading price and other information refers to the price of trading or the exchange ratio with other crypto assets.

2. Sufficient quantity and frequency of transactions are continuously carried out for the publication of the trading price and other information in 1.

3. Meets one of the following requirements:

A. The publication of trading price and other information in 1 is done by someone other than the entity.

B. The transactions in 2 are mainly those that were not carried out by the entity on its own account.

DEX, or decentralized exchange, is generally understood to be a trading platform without a central administrator.

The concept of a market is generally understood to include trading systems where buying and selling and exchanging can be done at any time.

In this case, the DEX in question has an exchange ratio for crypto assets that is made clear by an automatic market maker, and based on this clear exchange ratio, trades for the exchange of crypto assets are conducted at any time.

Therefore, this DEX can be considered within the scope of the market.

As such, as long as there are no special circumstances such as the exchange ratio published on this DEX being significantly different from that of other crypto asset exchanges, and as long as crypto asset exchange trades are continuously being settled on this DEX, the crypto assets traded on this DEX will be subject to mark-to-market at the end of the period as long as they meet the criteria 1-3 above.

Typically, in this case, the fair market value will be calculated by taking the final exchange ratio at the end of the fiscal year published by this DEX and multiplying it by the final trading price at the end of the fiscal year for the other crypto asset with an active market that is being exchanged at that exchange ratio.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7, 118-8

Our comments:

Same comments as that for FAQ3.

The liquidity of crypto assets that only trade on DEXs is usually very low.

In such cases there could be a significant deviation from the spot price that is displayed and the price at which a trade is actually settled.

The pricing mechanism used by most DEXs is called AMMs (Automatic Market Maker).

Due to the mechanism of AMMs, spreads will widen as the size of the trade gets larger.

Also, blockchain transactions are constantly being monitored by third parties and large transactions will be subject to front-running and will likely settle at unfavorable prices.

This is commonly known as a “sandwich attack” and is a type of MEV (Miner Extractable Value).

The same thing occurs in traditional finance due to high frequency traders, but in terms of the ratio of siphoned profits to transaction amount, the impact is significantly greater for DEX transactions.

When making mark-to-market adjustments at the end of the period based on DEX price information, it is reasonable to reflect not only liquidity discounts (DLOL) but also costs such as MEV.

4 Mark-to-Market of crypto assets that are locked for staking

Question

The company owns cryptocurrency A, which is currently locked-up (a mechanism that prevents the transfer of cryptocurrency to a different party) in order to obtain rewards through staking.

Under this lockup, the company is unable to transfer the cryptocurrency A until specified conditions are met.

In this case, will the locked up cryptocurrency A be subject to mark-to-market at year-end for corporate tax purposes and is it necessary to include the mark-to-market gain or loss in the amount of profit or loss?

Cryptocurrency A is listed on a cryptocurrency exchange, with sufficient quantity and frequency of trades, and the trading price is continuously published.

The company is not operating the exchange and is not conducting trades of cryptocurrency A on that exchange.

Answer

According to the corporate tax law, the difference between the fair value and the book value of the crypto assets should be recorded as profit or loss at the end of the fiscal year.

When a corporation holds a crypto asset that has an active market, it should evaluate the asset using the fair value method and record the difference between the fair value and the book value as the profit or loss of the fiscal year.

In this case, the crypto asset in question is subject to lock-up, meaning it can not be transferred during the lock-up period, however, it is possible to earn staking rewards during that period.

Also, the company bears the risk of future price fluctuations of the crypto asset, it is considered to have the crypto asset in its own account.

In addition, in this case, the crypto asset A meets the specified criteria such as being continuously traded on an exchange with prices being published, it is considered to be a crypto asset with an active market.

Therefore, the company should evaluate the crypto asset A using the fair value method at the end of the fiscal year and record the difference between the fair value and the book value as the profit or loss of that fiscal year.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

Our comments:

The conclusion that the crypto asset in question is subject to mark-to-market is predicated on the fact that there is an active market for the asset.

This is probably not a conclusion that most people currently staking cryptocurrencies will instinctively arrive at.

The reason is because it ignores the purpose or intent of holding the assets in the first place.

Let’s look at Ethereum as an example.

Ethereum previously used the PoW (Proof of Work) consensus mechanism like Bitcoin, where miners generated blocks.

However, in 2022, Ethereum transitioned to Proof of Stake (PoS), where validators are responsible for block generation.

To become a validator, one must stake 32 ETH.

If a company staked 32 ETH to contribute to the Ethereum network, and at the end of the year, the price of ETH has gone up, the company would have to sell some of their ETH to pay taxes.

And as a result, they will no longer have 32 ETH and would be disqualified from being a validator.

For some assets, there are different tax treatments depending on the purpose or intent of holding the asset.

Stocks are an example of such assets.

Shares held for trading purposes are subject to mark-to-market taxation, while investment purpose shares and subsidiary shares stocks are not, as they are held to exert influence on the investee company, not for short-term trading.

In our view, crypto assets should also be treated in a similar manner, considering the purpose of holding them, in order to ensure consistency with existing tax treatment and also to prevent unintended consequences of tax rules hindering business practices.

5 Mark-to-Market of crypto assets that are being lent

Question

Our company has lent crypto asset A, which we own, in order to earn usage fees.

Regarding this crypto asset A, we are unable to transfer it until the lending period ends.

In this case, will crypto asset A that our company is lending be subject to mark-to-market under corporate tax law and will it be necessary to include the mark-to-market gain or loss in the amount of profit or loss?

Crypto asset A is listed on a cryptocurrency exchange, with sufficient quantity and frequency of trading and continuous disclosure of trading prices.

Additionally, our company does not operate that cryptocurrency exchange and also does not trade in crypto asset A on that exchange.

Answer

Under corporate tax law, it will be necessary to include the difference between the fair value and the book value as the amount of profit or loss.

When an entity has crypto assets for which an active market exists at the end of the fiscal year, the amount evaluated by the fair value method shall be the fair value at that time, and the difference between that fair value and the book value shall be included in the amount of profit or loss for that fiscal year.

In this case, while the entity has lent the crypto asset it owns, it is able to earn usage fees during the lending period.

Furthermore, as the entity bears the risk of future price fluctuations of this asset, it can be considered that the entity has the assets in its own account.

In addition, in this case, crypto asset A meets the specified criteria such as continuously disclosed trading prices, etc.

Therefore, it is considered a crypto asset with an active market, and it is necessary for the entity to include the difference between the fair value evaluated by the fair value method and the book value at the end of the fiscal year as the amount of profit or loss for that fiscal year.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

Our comments:

Same comments as the other sections.

When lending crypto for long durations, it will be prudent to consider tax planning and hedging strategies to avoid any unintended tax exposure at year end.

6 Mark-to-Market of borrowed crypto assets

Question

Our company borrows cryptocurrency A from parties other than cryptocurrency exchange operators and earns revenue by lending it out or using it in other ways during the borrowing period.

In this case, will cryptocurrency A that our company has borrowed be subject to mark-to-market under corporate tax law and will it be necessary to include the mark-to-market gain or loss in the amount of profit or loss?

Additionally, cryptocurrency A is listed on a cryptocurrency exchange, with sufficient quantity and frequency of trading and continuous disclosure of trading prices.

Furthermore, our company does not operate that cryptocurrency exchange and also does not trade in cryptocurrency A on that exchange.

Answer

Cryptocurrency borrowed by the company may be subject to mark-to-market under corporate tax law, but it is not necessary to include the difference between the fair value and the book value in the amount of profit or loss.

When a company holds cryptocurrency with an active market at the end of a fiscal year, the fair value assessed under fair value method should be the fair value at that time, and if the company holds the cryptocurrency in its own account, the difference between the fair value and the book value should be included in the amount of profit or loss for that fiscal year.

The concept of “hold” here is a broad one that encompasses those that do not become the subject of ownership, and considering the fact that the company borrowing the cryptocurrency has the power of disposition of the borrowed cryptocurrency, it may be considered that the company holds the cryptocurrency.

In this case, cryptocurrency A satisfies the specified criteria such as continuous disclosure of trading prices, etc., and is a cryptocurrency with an active market, and if it is considered that the company holds cryptocurrency A, the fair value assessed under fair value method should be the fair value at that time.

However, considering that the company does not bear the risk of future price fluctuations of the cryptocurrency A that requires return, in general, it can not be said that the company holds the cryptocurrency A in its own account, therefore, the difference between the fair value and the book value does not need to be included in the amount of profit or loss for that fiscal year.

[Related laws and regulations, etc.]
Corporate tax law 61
Corporate Tax Law Enforcement Ordinance 118-7

For reference

The tax reform outline for fiscal year 2023 (decided in cabinet on December 23, 2022) states that when an entity sells crypto assets borrowed from a party other than a crypto exchange operator, and has not repurchased assets of the same kind by the end of the fiscal year in which the sale took place, the profit or loss equivalent amount calculated as if the repurchase had been made at that time will be recorded.

The details will be clarified in future laws and regulations.

Our comments:

The reference information is concerning.

When borrowing in crypto and then converting it to cash or other assets, exposure still remains regarding the borrowed crypto.

Let’s look at some journal entries as an example:

Assumption: Crypto value at the time of borrowing is 100, crypto value at year end is 150

If the crypto is converted to yen at the same time it is borrowed:

1 Journal entry at the time of borrowing:

Crypto 100  Liability 100

2 Journal entry at the time of converting to yen:

Cash 100  Crypto 100

3 If the crypto value at the end of the term increases, the following journal entry is needed to increase the amount of the borrowed crypto:

Mark-to-market loss 50  Liability 50

As per FAQ5, the lender will make the opposite journal entry and the liability (of the debtor) and asset (of the creditor) reconcile.

4 Lender’s journal entry

Asset 50  Mark-to-market gain 50

However, according to the outline of the tax system revision for 2023 (decided by the cabinet on December 23rd, 2022), if the crypto is not bought back by the end of the period, the profit or loss equivalent calculated as if it had been bought back must be recorded.

As the details are unknown, the exact journal entry that is required is unknown at this time, but a possible one would be as follows:

5 Journal entry assuming the crypto is bought back at the end of the period:

Crypto 150  Gain from assumed buyback 150

In the journal entry 3, a mark-to-market loss of 50 was recorded, resulting in a net profit of 100.

Entry 5 will be reversed when the buyback is actually made in future periods, and recognized as an expense at that time.

6 Journal entry when actually buying back the crypto (assuming the value of the crypto has further increased to 200):

Gain from assumed buyback 150  Crypto 150
Crypto 200  Cash 200

7 Journal entry for repayment of the loan at the same time:

Mark-to market loss 50  Liability 50
Liability 200  Crypto 200

In summary,

When there is no need to deem a repurchase (current treatment), the effect on annual taxable income for Years 1 and 2 are as follows:

Year 1: 50 loss
Year 2: 50 loss
Total: 100 loss

In the case where there is a deemed repurchase, the effect on annual taxable income for Years 1 and 2 are as follows:

Year 1: 100 gain
Year 2: 200 loss
Total: 100 loss

The former is in line with the tax treatment of the lender.

For the second one where there is a deemed repurchase, the asset of the creditor and liability of the debtor will not reconcile, indicating an inconsistency in treatment for a lender and borrower.

The purpose of the requirement for deemed repurchase is unknown at this time.

Considering the consistency with the tax treatment of the lender and the burden of additional administrative procedures, in our view, it seems that the change is unnecessary and the existing tax treatment suffices.

Summary

The common theme that keeps coming up in this FAQ is the lack of consideration over the purpose and intent of holding crypto.

Accounting and tax treatment should aim to accurately reflect the reality and substance of transactions.

To achieve that objective, consideration of the purpose of holding is essential.

Tax rules may require a certain degree of formalization to eliminate discretion, that is true.

In the case of stocks, there is a framework that is used to reflect the intent of the holding when considering tax treatments.

There is no reason not to apply a similar framework to crypto.

Improving productivity through the use of new technologies is essential for economic growth that makes people’s lives better.

If one applies this FAQ to practice, it is likely that it will lay unnecessary burden on businesses that use crypto, and that the negatives outweigh the positives.

The post Japanese Tax Authorities Release FAQ – Year End Mark-to-Market of Cryptos Held by Entities appeared first on Japan Professional Alliance.

On January 13, 2023, the National Tax Agency (NTA) published a guidance titled “Tax Treatment of NFTs (Information)”.

This is probably the first time the NTA has officially expressed its views on calculating taxes for NFTs (Non Fungible Tokens) in an FAQ format.

The reason why this FAQ is labeled as “information” is because it is not a law or regulation, but rather the view of the NTA.

Although it is not a law, the tax authorities in Japan will refer to this document when verifying the validity of tax calculations regarding NFTs.

In practice, I expect various accounting and tax treatments to be based on this FAQ.

In this post, we will look at the contents of the FAQ one by one and add comments on any points of interest.

Our comments will be inserted using blue text, and the rest is the original content of the FAQ.

The official document can be obtained at the following link:

ＮＦＴに関する税務上の取扱いについて（情報）（令和５年１月13日）（PDF／832KB）

Tax Treatment of NFTs (Information)

Table of Contents

Our comments:

From looking at the table of contents, the FAQ for NFTs is structured similarly to the FAQ for cryptocurrencies.

NFTs are essentially digital certifications or rights certificates.

Before reading the FAQ, I expected that tax handling would also be interpreted based on the rights represented by the NFT, rather than coming up with new interpretations focusing on the technical aspects of an NFT.

As I read the FAQ, it was as I expected.

There are some simplified tax treatments aimed at reducing the accounting burden of casual everyday NFT users.

For example:

FAQ 8: A simple calculation method is permitted for tokens received as rewards through blockchain games

FAQ 10: Treatment that exempts withholding income tax for insignificant NFT transactions

However, these simplified measures are still exceptions and the general rule is that tax handling of NFTs must comply with existing tax rules.

In some cases, some tax handling is clearly difficult to apply to NFT transactions.

For example, in FAQ 10, which allows for the exception of withholding income tax for insignificant transactions, the general rule remains that the business operator who is the NFT purchaser must withhold income tax for significant transactions.

Of course, smart contracts as they are do not take into account the tax laws of each country.

If one transfers an amount after deducting withholding tax, the smart contract will simply reject that transaction.

In this way, I strongly felt that there is a limit to applying traditional tax practices in the digital age.

1 Creating an NFT and transferring to a third party (primary circulation)

Question

I created digital art and sold the NFT associated with that digital art to a third party through a marketplace and received payment.

This allows the third party who purchased the NFT to view the digital art. Can you tell me how to handle the income tax in this case?

Answer

The profit obtained from creating digital art and selling the associated NFT is subject to income tax.

Explanation:

Under the Income Tax Law, income is defined as economic value obtained in the form of revenue, etc., and in this case, as it is recognized that economic value has been obtained in the form of revenue, etc., it is subject to income tax.

The transaction in question corresponds to a transaction related to the setting of “rights to view digital art” and the income generated from this transaction is classified as miscellaneous income (or business income).

In this case, the amount of miscellaneous income is calculated using the following equation.

Equation:
Miscellaneous income amount = Income from transferring the NFT – necessary expenses associated with the NFT

(Note 1) If you received the NFT transfer income as a token that circulates as currency within the marketplace, the fair market value of that token will be the transfer income. However, if it is difficult to determine the fair market value due to reasons such as the token not being able to be exchanged for assets such as cryptocurrency, it is acceptable to treat the fair market value of that token as the fair market value of the transferred NFT (or the cost of sal, etc. if there is no market value)

(Note 2) Necessary expenses associated with the NFT refers to the amount of cost of sales and selling and general administrative expenses necessary to obtain the NFT transfer income. Please note that the cost of sales of NFT is the amount of expenses incurred to create the NFT and does not include the cost of creating digital art.

(Note 3) If the amount of miscellaneous income is negative (if a loss is incurred), it cannot be offset against other income (however, it can be offset against other miscellaneous income.)

(Reference: Corporate Tax Treatment)
If an entity creates digital art and sells the NFT associated with it for reasonable consideration, the profit obtained from the sale is subject to corporate income tax in the same way as income tax.
In this case, the reasonable consideration received should be included in taxable income for the fiscal year which includes the day of the sale.

[Related laws and regulations, etc.]
Income tax law 27, 35, 36, 37, 69
Corporate tax law 22, 22-2

Our comments:

At first glance, It appears that the costs incurred to create the digital art cannot be deducted as expenses, as it is stated that “the cost of sales of NFT is the amount of expenses incurred to create the NFT and does not include the cost of creating digital art”.

However, it seems unreasonable to interpret this as not being able to deduct costs to create the digital art as expenses, as it is clear that it was incurred in connection with obtaining income from the NFT sale. .

Note the equation for calculating miscellaneous income; miscellaneous income = Income from transferring NFT – necessary expenses associated with the NFT.

It is stated that “necessary expenses associated with the NFT”, refers to the “amount of cost of sales and selling and general administrative expenses necessary to obtain the NFT transfer income”.

Although the production costs for digital art are explicitly excluded from the cost of sales for NFT, we believe that they are not precluded from being considered as “selling and general administrative expenses”.

In the case of 1 of 1 NFT art, one can directly associate certain costs with sales.

Even if it is not 1 of 1, it is possible to associate cost with sales by allocating production costs, including the cost of the digital art, to the NFT.

At this time, we do not fully understand the reason why digital art production costs are explicitly excluded from cost of sales, other than that it may be difficult to directly associate certain costs to a particular NFT, in some cases. (And in this case, that cost would be indirectly matched with sales through SGA expenses as we mentioned above.)

2 Creating an NFT and gifting to an acquaintance (primary circulation)

Question

I created digital art and gifted the associated NFT to an acquaintance without receiving any payment.

This allows the acquaintance to view the digital art. Can you tell me how to handle the income tax in this case?

Answer

Even if you create digital art and gift the associated NFT to an acquaintance, it does not result in any income tax liability.

Explanation

Under Income Tax Law, income is defined as economic value acquired in the form of revenue, etc.

In this case, as it is not recognized that new economic value has been acquired in the form of revenue, etc., there is no income tax liability.

(Note) Please refer to question 9 for the gift tax liability in case of receiving a gift of NFT.

(Reference: Handling of Corporate Tax)
If an entity creates digital art and gifts the associated NFT, it will be subject to corporate tax. In this case, the amount to be included in the calculation of the entity’s taxable income is the value (market value) of the NFT at the time of the gift.

Please note that the gift will be treated as a donation under the Corporate Tax Law and the amount that exceeds the amount calculated under the provisions of the Corporate Tax Law will not be permitted in the calculation of the corporation’s income as a deductible expense.

[Related laws and regulations, etc.]
Income tax law 36
Corporate tax law 22, 22-2, 37

Our comments:

While receiving a gift does not fall under income according to the Income Tax Law, it is necessary to consider gift tax (FAQ 9).

3 Non-resident creating an NFT and transferring it on a Japanese marketplace (primary circulation)

Question

I am a non-resident living in the United States. Recently, I created digital art and sold the associated NFT through a Japanese marketplace to a third party and received payment.

This allows the third party to view the digital art. Can you tell me how to handle the income tax in this case?

Answer

As a general rule, if a non-resident sells NFTs on a Japanese marketplace, they will not be subject to Japanese income tax.

Explanation

Under Japan’s income tax law, residents are subject to taxation on worldwide income, while non-residents are only subject to taxation on income earned in Japan (domestic-sourced income).

The transaction in question, involving the transfer of rights to view digital art through an NFT, does not generally fall under the category of domestic sourced income and therefore would not be subject to income tax.

(Note: For information on the handling of withholding tax on transactions related to copyrights, please refer to question 10.)

[Related laws and regulations, etc.]
Income tax law 161

Our comments:

No particular comments.

4 Reselling a purchased NFT to a third party (secondary circulation)

Question

I purchased digital art in the form of an NFT from an artist and was able to view the digital art.

Recently, I resold the NFT to a third party through a marketplace and received payment.

As a result, the rights to view the digital art that I possessed have been transferred to the third party. Can you tell me how this is handled for income tax purposes?

Answer

Profit obtained from the resale of digital art linked to NFTs is subject to income tax.

Explanation

Income under the income tax law refers to economic value newly acquired in the form of income, etc.

In the case of your question, it is recognized that new economic value has been acquired in the form of income, etc., and therefore it is subject to income tax.

The transaction in question corresponds to the transfer of the “right to view digital art,” and the income generated from this transaction will be classified as transfer income.

(Note) If the transfer of the NFT corresponds to the transfer of inventory assets or quasi-inventory assets or the transfer of assets for the purpose of profit, it will be classified as business income or miscellaneous income.

The amount of transfer income in this case is calculated by the following equation.

Equation:
Transfer income = Income from sale of NFT – Acquisition cost of NFT – transfer cost of NFT- special deduction

(Note 1) If the income from the resale of the NFT is received in the form of a token that circulates on the marketplace, the value of that token will be the income from the resale.
However, if the value of the token is difficult to determine due to reasons such as the token not being able to be exchanged for assets such as cryptocurrency, the market value of the NFT sold (or the acquisition cost if there is no market value) can be used as the value of the token.

(Note 2) The acquisition cost of an NFT is the total amount of the purchase price and expenses incurred at the time of purchase.

(Note 3) The transfer cost of an NFT refers to the amount of expenses incurred for the transfer.

(Note 4) The special deduction for the comprehensive taxation of transfer income is 500,000 yen.
However, when the transfer profit (the amount after subtracting the acquisition cost and transfer cost from the transfer income) is less than 500,000 yen, only that amount can be deducted.

(Note 5) When the amount of transfer income is negative (a loss), it is possible to offset it against other income.
However, if the NFT is mainly owned for the purpose of hobby, recreation, maintenance or appreciation, it cannot be offset against other income (it can be offset within the comprehensive transfer income).

(Reference: Handling of Corporate Tax)
When an entity sells an NFT that it purchased with digital art attached, for reasonable consideration, the profit obtained from the sale is subject to corporate tax, similar to income tax.

In this case, the amount to be included in the calculation of the entity’s taxable income for the fiscal year which includes the date of sale, is the amount of reasonable consideration received.

[Related laws and regulations, etc.]
Income tax law 27, 33, 35, 36, 37, 38, 69
Income tax law implementation ordinance 178
Corporate tax law 22, 22-2

Our comments:

It is stated that NFTs primarily held for the purpose of hobby, recreation, maintenance or appreciation cannot be consolidated with other income. At present, many NFTs likely fall under this category.

5 Purchased NFT lost due to unauthorized access by a third party

Question

I purchased an NFT linked to digital art from a digital art creator and was able to view the digital art.

Recently, the NFT I purchased was lost due to unauthorized access by a third party. Can you tell me how to handle the income tax in this case?

Answer

If the NFT that you purchased was lost due to unauthorized access by a third party, the handling of income tax is as follows:

• If the NFT is not classified as an asset that is not necessary for daily life or business-use asset and the loss of the NFT is due to theft, it can be treated as a miscellaneous loss deduction
• If the NFT is classified as a business-use asset, the loss can be included as necessary expenses in calculating business income or miscellaneous income

Explanation

(Miscellaneous loss deduction)
Under the income tax law, losses caused by disasters, theft, or embezzlement on assets (excluding assets that are not normally necessary for daily life and inventory assets, etc.) are subject to miscellaneous loss deductions.

Therefore, if unauthorized access by a third party is classified as theft, and the NFT is not classified as an asset that is not normally necessary for daily life or a business-use asset, the loss related to the disappearance of the NFT will be subject to miscellaneous loss deductions.

(Note 1)
Assets that are not normally necessary for daily life include:

1. Movable assets such as racing horses used for gambling activities
2. Assets mainly owned for the purpose of hobbies, recreation, maintenance or appreciation
3. Movable assets such as precious metals, paintings, and handicrafts that exceed 300,000 yen

(Note 2)
Business-use assets, etc. include inventory assets and assets supplied for the purpose of business (including deferred assets that have not yet been included in necessary expenses) and forests.

(Note 3)
The amount of loss shall be the fair value of the NFT at the time of its loss. In case the fair value is not known, the purchase price of the NFT can be used.

(Necessary Expense)
Under the income tax law, losses on business-use assets, etc. can be included as necessary expenses in calculating business income or miscellaneous income.

(Note)
The amount included as necessary expenses will be the book value of the NFT.

[Related laws and regulations, etc.]
Income tax law 51, 72

Our comments:

Assets not classified as “not normally necessary for daily life” (so basically assets that are necessary for daily life) can be considered for loss offset.

The amount that can be used as the loss offset is

(Net Loss Amount) – (Total Income Amount) x 10%

Net Loss Amount is calculated by deducting any insurance received etc. from the loss amount. It is rare for NFTs to have insurance, so in most cases, net loss will be the market value of the NFT at the time of loss.

For example, if a person with a total income of 5 million yen loses an NFT with a market value of 2 million yen due to unauthorized access, the loss offset amount will be 2 million yen – 5 million yen x 10% = 1.5 million yen.

If the loss offset amount is large and cannot be used in its entirety to offset taxable income of that year, the remaining amount can be carried forward for 3 years.
However, the most important thing is to carefully manage your PrivateKey to prevent unauthorized access.

It is important to separate wallets used for NFTs from wallets used to store other digital assets, not to approve transactions recklessly, not to click on random links, and make it a habit of going to websites through bookmarks (instead of clicking links), among other basic security measures.

6 Obtaining tokens issued by a business counterparty as payment for services rendered

Question

I acquired tokens issued by a business counterparty as consideration for providing services.

These tokens can be used when purchasing goods sold by the business counterparty. Can you tell me how to handle income tax in this case?

Answer

If tokens issued by a business counterparty are acquired as consideration for providing services, they are subject to income tax.

Explanation

Income tax law defines income as economic value acquired in the form of income or other means. In this case, it is recognized that economic value was acquired in the form of income or other means, making it subject to income tax.

The income classification for consideration for services is as follows:

• In the case of contracts such as commission contracts or similar contracts, it is classified as business income or miscellaneous income.
• In the case of contracts such as employment contracts or similar contracts, it is classified as salary income.

(Note) The amount of consideration for services is the current market value of the tokens.
However, if it is difficult to determine the market value due to reasons such as the token not being able to be exchanged for assets with property value such as cryptocurrency, it is acceptable to handle the amount of consideration for services as specified in the contract as the market value of the token.

[Related laws and regulations, etc.]
Income tax law 27, 28, 35, 36

Our comments:

No particular comments.

7 Obtaining tokens issued by the seller when purchasing a product

Question

I acquired tokens issued by the seller when purchasing goods.

These tokens can be used when purchasing goods from the seller. Can you tell me how to handle income tax in this case?

Answer

The economic benefit from acquiring tokens issued by the seller for free when purchasing goods is subject to income tax.

Explanation

Income tax law defines income as economic value acquired in the form of income or other means.

In this case, it is recognized that economic value was acquired in the form of income or other means, making it subject to income tax.

The economic benefit from acquiring tokens for free is considered as a gift from the seller, and it is classified as temporary income.

(Note) The amount of the temporary income is the current market value of the tokens.
However, if it is difficult to determine the market value due to reasons such as the token not being able to be exchanged for assets with property value such as cryptocurrency, it is acceptable to handle the market value as 0.

[Related laws and regulations, etc.]
Income tax law 34, 36

Our comments:

No particular comments.

8 Obtaining in-game currency as a reward for playing a blockchain game

Question

I played a blockchain game and received in-game currency (tokens) as a reward. Can you tell me how to handle income tax in this case?

Answer

In general, rewards obtained from blockchain games are subject to income tax.

Explanation

Income tax law defines income as economic value acquired in the form of income or other means.

In this case, it is recognized that economic value was acquired in the form of income or other means, making it subject to income tax.

However, if the in-game currency (tokens) can only be used within the game (and cannot be exchanged for assets outside the game), it is not subject to income tax.

Rewards from blockchain games are classified as miscellaneous income and the amount of miscellaneous income is calculated using the following equation.

Equation:
Miscellaneous income = Income amount from the blockchain game – necessary expenses related to the blockchain game

(Note 1)
The income amount from the blockchain game is the total amount of in-game currency (tokens) obtained in the blockchain game.
The measurement of in-game currency (tokens) shall be performed each time they are acquired.
However, it is also possible to track the increase or decrease in the quantity of the in-game currency (tokens) and evaluate it as a lump sum at the end of the month or year.
In cases where it is difficult to determine the value of in-game currency (tokens) due to reasons such as not being able to exchange them directly with digital assets, it is acceptable to set the value at 0 yen.
In this case, the blockchain game rewards will be taxed at the time when the “in-game currency (tokens)” is exchanged for “other tokens that can be exchanged with digital assets.

(Note 2)
The necessary expenses related to the blockchain are the total amount of the acquisition cost of in-game currency (tokens) used to obtain blockchain game rewards. Regarding the acquisition cost of in-game currency (tokens),

• The purchase price for in-game currency (tokens) purchased
• The amount considered as income for in-game currency (tokens) obtained through the blockchain game (specifically the amount evaluated in (Note 1)) will be used

In blockchain games, obtaining and using in-game currency (tokens) is done frequently, and evaluating each transaction is considered cumbersome. Therefore, calculating income based on in-game currency (tokens) and evaluating it as a lump sum at the end of the year (the simplified method) is acceptable when calculating miscellaneous income amount.

The simplified method:

• The total amount of in-game currency (tokens) owned on December 31st of that year – the total amount of in-game currency (tokens) owned on January 1st of that year – the total amount of in-game currency (tokens) purchased during that year = income amount based on in-game currency (tokens)
• Income amount based on in-game currency (tokens) x end-of-year exchange rate for digital assets = miscellaneous income amount
  (Note) If there are in-game currency (tokens) that have been exchanged for digital assets during the year, the value of the obtained digital assets should be added to the miscellaneous income amount.
• In cases where it is difficult to determine the value of in-game currency (tokens) due to reasons such as not being able to exchange them directly with digital assets, the miscellaneous income amount may be considered as 0 yen.
  In this case, when the “in-game currency (tokens)” are exchanged for “other tokens that can be exchanged with digital assets” the value of the tokens should be reported as miscellaneous income.

[Related laws and regulations, etc.]
Income tax law 35, 36, 37

Our comments:

I don’t have any particular comments, just mixed feelings.

If we all start strictly applying tax laws, there are many transactions that we perform in real life without thinking about tax consequences that will all of a sudden require tax considerations.

For example, receiving apples from a neighbor that has an apple tree, or getting a freebie from a restaurant that you frequent.

However, when these things are written down on paper by the tax authorities, any actions that do not comply with them become rule violations.

In this FAQ, it is now on paper that tokens obtained through games are generally considered taxable.

Most people, when playing games, pay attention to the rules of the game but not the rules of tax.

And that is how it should be, life is too short to be thinking about taxes every time one does something.

If the tax authorities put these things into writing and regulations, it may impose tax risks on many people without them knowing.

As I have repeatedly commented in our commentary to the Tax FAQs related to cryptocurrencies, I believe that taxing digital assets when they are converted into fiat currencies or other assets in the real world is more practical and protects taxpayers.

9 When NFT is acquired through inheritance or gift

Question

Please tell me how to handle gift or inheritance taxes when acquiring NFTs through gift or inheritance.

Answer

If an individual acquires an NFT with economic value through gift, inheritance, or bequest, gift or inheritance tax will be imposed after considering its content, nature, transaction situation, etc., and evaluating its value individually.

Explanation

According to inheritance tax law, when an individual acquires property with economic value that can be estimated in money through gift, inheritance, or bequest, it is considered a subject of gift or inheritance tax.

In this case, there is no provision for the valuation of NFTs, so it will be measured based on the method specified in Valuation Directive 5 (Measurement of Assets Without Specified Method) in accordance with the valuation method specified in the Valuation Directive.

For example, it will be measured based on the provisions of Valuation Directive 135 (Valuation of Painting, Calligraphy, and Antiques), taking into account the content, nature, transaction situation, etc., and referring to the sales example price and expert opinion price.

(Note) For NFTs with market transaction prices at the time of taxation, they can be measured based on such prices.

(Reference)
Valuation Directive
(Measurement of assets without specified method)
5 The value of assets without a specified method in these guidelines shall be evaluated in accordance with the evaluation method specified in these guidelines.

(Valuation of Paintings, Calligraphy, and Antiques)
135 The evaluation of paintings, calligraphy, and antiques shall be conducted in accordance with the following categories and respective methods.
(1) The value of paintings, calligraphy, and antiques sold by dealers of paintings, calligraphy, and antiques shall be evaluated in accordance with the provisions of 133 (Valuation of wholesale goods, etc.).
(2) The value of paintings, calligraphy, and antiques other than those specified in (1) shall be evaluated by reference to the actual sales price and expert opinion price, etc.

[Related laws and regulations, etc.]
Inheritance Tax Law 2, 2-2
Inheritance Tax Law Basic Understanding 11-2-1
Valuation Directive 5, 135

Our comments:

I don’t have any comments on the tax treatment itself, but one can not stress enough the importance of being prepared for an emergency.

The basic rule of NFTs is self custody.

It is important to come up with a procedure to communicate important information starting from where your wallet is stored, how it is used, and to make sure that it will be passed on to family members safely in case something happens to you.

10 Handling of withholding tax on NFT transactions

Question

As a salary income earner (an individual who is not conducting business or paying salary in Japan), I purchased an NFT linked to a digital art through a marketplace from a digital art creator, and paid the purchase price.

I did not receive a transfer of the copyright related to the digital art from the producer and received permission for use of the digital art in accordance with Article 21 of the Copyright Act for reproduction rights and Article 23 for public transmission rights, etc., for using the digital art as an icon on SNS (with the exception of using the digital art as an icon on SNS, I have not received permission for use of the copyright).

In this case, do I need to withhold income tax as “copyright usage fee” when paying for the purchase price of the NFT?

(Note) According to the terms of use for this marketplace, the copyright related to the digital art is said to belong to the producer, and it is specified that only the producer can grant permission for use of the copyright.
Also, the breakdown of the purchase price of the NFT does not specify the consideration amount for allowing use as an icon on SNS.

Answer

There is no need to withhold income tax.

Explanation

Those that pay “royalty fees” for copyrighted material within the country to residents are required to withhold income tax when making those payments.

However, individuals who do not pay salaries are not required to withhold income taxes on such payments.

In addition, when those that conduct business in Japan pay “royalty fees” or “copyright transfer fees” related to their business within the country to non-residents or foreign companies, they are required to withhold income tax on those payments (in some cases, they may be exempt from withholding due to a tax treaty).

(Note) For the income from “royalties” or “copyright transfer fees” that non-residents or foreign companies without a permanent establishment in the country have, it is considered that the tax relationship will end with just withholding at source (depending on the application of tax treaties, there may be cases where withholding at source is not required).

In the case of purchasing NFTs associated with digital art and using it as a SNS icon, the cost of obtaining the permission to use the copyrighted material stipulated in Article 21 of the Copyright Act, such as the right to reproduce and the right to transmit to the public, is considered as the “royalty fee”.

Therefore, in principle, income tax must be withheld at the time of payment.

However, in the case of the question, the payment for the purchase of the NFT is made by an individual who is a salary earner (an individual that does not conduct business in Japan, nor makes salary payments) so there is no need to withhold income tax as “royalty fee” at the time of payment for the purchase of the NFT.

(Note) Even if the payment of NFT purchase price is made by someone other than the salary income earner (an individual who is not engaged in business or paying salary in Japan), as in the question, it is difficult to distinguish the amount of compensation for obtaining the permission to use the copyright of digital art as an SNS icon according to the Copyright Act article 21 and article 23, which regulates the right of reproduction and right of public transmission, respectively.
Also, since the scope of permission is limited to use as an SNS icon, even if the permission is for a fee, it is recognized that the amount of compensation is extremely small.
In such cases, there is no need to withhold income tax as “copyright usage fee” when paying the NFT purchase price.

[Related laws and regulations, etc.]
Income tax law 161, 204, 212

Our comments:

In the example given, it is stated that

if the compensation for receiving permission to use a copyrighted work is not clearly specified and is difficult to distinguish the compensation portion

and

that if the scope of the permission is limited to using it as an SNS icon, and even if the permission is paid, the compensation portion is considered to be extremely small,

in such cases, the “copyright usage fee” does not need to be withheld as income tax at the time of payment of the NFT purchase price.

I generally consider it to be positive for there to be exceptions for insignificant transactions that are practical and lessen the unnecessary burden on taxpayers.

The issue that I have with the FAQ conclusion is that an exception is just an exception.

The general rule still holds that if it is possible to distinguish the compensation portion or if the amount of the compensation portion is significant, it becomes subject to withholding.

For transactions that occur on a blockchain, It is not realistic for a purchaser to reduce the transfer amount just because their tax jurisdiction requires so.

The smart contract will not care and just simply reject that transaction, leaving the purchaser to unwittingly commit a rule violation, or just simply give up on the transaction.

This is one example of tax practices based on traditional transaction patterns becoming incompatible in the digital age.

11 Treatment of consumption tax on NFT transactions 1 (Creator of digital art)

Question

I am an individual business owner who creates digital art (copyrighted work), and I sold a digital art that I created, which is linked to an NFT, to a Japanese customer for a fee through a marketplace.

I will grant the use of the relevant digital art to the Japanese customer who received the NFT. Can you tell me how to handle consumption tax in this case?

Answer

This transaction is a business transaction in which the creator of digital art obtains consideration and grants the use of copyrighted works to Japanese consumers, and is subject to consumption tax as a service for the provision of digital services.

Explanation

Under the Consumption Tax Law, “transfer of assets” and “loaning of assets” as well as “provision of services” that are carried out by business operators as a business in Japan are subject to consumption tax (Note 1, 2).

This transaction is considered to be a business in which consideration is obtained and it is a transaction related to the permission to use copyrighted works (as specified in Article 2, Paragraph 1, Item 1 of the Copyright Act) that is conducted through telecommunications lines, and therefore it falls under the category of “provision of digital services” (Article 21, Paragraph 8, Item 3 of the Consumption Tax Law).

And the determination of whether the provision of digital services was carried out domestically or internationally (domestic or foreign determination) is based on whether the address (or residence in the case of an individual) of the person receiving the service is located within the country (Article 43, Paragraph 3 of the Consumption Tax Law).

Therefore, in this transaction, as the provision of digital services that is carried out domestically as a business by the service provider (the person who grants permission to use digital art) in this case, the service provider (the person who grants permission to use digital art) will be subject to consumption tax (Note 3, 4).

(Note 1)
Even if it is a transaction performed by a person receiving salary income, if the transfer of assets, etc. that is performed in exchange for consideration is repeated, continued, and independent, it falls under the category of “business”.

(Note 2)
Transactions without consideration are generally not subject to consumption tax.

(Note 3)
The counterparty in this transaction is a Japanese consumer, and it is not recognized that the counterparty is limited to a normal business operator, so even if the creator of digital art was a foreign business operator, this transaction does not fall under the category of “provision of digital services for business operators” and will not be subject to the so-called “reverse charge method” where the domestic business operator receiving the service will file a declaration and pay the tax (Article 21, Paragraph 8, Item 4 of the Consumption Tax Law).

(Note 4) If the address or similar of the person receiving the service is located outside of Japan, it will be exempt from consumption tax.

(Reference)
Business operators whose taxable sales (Note 2) for the reference period (Note 1) of the taxation period exceed 10 million yen (Note 3) will be subject to consumption tax and will be required to file and pay consumption tax.

(Note 1)
As a general rule, the reference period for individual business operators is the previous two years, and for corporations, it is the previous two fiscal years.

(Note 2)
Taxable sales refers to the total amount of sales (excluding consumption and local consumption taxes) for transactions subject to consumption tax, and the total amount of tax-free sales for export transactions, etc.
If there are amounts for returns, discounts, or refunds, the remainder after subtracting these amounts (excluding consumption and local consumption taxes) is considered taxable sales.
Please note that in the specific period, if the business operator was exempt from tax in that period, the taxable sales of that period will not include the consumption tax, so when calculating the taxable sales of the reference period, the tax-excluded processing should not be done.

(Note 3)
Even if the taxable sales for the reference period of the taxation period is less than 10 million yen, if the taxable sales for a specific period (for individual business operators, the period from January 1 of the previous year to June 30 of the current year, and for corporations, as a general rule, the period of six months after the start of the current fiscal year) exceed 10 million yen, the operator will be subject to taxation.
In addition, the determination of 10 million yen for the specific period can also be made using the total amount of salary and other payments instead of taxable sales.

[Related laws and regulations, etc.]
Consumption tax law 2, 4, 5, 9, 9-2, 28, 45
Consumption tax law implementation ordinance 6, 45
Fundamental directives of consumption tax law 1-4-5, 5-1-1, 5-1-2, 5-7-15-2, 5-8-3, 5-8-4

Our comments:

The sale of NFTs by a business operator is a taxable transaction for consumption tax purposes.

Once the Qualified Invoice System becomes effective in October of 2023, Qualified Invoices with the registration number of the seller will be necessary for the purchaser of the NFT to claim tax deductions for consumption tax paid when purchasing the NFT.

It will be interesting to see if and how the practice of purchasing NFTs on the blockchain and separately issuing a Qualified Invoice will become a standard business practice.

This is also an example of how traditional tax practices have become incompatible with the digital age.

12 Treatment of consumption tax on NFT transactions 2 (Reseller of NFT digital art)

Question

I purchased an NFT that is linked to digital art (copyrighted work) from a digital art creator through a marketplace, and then I transferred the NFT to another person for consideration through the same marketplace.

Initially, I received the permission to use the digital art through the purchase of the NFT, and later by transferring the NFT to another person, I transferred the rights (usage rights) related to the permission to use the digital art to that other person.

Also, according to the terms of use of the marketplace, the copyright for the digital art belongs to the creator, and only the creator is allowed to grant permission to use the work. It is stated that the only thing that is transferred through the transfer of the NFT is the usage rights of the work.

Can you tell me how consumption tax should be handled in this case?

Answer

This transaction is the transfer of rights (usage rights under article 63, paragraph 3 of the Copyright Act) related to the permission to use digital art from the person who received the permission to use the digital art from the digital art creator (the copyright holder) to another person.

If this is a transaction carried out by a domestic business operator for profit, consumption tax will be imposed on that domestic business operator.

Explanation

Under the Consumption Tax Law, “transfer of assets” and “loaning of assets” as well as “provision of services” that are carried out by business operators as a business in Japan are subject to consumption tax (Note 1, 2).

In this transaction, it is stated in the terms of use of the marketplace that the copyright of the digital art belongs to the creator and that only the creator can grant the use of the work, and that the transfer of the NFT only transfers the right to use the work.

From this, it can be recognized that the transfer in question is not the transfer of the copyright itself, nor is it a grant of the use of the copyright.

Therefore, this transaction is recognized as a transfer of NFTs associated with digital art, in which the person who received the permission for the use of the digital art from the creator of the digital art (copyright holder) transfers the right related to the permission (use right) to another person.

And since the location of the assets at the time of the transfer of the use right is not clear, the determination of whether the transaction was conducted domestically or not (domestic or foreign determination) is made based on whether the office or other location related to the transfer is located in Japan (Consumption Tax Law article 43, paragraph 1, and Implementation Ordinance article 61, paragraph 10).

Therefore, if this transaction is carried out as a business in Japan (by a business operator whose office or other location related to the transfer is located in Japan), the business operator will be subject to consumption tax (note 3).

(Note 1)
Even if it is a transaction performed by a person receiving salary income, if the transfer of assets, etc. that is performed in exchange for consideration is repeated, continued, and independent, it falls under the category of “business”.

(Note 2)
Transactions without consideration are generally not subject to consumption tax.

(Note 3)
In the event that, according to a contract between parties such as a marketplace’s terms of use, the transfer of an NFT is accompanied by the transfer of copyright, the determination of whether it is a domestic or foreign transfer will be made based on the address of the person transferring the copyright (Article 43, Paragraph 1 of the Consumption Tax Law and Article 61, Paragraph 7 of the Consumption Tax Implementation Regulations).
If the other party to the transfer is a non-resident, it will be eligible for export tax exemption (Article 71, Paragraph 5 of the Consumption Tax Law and Article 172, Paragraph 6 of the Consumption Tax Implementation Regulations).
Additionally, if the contract between the parties stipulates that the transfer of an NFT also includes permission to use the copyright, it will be subject to the same tax relations as in Question 11.