Japanese Tax Authorities Releases FAQ (Ver3) on Crypto Taxes

Category: ,
Author: Kensaku Kimura
Post Date: December 20, 2019
Last Update: February 4, 2023

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:

2017 2018 2019
Individual Taxation Division Individual Taxation Division Individual Taxation Division
Tax Consolidation Division Tax Consolidation Division
Corporate Taxation Division Corporate Taxation Division
Asset Taxation Division Asset Taxation Division
Asset Evaluation Planning Officer Asset Evaluation Planning Officer
Consumption Tax Office Consumption Tax Office
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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”.

2017 2018 2019
Calculating taxable income related to Cryptocurrency (Information) Tax Treatment of Cryptocurrencies (Information) Tax Treatment Cryptocurrencies (Information)
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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:

No Item Ver first appeared in Changes from Ver2
Income Tax and Corporate Tax
1 Sales of Cryptocurrency 1 Carried over (significant change in the method for calculating acquisition cost)
2 Purchase of Goods with Cryptocurrency 1 Carried over (significant change in the method for calculating acquisition cost)
3 Crypto-to-crypto Trades 1 Carried over (significant change in the method for calculating acquisition cost)
4 Acquisition Cost of Cryptocurrency 1 Carried over
5 Acquisition of Cryptocurrency Through Forks 1 Carried over
6 Acquisition of Cryptocurrency Through Mining 1 Carried over
Income Tax
7 When to Recognize Income from Cryptocurrency Transactions in Total Income 3 New
8 Income Classification of Cryptocurrency 1 Carried over (minor changes)
9 Necessary Expenses of Cryptocurrency 2 Carried over
10 Cost Basis of the Transferred Cryptocurrency 3 New
11 Submission of Cryptocurrency Measurement Method 3 New
12 When Changing the Method of Cryptocurrency Measurement 3 New
13 When the Purchase Price or the Sale Price of the Cryptocurrency is Unknown 2 Carried over (addition of the 5% rule)
14 Calculation of Taxable Income using the Annual Transaction Report 2 Carried over
15 Contents of the Annual Transaction Report 2 Carried over
16 When Transferring Cryptocurrency at Below Market Value 3 New
17 Treatment of Losses from Cryptocurrency Transactions 1 Carried over
18 Cryptocurrency Margin Trading 1 Carried over (minor changes)
19 Cryptocurrency Margin Trading (2) 3 New
Corporate Tax
20 When to Recognize Profit From Transferring Cryptocurrency 3 New
21 Cost Basis of Transferred Cryptocurrency 3 New
22 Mark-to-market of Cryptocurrency at Year-end 3 New (Significant implications from taxation on unrealized gains/losses)
23 Cryptocurrency Margin Trading 3 New
24 When to Recognize Profit From Cryptocurrency Margin Trading 3 New
25 Provisional Settlement Profit for Cryptocurrency Margin Trading at Year-end 3 New (Significant implications from taxation on unrealized gains/losses)
Inheritance Tax and Gift Tax
26 When Cryptocurrency is Acquired Through Inheritance or Gift 2 Carried over
27 How to Measure Cryptocurrency Acquired Through Inheritance or Gift 2 Carried over
Income Tax Withholding
28 Payment of Salary, etc. Using Cryptocurrency
Consumption Tax
29 Treatment of Consumption Tax When Transferring Cryptocurrency 2 Carried over
Statutory Declaration
30 Whether to Include Cryptocurrency in the Property and Debt Statement 2 Carried over
31 How to Record the Value of Cryptocurrency in the Property and Debt Statement 2 Carried over
32 Whether to Include Cryptocurrency in the Foreign Property Statement 2 Carried over
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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.]