Japanese Tax Authorities Releases FAQ (Ver3) on Crypto Taxes

Japanese Tax Authorities Releases FAQ (Ver3) on Crypto Taxes

Compared to the FAQ in 2018, Version 3 covers a wider range with dedicated section on corporate tax

On December 20, 2019, the National Tax Agency (NTA) published a guidance titled “Tax Treatment of Cryptocurrencies (Information)”.

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

There were two changes in Version 3 that we think have significant implications.

The two are:

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)

In this post, we will look at the contents of the FAQ that was recently released (Version3) one by one, compare that with the version that was released on November 21, 2018 (Version2), and add comments on any points of interest.

Before looking at the content of each FAQ, there is one major change that can be seen in the table of contents.

1. There are more FAQ items

 

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:

WordPress Data Table Plugin

In Version 2, the number of divisions increased from 1 in Version 1 to six.

There was no change in Version 3.

 

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.

There was no change in title for Version 3.

There could be changes in Version 4 though, if the NTA releases one in the future.

The revised Payment Services Act now refers to “Cryptocurrencies” as “Crypto Assets”.

WordPress Data Table Plugin

 

There are more FAQ items

The noticeable change with Version 3 is that Corporate Tax now has its own section with new FAQ items.

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

In Version 3, 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 these changes in mind, here are the items covered in Version 3 of the FAQ:

WordPress Data Table Plugin

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:

仮想通貨に関する税務上の取扱いについて（情報）（令和元年12月20日）（PDF/966KB）

 

 

Income Tax and Corporate Tax

1 Sale of Cryptocurrency

Question

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

(Example)
On April 2, I bought 4BTC for JPY2,000,000.

On April 20, I sold 0.2BTC for JPY110,000.

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

 

Answer

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

JPY 110,000 [transfer price] – ( (JPY2,000,000 ÷ 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 cryptocurrency you hold, income is the difference between the selling price of the cryptocurrency and the acquisition price of the cryptocurrency 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 and 2)

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 11 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 “4 Acquisition Cost of Cryptocurrency”.

 

2 Purchase of Goods with Cryptocurrency

Question

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

(Example)
March 9th Purchased 4 bitcoin for 2,000,000 yen.

September 28th Paid 0.3 bitcoin to purchase goods worth 162,000 yen (including consumption tax).

The exchange rate at the time of transaction was 1 BTC = 1,850,000 yen.

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

 

Answer

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

253,000 yen [goods price (=transfer price of bitcoin] – ( (2,000,000 yen ÷ 4BTC) [acquisition cost per 1BTC] (Note 1) × 0.3 BTC [bitcoin paid] ) [transfer cost] = 103,000 yen (Note 2) [income]

(Note)
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).

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

If you use the cryptocurrency you hold for payment when purchasing goods, this means that you transferred the cryptocurrency you hold, and the difference between the transfer price of that cryptocurrency and the acquisition cost of that cryptocurrency 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 Sales of Cryptocurrency”.

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.

 

3 Crypto-to-crypto Trades

Question

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

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

On November 2, I used 1 BTC to purchase 20 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 cryptocurrency.

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

 

Answer

(30,000 yen x 10XRP) [purchase price of XRP (=transfer price of bitcoin)] – ( (2,000,000 yen / 4BTC) [price per bitcoin (Note 1)] x 1BTC [bitcoin paid] ) [transfer cost] = 100,000 yen(Note 2) [income]

(Note)
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).

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

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

Therefore, taxable income from transferring cryptocurrency A shall be calculated in a way similar to “2 Purchase of Goods with Cryptocurrency”.

 

[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 “4 Acquisition Cost of Cryptocurrency”.

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

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.

 

4 Acquisition Cost of Cryptocurrency

Question

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

(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 cryptocurrency 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 cryptocurrency 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 cryptocurrency.

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 cryptocurrency 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 cryptocurrency 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 cryptocurrency is obtained through a fork, the acquisition value is 0 yen (refer to Question 5).”

 

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 cryptocurrency?

Answer

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

(Note)

1. Under Consumption Tax Law, the transfer of cryptocurrency and other payment methods is not subject to taxation, but the transaction fee paid to a cryptocurrency 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 cryptocurrency 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
Handling of corporate tax with the implementation of the Consumption Tax Act, etc. (Direct Law 2-1 dated March 1, 1989) 1-3

 

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 much has changed in Version 3 other than reflecting the increase in consumption tax from 8% to 10% in the illustrative example.

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.

 

5 Acquisition of Cryptocurrency Through Forks

Question

If one acquires a new cryptocurrency 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 cryptocurrency through a split (fork) of an existing cryptocurrency, 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 cryptocurrency 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 cryptocurrency 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 cryptocurrency 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 cryptocurrency 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.

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

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.

 

6 Acquisition of Cryptocurrency Through Mining

Question

If cryptocurrency is obtained through mining, is the income subject to income tax or corporate tax?

 

Answer

Income from cryptocurrency obtained through mining is subject to income tax or corporate tax.

If one acquires cryptocurrency through mining (etc.), the amount of income is calculated by subtracting necessary expenses (costs incurred through mining or other means) from the amount of revenue (the market value of the cryptocurrency at the time it was acquired through mining or other means).

[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 Version 3 either.

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

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.

 

Income Tax

7 When to Recognize Income from Cryptocurrency Transactions in Total Income

Question

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

 

Answer

In principle, it should be considered as income in the year in which the transfer of the cryptocurrency 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 cryptocurrency was entered.

Profit and loss generated from cryptocurrency transactions are generally classified as miscellaneous income (refer to Question 8).

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 cryptocurrency 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.

 

8 Income Classification of Cryptocurrency

Question

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

 

Answer

In general, gains resulting from the use of cryptocurrencies are classified as miscellaneous income.

Gains and losses (gain or loss recognized in relation to the relative relationship between domestic currency or foreign currency) arising from cryptocurrency transactions are classified as miscellaneous income, unless:

• the cryptocurrency transaction itself is considered as a business(Note 1)
• the cryptocurrency transaction is performed in conjunction with acts that are the basis for various types of income such as business income(Note 2)

(Note)
“Cryptocurrency transaction itself is considered as a business”, for example, if it is objectively clear that the cryptocurrency transaction is being conducted as a business, such as if the income is used to support one’s livelihood, the income classification would be business income.

“The cryptocurrency 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 cryptocurrency as a business asset, and is using the cryptocurrency as a means of payment when purchasing inventory etc.

 

[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 Version 3.

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

Since the FAQ states that it is miscellaneous income “except when it is generated in conjunction with acts that are the basis for various types of income such as business income”, I think the point is that it can be reported as other income (business income or miscellaneous income) if it can be objectively proven.

On the other hand, the word “in general” is likely to be a hurdle in practice.

 

9 ​​Necessary Expenses of Cryptocurrency

Question

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

 

Answer

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

• Transfer cost of the cryptocurrency sold
• Transaction fees paid for the sale of the cryptocurrency

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 necessary for the sale of the cryptocurrency.

In principle, income from the sale of cryptocurrency is classified as miscellaneous income (see Question 8).

The amount that can be included in the necessary expenses is (1) transfer cost of the cryptocurrency and other expenses directly related to the sale of the cryptocurrency, and (2) the amount of selling expenses, general administrative expenses, and other expenses incurred in the business that should generate the income in the year.

Please note the following items regarding necessary expenses.
(1) 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.
(2) For personal business, expenses that are related to both household and business activities (such expenses are called “household-related expenses”) should be based on transaction records. Expenses related to both household and business affairs may be included in necessary expenses only if they can be clearly classified as directly necessary for the performance of the business based on the transaction records.

 

[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 Version 3.

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.

 

10 Cost Basis of the Transferred Cryptocurrency

Question

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

What is the transfer cost for the sale of this cryptocurrency?

(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 cryptocurrency.

 

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 cryptocurrencies, it is necessary to calculate the transfer cost.

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

This “valuation of cryptocurrency 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 cryptocurrency held at the beginning of the year and the total acquisition cost of that cryptocurrency acquired during the year by the total quantity of that cryptocurrency.

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 cryptocurrency acquired at each acquisition point to the total acquisition cost of that cryptocurrency held at that acquisition point and dividing it by the total quantity of that cryptocurrency 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 cryptocurrency 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 cryptocurrency acquired during the year ÷
(2) Quantity of the same type (name) of cryptocurrency acquired during the year =
(3) Acquisition cost per unit at the end of the year

(Note) If there is cryptocurrency 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 cryptocurrency 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 cryptocurrencies of different types (names), revise the average unit price using the following calculation formula.

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

(Note)
1 If there is cryptocurrency 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 virtual currency held at acquisition] + 1,650,000 yen [acquisition cost on June 20th] = 3,495,000 yen
(2) Quantity of cryptocurrency 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 cryptocurrency 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 cryptocurrency 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 cryptocurrency 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 cryptocurrency fairly simple, it is possible to create a “Cryptocurrency Calculation Sheet (for the total average method or the moving average method)” based on the “Annual Trading Report” sent by the cryptocurrency exchange operator. (Refer to Question 14)

The “Cryptocurrency 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.

 

11　Submission of Cryptocurrency Measurement Method

Question

I recently acquired my first cryptocurrency, 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 Cryptocurrency 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 cryptocurrency.

As stated in “10 Cost Basis of Cryptocurrency,” the evaluation value of the cryptocurrency 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 cryptocurrency such as selling it.

These evaluation methods are selected for each type of cryptocurrency (name) and if you (1) acquire a cryptocurrency for the first time or (2) acquire a different type of cryptocurrency, you must submit a notice (Notice of Method of Evaluation of Cryptocurrency 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)
This treatment was implemented as a result of revisions to the Income Tax Law, etc. in 2019, but for those who have held cryptocurrency prior to the implementation date (April 1, 2019), it is necessary to submit a “Notice of Method of Evaluation of Cryptocurrency Income Tax” by the deadline for filing the 2019 income tax return (March 16, 2021).

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

An example of the Notice of Method of Evaluation of Cryptocurrency 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 cryptocurrency 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).

 

12 When Changing the Method of Cryptocurrency Measurement

Question

I submitted a “Notice of Method of Evaluation of Cryptocurrency Income Tax” selecting the total average method as the evaluation method for cryptocurrency, 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 Cryptocurrency 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.

The application should include details of the proposed evaluation method and other required information.

1. Note:
   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 cryptocurrency 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 and 2.

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.

 

13 When the Purchase Price or Sale Price of the Cryptocurrency is Unknown

Question

I have traded cryptocurrency 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 cryptocurrency.

Is there a way to check these prices?

 

Answer

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

1 Cryptocurrency transactions through domestic cryptocurrency exchanges

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

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

If you do not have an Annual Trading Report, please request a new one from the cryptocurrency 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 cryptocurrency yourself.

2 Cryptocurrency transactions other than those in category 1 (transactions through foreign cryptocurrency 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 cryptocurrency by checking the withdrawal status of the bank account used to purchase cryptocurrency and the deposit status of the bank account used to sell cryptocurrency.
• Confirm the acquisition cost and sale price of cryptocurrency by using the transaction history of cryptocurrency transactions and the transaction market published by the cryptocurrency exchange (Note).

(Note) In the case of transactions between individuals, use the transaction market of the cryptocurrency 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 cryptocurrency sold as 5% of the selling price.

For example, if a cryptocurrency is sold for 5 million yen, the acquisition cost of that cryptocurrency 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.

 

14 Calculation of Taxable Income using the Annual Transaction Report

Question

Cryptocurrency exchange A and B sent the following annual transaction reports.

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

 

Answer

By inputting the red and blue portions of the annual transaction report into the “Calculation Sheet for Cryptocurrency (using the 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 cryptocurrency is 2,189,000 yen.

Please refer to the next page for an example of calculating the “Calculation Sheet for Cryptocurrency (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.

 

15 Contents of the Annual Transaction Report

Question

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

 

Answer

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

* In cases where cryptocurrency 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 cryptocurrency from a cryptocurrency exchange for free
“Sold quantity during the year”: –
“Sold amount during the year”: The value (market value) of the cryptocurrency received
“Purchased quantity during the year”: The number of cryptocurrency received
“Purchased amount during the year”: The value (market value) of the cryptocurrency received”

2. When settling with cryptocurrency

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

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

Please note that the format of the annual trading report may vary depending on the cryptocurrency 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.

 

16 ​​When Transferring Cryptocurrency at Below Market Value

Question

As in the following example, I sold cryptocurrency 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 = 1,200,000 yen.

(Note) Transaction fees for buying and selling cryptocurrency 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 840,000 yen (equivalent to 70% of the market value), so it is necessary to report an income amount of 390,000 yen.

After April 1, 2019, when an individual transfers cryptocurrency 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 cryptocurrency that is considered a gift in essence, at the time of such transfer in the total income amount for miscellaneous income, etc.

(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.

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: 1,200,000 yen x 70% = 840,000 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] + (840,000 yen – 450,000 yen) [Difference between actual sales price and the amount equivalent to 70% of the market value] = 840,000 yen [Total income]

Taxable Income Calculation
840,000 yen [Total income] – 450,000 yen [Transfer cost] = 390,000 yen [Taxable Income]

Also, if cryptocurrency 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 cryptocurrency at the time of the gift or inheritance must be included in the total income for miscellaneous income, etc.

 

[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.

 

17 Treatment of Losses from Cryptocurrency Transactions

Question

I incurred a loss in the amount of miscellaneous income through cryptocurrency 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 Version 1 and 2.

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.

 

18 Cryptocurrency Margin Trading

Question

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

 

Answer

Margin trading of cryptocurrency is not subject to separate reporting taxation.

Income from margin trading of cryptocurrency is not subject to separate reporting taxation, so it will be reported under comprehensive taxation.

Under the Special Tax Measures Act, separate reporting taxation (special taxation of miscellaneous income related to futures trading, etc.) applies to 1 commodity futures trading, 2 financial product futures trading, and 3 covered warrant acquisition, which are based on the Financial Instruments and Exchange Act, among others.

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

On the other hand, margin trading of cryptocurrency does not fall under any of these transactions, so it is not subject to separate reporting taxation and the 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 and 2.

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

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.

 

19 Cryptocurrency Margin Trading (2)

Question

Please tell me the method of calculating the amount of income in the case of the following cryptocurrency 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 cryptocurrency 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 cryptocurrency credit transaction is a buying and selling of cryptocurrency that is conducted based on credit from a cryptocurrency exchange operator.

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

In addition, income from cryptocurrency 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 cryptocurrency exchange operator is included in the sale price, and the so-called commodity loan fee paid to the cryptocurrency exchange operator is deducted from the sale price.

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

 

Corporate Tax

20 When to Recognize Profit From Transferring Cryptocurrency

Question

When selling cryptocurrency, buying goods with cryptocurrency, or exchanging cryptocurrency, 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 cryptocurrency should be recorded in the fiscal year in which the contract for the sale, purchase, or exchange of cryptocurrency was made (i.e., the date of the agreement).

For transactions involving the sale of cryptocurrency (Question 1), the purchase of goods with cryptocurrency (Question 2), or the exchange of cryptocurrency (Question 3), as the cryptocurrency is transferred, 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.

 

21 Cost Basis of Transferred Cryptocurrency

Question

Can you tell me about the transfer cost of cryptocurrency?

 

Answer

The transfer cost of cryptocurrency is calculated as follows:

Transfer cost = Book value per unit of cryptocurrency x Quantity of cryptocurrency transferred

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

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

 

(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 11.

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 11 and 12.

 

22 Mark-to-market of Cryptocurrency at Year-end

Question

Our company held cryptocurrency at year end.

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

 

Answer

An entity must measure its cryptocurrency (those that are actively traded on a market, referred to as “market cryptocurrency” 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.

From an accounting perspective, market cryptocurrency held at year end is subject to mark-to-market.

This has been considered in arriving at this conclusion for tax purposes.

The fair value is calculated by multiplying the quantity of the market cryptocurrency by one of the following:

The final trading price of the market cryptocurrency 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 cryptocurrency as published by a price publisher on the last day of the fiscal year multiplied by the final trading price of the other market cryptocurrency 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)

Gains or losses from mark-to-market of cryptocurrencies will only be recognized from cryptocurrency held by the entity on its own account.

Therefore, though cryptocurrency held by cryptocurrency exchanges on behalf of its customers are subject to mark-to-market, no gains or losses will be recognized.

The mark-to-market gain or loss will be reversed in the following fiscal year.

(Note) A cryptocurrency 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 cryptocurrency.
(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.

 

23 Cryptocurrency Margin Trading

Question

Please tell me the method of calculating the amount of income in the case of the following cryptocurrency 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 cryptocurrency 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 cryptocurrency margin trade refers to the buying and selling of cryptocurrency in which credit is provided by a cryptocurrency exchange operator (referred to in this question as a “cryptocurrency exchange operator”). This is defined in Article 2, Paragraph 7 of the Payment Services Act.

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

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

3 The buying commission fee and so-called borrowing fee paid to cryptocurrency 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 cryptocurrency credit transaction mentioned above is conducted, i.e. when cryptocurrency is bought and then the same type of cryptocurrency is sold and settled, the transfer loss and gain amount of cryptocurrency will be the difference between the amount of consideration that should be normally obtained by the transfer of cryptocurrency (selling price) (note 5, 7) and the amount of consideration related to the buying of cryptocurrency (buying price) (note 6, 7).

(Note)
5 The so-called borrowing fee received from cryptocurrency exchange operators is included in the selling price.

6 The buying commission fee and amount equivalent to interest paid to cryptocurrency 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 cryptocurrency FX trading and cryptocurrency futures trading are classified as derivative trading, not cryptocurrency 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.

 

24 When to Recognize Profit From Cryptocurrency Margin Trading

Question

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

 

Answer

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

(1) For transactions in which cryptocurrency 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 cryptocurrency 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 Question 20, which requires entities to recognize gains or losses based on the contract date of the sell transaction.

For transactions where cryptocurrency 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 Question 20.

(Note) Cryptocurrency credit transactions refers to the buying and selling of cryptocurrency with credit provided by entities conducting cryptocurrency exchange business as defined in Article 7 of Section 2 of the Payment Services Act.

 

[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.

 

25 Provisional Settlement Profit for Cryptocurrency Margin Trading at Year-end

Question

Our company conducts cryptocurrency 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 cryptocurrency credit transactions (Note) 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.

(Note) Cryptocurrency credit transactions refers to the buying and selling of cryptocurrency with credit provided by entities conducting cryptocurrency exchange business as defined in Article 7 of Section 2 of the Payment Services Act.

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

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

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

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

(the fair value of the cryptocurrency at the end of the period × the quantity of the cryptocurrency) – 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 22 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.

 

Inheritance Tax and Gift Tax

26 When Cryptocurrency is Acquired Through Inheritance or Gift

Question:

What is the tax treatment for cryptocurrency acquired through inheritance or gift?

 

Answer:

Inheritance tax or gift tax will be imposed when cryptocurrency 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 cryptocurrency, 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 cryptocurrency is acquired through inheritance, bequest, or gift from the inherited person, etc., inheritance tax or gift tax will be imposed.

 

[Related laws and regulations, etc.]
Inheritance Tax Law 2, 2-2
Inheritance Tax Law Basic Understanding 11-2-1
Payment Services Act 2-5

 

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.

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.

 

27 How to Measure Cryptocurrency Acquired Through Inheritance or Gift

Question

How can I measure cryptocurrency that I have acquired through inheritance or gift?

 

Answer

Cryptocurrency with an active market is measured based on the trading price at the time of the taxable event published by a cryptocurrency exchange where the taxpayer is trading.

Regarding the valuation method for cryptocurrency, 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 cryptocurrency with an active market(Note 1), the trading price at the time of taxable event published by a cryptocurrency exchange where the taxpayer is trading(Notes 2, 3, 4) will be used for valuation, similar to foreign currency.

For cryptocurrency without an active market, individual valuation will be conducted taking into consideration the content and characteristics, trading realities, etc. of the cryptocurrency(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 cryptocurrency exchange or a cryptocurrency sales venue, and price information is consistently provided.

2 “Trading price at the time of taxable event published by a cryptocurrency exchange” includes the transaction price recorded on a balance certificate provided by a cryptocurrency 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 cryptocurrency exchange (cryptocurrency sales venue), it is not a problem using the selling price of the taxpayer.

4 If the taxpayer is conducting transactions with multiple cryptocurrency exchanges, it is not a problem to evaluate based on the transaction price at the time of taxable event published by the selected cryptocurrency 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.

 

Income Tax Withholding

28 Payment of Salary, etc. Using Cryptocurrency

Question

Our company has decided to pay a part of our monthly salaries in a cryptocurrency 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 cryptocurrency (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 cryptocurrency.

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 cryptocurrency, the value of the cryptocurrency 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 cryptocurrency payment.

Note that for non-cash benefits-in-kind, the economic benefit should be evaluated, but in the case of cryptocurrency, 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.

 

Consumption Tax

29 Treatment of Consumption Tax When Transferring Cryptocurrency

Question

Our company has transferred (sold) our cryptocurrency through a domestic cryptocurrency exchange. Can you explain the consumption tax consequences in this case?

 

Answer

The transfer of cryptocurrency through a domestic cryptocurrency 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 cryptocurrency through a domestic cryptocurrency 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 cryptocurrency 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 cryptocurrency exchange as commission for the sale and purchase of cryptocurrency 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 cryptocurrency for the purpose of buying and selling cryptocurrency, 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 cryptocurrency 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 cryptocurrency made domestically before June 2017 through an intermediary such as a cryptocurrency 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, 49
Payment Services Act 2-5

 

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.

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.

 

Statutory Declaration

30 Whether to Include Cryptocurrency in the Property and Debt Statement

Question

I have cryptocurrency held at cryptocurrency exchanges in Japan and overseas.

Do I have to include cryptocurrency in the Property and Debt Statement?

 

Answer

Yes, cryptocurrency is subject to inclusion in the Property and Debt Statement.

If you have cryptocurrency with property value as stipulated in Article 5 of Paragraph 2 of the Payment Services Act as of December 31, it will be necessary to record it in the Property and Debt Statement.

Cryptocurrency corresponds to “Other Property” in the Property Classification, so please record it by type of cryptocurrency (such as bitcoin), purpose, and location in the Property and Debt Statement.

The location of the cryptocurrency exchange where cryptocurrency is deposited does not affect whether or not it should be recorded in the Property and Debt Statement.

(Note) The location of cryptocurrency 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 12-2-6
Remittance and Other Statements Regulations12-3-6, 15-1-2, Supplementary Table 3
Payment and Services Act 2-5

 

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.

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

 

31 How to Record the Value of Cryptocurrency in the Property and Debt Statement

Question

How do I record the value of cryptocurrency in my Property and Debt Statement?

 

Answer

Regarding the value of cryptocurrency, if there is an active market, the transaction price published by the cryptocurrency 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 cryptocurrency as of December 31 of that year according to the situation of the cryptocurrency.

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 cryptocurrency 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 cryptocurrency exchange or sales platform, and price information is continuously provided.

“The trading price as of December 31 of that year published by the cryptocurrency 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 cryptocurrency exchange (sales platform), it is acceptable to record the selling price of the cryptocurrency to the cryptocurrency exchange by the party submitting the Property and Debt Statement.
If the party submitting the Property and Debt Statement is conducting transactions with multiple cryptocurrency exchanges, it is acceptable to record the trading price as of December 31 of that year published by the cryptocurrency 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 cryptocurrency 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 cryptocurrency 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 6-2-3
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.

 

32 Whether to Include Cryptocurrency in the Foreign Property Statement

Question

I hold cryptocurrency on a foreign cryptocurrency exchange.

Do I have to include the cryptocurrency in the Foreign Property Statement?

 

Answer:

No, cryptocurrency 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., cryptocurrency 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, cryptocurrency held on a foreign cryptocurrency exchange by a resident individual is not considered “property located abroad” and will not be included in the foreign property and debt schedule.

[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 Version 2, the number of FAQ items significantly increased from 9 to 21 compared to Version 1.

In Version 3, the number of items again increased from 21 to 32.

Without question, this is a sign that cryptocurrencies are getting real life adoption.

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.

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)