Statutory definition

In which fiscal year does a corporation recognize gains or losses when selling crypto assets? Article 61(1) of the Corporation Tax Act provides the answer. It creates the category “short-term trading commodities and similar assets” and includes crypto assets within it.

“Where a domestic corporation transfers short-term trading commodities and similar assets (meaning assets prescribed by Cabinet Order as acquired to profit from short-term price fluctuations (excluding securities), and crypto assets under Article 2(14) (Definitions) of the Payment Services Act (Act No. 59 of 2009), hereinafter referred to in this article as ‘crypto assets’; the same applies throughout this article), the transfer gain (the excess of the amount in item (i) over the amount in item (ii)) or transfer loss (the excess of the amount in item (ii) over the amount in item (i)) shall, except where Articles 62 through 62-5 (Transfers of Assets through Mergers, etc.) apply, be included in gross income or deductible expenses in calculating income for the fiscal year containing the date the transfer agreement was concluded (or, for distributions of surplus and other events prescribed by Ministry of Finance Order, the date the distribution takes effect or another date prescribed by that Order).”

The sentence is dauntingly long, but its core is simple. When crypto assets are transferred, the gain or loss enters gross income or deductible expenses for the fiscal year containing “the date the transfer agreement was concluded.”

The first part of “short-term trading commodities and similar assets” has a purpose requirement: assets acquired to profit from short-term price fluctuations. Crypto assets have no such requirement. Regardless of the intention at acquisition, corporate crypto holdings fall under this provision. Their definition is borrowed from Article 2(14) of the Payment Services Act (How does the tax law define "cryptoassets"?）。

Overview

Recognition Uses the Agreement Date

Article 61(1) expressly specifies the agreement date to establish that the delivery date is not the relevant date. Trade execution and actual movement of crypto assets or funds can occur on different days. If these cross fiscal year-end, the recognition year changes.

The provision chooses the agreement date. Thus, where a corporation with a March year-end agrees a sale in late March but delivery occurs in the next fiscal year, the wording requires recognition in the year ending March.

The parentheses contain an exception. For transfers through “distributions of surplus or other events prescribed by Ministry of Finance Order,” the relevant date is “the date the distribution takes effect or another date prescribed by that Order.” A different date is provided for assets moving without an agreement. Those events and dates are delegated to a Ministry of Finance Order, whose original text this article has not examined.

How Are Transfer Gains and Losses Calculated?

The amount is the difference between items (i) and (ii). If item (i) exceeds item (ii), the excess is a transfer gain; if the reverse, the excess is a transfer loss.

Item (i) is “the consideration ordinarily receivable from a transfer for consideration of those short-term trading commodities and similar assets at the time of transfer.” It does not say the amount actually received. The standard is what would ordinarily be received in a transfer for consideration.

Item (ii) is “the cost relating to the transfer,” defined in parentheses as the amount calculated under the method for book value per unit multiplied by the quantity transferred. The next question is how that unit amount is determined.

Where Does the Transfer Cost Come From?

Article 118-6(1) of the Order for Enforcement of the Corporation Tax Act specifies two methods for calculating book value per unit: item (i), moving average, and item (ii), total average. A method is selected by notification; if none is selected, the statutory method applies. Paragraph (8) states that “the method prescribed by Cabinet Order in Article 61(1)(ii) of the Act shall be the moving average method specified in paragraph (1)(i).” Corporations without a notification therefore use moving average.

The unit of selection is also specified. Paragraph (4) requires selection “for each type and, for crypto assets, each category under paragraph (2).” Those categories are: (i) specified transfer-restricted crypto assets that are not self-issued; (ii) specified transfer-restricted crypto assets that are self-issued; (iii) specified self-issued crypto assets; and (iv) all others.

Article 118-5 of the Order for Enforcement of the Corporation Tax Act divides the initial acquisition cost into three categories.

A Change in Classification Can Trigger a Deemed Transfer

Article 61 also contains a provision deeming a transfer to occur without a sale or purchase: paragraph (6).

“Where a domestic corporation holds crypto assets for its own account and those assets cease to qualify as specified self-issued crypto assets or another event prescribed by Cabinet Order occurs, its income for each fiscal year shall be calculated, as prescribed by Cabinet Order, deeming the corporation to have transferred and reacquired the assets.”

Article 118-11(1) of the Order lists those “events prescribed by Cabinet Order.” Because the items are intricate, they are presented in a table. There are two keys: items (ii) and (iii) differ according to whether the assets qualified as market crypto assets at any time during the year (those that did are called “item (ii) crypto assets”); and paragraphs (2) and (3) prescribe two different deemed values.

The difference between paragraphs (2) and (3) directly affects the amount. Paragraph (2) deems the assets “transferred at their book value immediately before that time and acquired at that book value,” creating a sale and repurchase at the same amount with no gain or loss. Paragraph (3) uses the price on the latest trading-price publication date, so the difference from book value enters the income calculation.

In both cases, no external transaction occurs. The system requires someone to identify the relevant date to recognize the event.

How Does This Differ for Individuals?

For individuals, Article 48-2 of the Income Tax Act and Article 119-2 onward of its Enforcement Order perform a similar role. They are similar but not identical.

• The default methods are opposite. Corporations without a notification use moving average (corporation tax Order, Article 118-6(8)); individuals use “valuation at acquisition cost calculated using the total average method” (income tax Order, Article 119-5(1)).
• The acquisition-cost wording differs. For individuals it is the purchase price plus commissions and other acquisition expenses; for corporations the list expressly includes freight-in and customs duties.
• The cutoff differs. For individuals it is December 31; for corporations it is fiscal year-end.

Acquisition cost for individuals is discussed in How is the acquisition price of crypto assets held by individuals determined?. Article 61 also contains, separately from transfer gains and losses in paragraph (1), a year-end market valuation mechanism for recognizing valuation gains and losses in paragraphs (2) and (3).

Points that require care in practice

• When the agreement and delivery dates cross fiscal year-end. If bookkeeping follows delivery dates, transactions near year-end alone may depart from the statutory treatment.
• Whether the transfer falls under “distributions of surplus or other events prescribed by Ministry of Finance Order.” If so, the relevant date changes.
• When one crypto asset is exchanged for another. On the acquisition side, Article 118-6(6)(i) of the corporation tax Order excludes from “acquisition” other crypto assets temporarily needed for a purchase, sale, or exchange.
• When restricted or self-issued tokens are held. A transfer may be deemed to occur on the date their classification changes, even without trading. Assigning responsibility for identifying that date affects the risk of omissions.
• Whether a method for book value per unit has been notified. Without notification, moving average applies. Selection by type and by crypto asset category is also easily overlooked.
• Confusing transfer gains and losses under paragraph (1) with year-end market valuation gains and losses under paragraphs (2) and (3). Unless the calculations are distinguished, amounts may be counted twice or one may be omitted.

Legal basis

• Corporation Tax Act, Article 61(1) (Gains and Losses on Transfers and Market Valuation of Short-Term Trading Commodities, etc.) / Quoted wording: “The transfer gain (the excess of item (i) over item (ii)) or transfer loss (the excess of item (ii) over item (i)) shall, except where Articles 62 through 62-5 (Transfers of Assets through Mergers, etc.) apply, be included in gross income or deductible expenses in calculating income for the fiscal year containing the date the transfer agreement was concluded (or, for distributions of surplus and other events prescribed by Ministry of Finance Order, the date the distribution takes effect or another date prescribed by that Order).”
• Corporation Tax Act, Article 61(1)(i) (Same) / Quoted wording: “the consideration ordinarily receivable from a transfer for consideration of those short-term trading commodities and similar assets at the time of transfer.”
• Corporation Tax Act, Article 61(1)(ii) (Same) / Quoted wording: “the cost relating to the transfer of those short-term trading commodities and similar assets (meaning the amount calculated by multiplying their quantity transferred by the amount calculated under the method selected by that domestic corporation for book value per unit (or, if no method was selected or the selected method was not used, the amount calculated under the method prescribed by Cabinet Order)).”
• Corporation Tax Act, Article 61(6) (Same) / Quoted wording: “Where a domestic corporation holds crypto assets for its own account and those assets cease to qualify as specified self-issued crypto assets or another event prescribed by Cabinet Order occurs, its income for each fiscal year shall be calculated, as prescribed by Cabinet Order, deeming the corporation to have transferred and reacquired the assets.”
• Order for Enforcement of the Corporation Tax Act, Article 118-5(i) (Acquisition Cost of Short-Term Trading Commodities, etc.) / Quoted wording: “The purchase price (plus freight-in, handling charges, transport insurance, purchase commissions, customs duties (excluding additional taxes under Article 2(1)(iv)-2 (Definitions) of the Customs Act), and any other expenses incurred to purchase the assets).”
• Order for Enforcement of the Corporation Tax Act, Article 118-5(ii) (Same) / Quoted wording: “the expenses incurred for their issuance.”
• Order for Enforcement of the Corporation Tax Act, Article 118-5(iii) (Same) / Quoted wording: “the value ordinarily required to acquire the assets at the time of acquisition.”
• Order for Enforcement of the Corporation Tax Act, Article 118-6(1) (Methods for Calculating Book Value per Unit of Short-Term Trading Commodities, etc., and Selection Procedures) / Quoted wording: “The methods for calculating book value per unit when calculating transfer costs for short-term trading commodities and similar assets shall be the following methods.”
• Order for Enforcement of the Corporation Tax Act, Article 118-6(2) (Same) / Quoted wording: “For crypto assets, the types referred to in the items of the preceding paragraph shall be each type after classification into one of the following crypto asset categories.”
• Order for Enforcement of the Corporation Tax Act, Article 118-6(4) (Same) / Quoted wording: “The method for calculating book value per unit of short-term trading commodities and similar assets must be selected for each type and, for crypto assets, each category under paragraph (2).”
• Order for Enforcement of the Corporation Tax Act, Article 118-6(6)(i) (Same) / Quoted wording: “acquisition of other crypto assets temporarily necessary when purchasing, selling, or exchanging crypto assets for a different type.”
• Order for Enforcement of the Corporation Tax Act, Article 118-6(8) (Same) / Quoted wording: “The method prescribed by Cabinet Order in Article 61(1)(ii) of the Act shall be the moving average method specified in paragraph (1)(i).”
• Order for Enforcement of the Corporation Tax Act, Article 118-11(1) (Deemed Transfers upon Changes in Crypto Asset Classification, etc.) / Quoted wording: “The events prescribed by Cabinet Order in Article 61(6) of the Act (Gains and Losses on Transfers and Market Valuation of Short-Term Trading Commodities, etc.) shall be the following events.”
• Order for Enforcement of the Corporation Tax Act, Article 118-11(1)(i) (Same) / Quoted wording: “Crypto assets held by the domestic corporation referred to in Article 61(6) of the Act cease to qualify as specified self-issued crypto assets (as defined in Article 61(2)(i)(b); the same applies in this paragraph).”
• Order for Enforcement of the Corporation Tax Act, Article 118-11(1)(ii) (Same) / Quoted wording: “(a) The crypto assets come to qualify as specified transfer-restricted crypto assets (as defined in Article 61(2)(i)(a) of the Act; the same applies in this paragraph).”
• Order for Enforcement of the Corporation Tax Act, Article 118-11(1)(ii)(c) (Same) / Quoted wording: “The crypto assets cease to qualify as specified transfer-restricted crypto assets subject to an election of the market value method because their valuation method changes.”
• Order for Enforcement of the Corporation Tax Act, Article 118-11(1)(iii) (Same) / Quoted wording: “The following events occurring in relation to crypto assets held by the domestic corporation under Article 61(6) of the Act that do not qualify as item (ii) crypto assets.”
• Order for Enforcement of the Corporation Tax Act, Article 118-11(1)(iv) (Same) / Quoted wording: “Crypto assets held by the domestic corporation under Article 61(6) of the Act cease to qualify as market crypto assets at some point during that fiscal year.”
• Order for Enforcement of the Corporation Tax Act, Article 118-11(2) (Same) / Quoted wording: “At the time that event occurs, income for each fiscal year of the domestic corporation shall be calculated deeming the crypto assets to have been transferred at their book value immediately before that time and acquired at that book value.”
• Order for Enforcement of the Corporation Tax Act, Article 118-11(3) (Same) / Quoted wording: “At the time that event occurs (or, for an event under item (ii), limited to subitem (c), or item (iv) of that paragraph, at the end of the fiscal year in which it occurs).”
• Payment Services Act, Article 2(14) (Definitions) / Quoted wording: “In this Act, ‘crypto assets’ means the following, excluding those representing rights prescribed in Article 29-2(1)(viii) of the Financial Instruments and Exchange Act.”
• Order for Enforcement of the Income Tax Act, Article 119-5(1) (Statutory Crypto Asset Valuation Method) / Quoted wording: “The method shall be valuation at acquisition cost calculated using the total average method specified in Article 119-2(1)(i) (Methods of Valuation of Crypto Assets).”
• Order for Enforcement of the Income Tax Act, Article 119-6(1)(i) (Acquisition Cost of Crypto Assets) / Quoted wording: “the purchase price (plus purchase commissions and other acquisition expenses, if any).”