Statutory definition

Article 61(7) of the Corporation Tax Act directly specifies the corporate tax treatment of crypto margin transactions.

“Where a domestic corporation conducts crypto asset margin transactions (purchases and sales of crypto assets using credit provided by another person; the same applies throughout this article) and any remain unsettled at fiscal year-end, the amount equivalent to the gain or loss calculated as prescribed by Ministry of Finance Order, deeming those transactions settled at that time (the ‘deemed settlement gain or loss’ in the following paragraph), shall be included in gross income or deductible expenses in calculating income for that fiscal year.”

This long sentence makes three points. Crypto margin transactions are purchases and sales of crypto assets using credit from another person. Transactions unsettled at fiscal year-end are deemed settled then. The resulting gain or loss is included in gross income or deductible expenses for that fiscal year. This is the “deemed settlement gain or loss.”

Even if the position remains open, profit or loss is recognized as if it were closed at year-end. An unsettled position does not mean nothing needs to be done.

For individuals, one provision uses the same term: Article 119-7 of the Order for Enforcement of the Income Tax Act.

“Where a resident buys and sells crypto assets through crypto asset margin transactions (purchases and sales using credit provided by another person; the same applies throughout this article) and settles the margin transaction through sales and purchases of crypto assets, the amount included as necessary expenses in calculating that person's business income or miscellaneous income for the year, as the cost of acquiring the assets sold, shall, notwithstanding Articles 119-2 through the preceding article, be the amount incurred to acquire the crypto assets purchased in that margin transaction.”

The parenthetical definition is identical to Article 61(7) of the Corporation Tax Act. However, this provision specifies necessary expenses upon settlement, not deemed year-end settlement.

Overview

What Counts as a Margin Transaction?

The definition has two elements: credit supplied by another person, and purchases and sales of crypto assets. If both are met, the transaction falls within the statutory definition regardless of the exchange's product name.

Conversely, simply buying and selling with one's own funds involves no credit and falls outside this provision. For corporations, its profit or loss is treated as a transfer gain or loss under Article 61(1), and assets held at year-end are subject to market valuation under paragraph (3).

Corporations Are Deemed to Settle at Year-End

Article 61 separates recognition situations by paragraph: transfer gains and losses in paragraph (1), year-end market valuation gains and losses on holdings in paragraph (3), and deemed settlement of outstanding margin transactions in paragraph (7). Paragraph (7) addresses unsettled transactions themselves, rather than crypto assets held.

Paragraph (7) does not specify how to calculate deemed settlement gains and losses. It merely requires calculation as prescribed by Ministry of Finance Order on the assumption of settlement. The amount cannot be determined from this provision alone.

Reversal in the Following Year

Recognizing a gain or loss on deemed year-end settlement is not the end. The actual position remains open, so the entry is reversed the following year. Article 118-12(1) of the corporation tax Order provides for this.

“An amount equivalent to the amount included by a domestic corporation in gross income or deductible expenses for a fiscal year under Article 61(7) of the Act (Gains and Losses on Transfers and Market Valuation of Short-Term Trading Commodities, etc.) shall be included in deductible expenses or gross income in calculating income for the following fiscal year.”

Prior-year gross income becomes a deduction the following year, and a prior-year deduction becomes gross income. The same amount is entered on the opposite side to cancel it: a reversal. Actual settlement gains and losses are recognized after this cancellation, preventing the same gain from being counted twice.

A parallel provision applies to holdings. Valuation gains or losses recognized under Article 61(3) are reversed in the following fiscal year under Article 118-10(1) of the corporation tax Order.

What Happens When Crypto Assets Are Acquired through a Margin Transaction?

Another corporation-only provision is Article 61(9) of the Corporation Tax Act.

“Where a domestic corporation acquires crypto assets under a crypto asset margin transaction agreement (excluding acquisitions under agreements to which Article 61-6(1) (Deferral of Gains or Losses through Deferred Hedge Accounting) applies), the difference between the assets' value at acquisition and the consideration paid under the agreement giving rise to the acquisition shall be included in gross income or deductible expenses in calculating income for the fiscal year containing the acquisition date.”

When crypto assets are acquired under the agreement, the difference between their value at acquisition and the consideration paid enters gross income or deductible expenses for that fiscal year. The difference between market value and payment becomes a gain or loss upon purchase.

Article 118-6(10) of the corporation tax Order specifies cost when an actual offsetting trade settles the transaction.

“Where a domestic corporation sells or purchases crypto assets through a margin transaction under Article 61(7) of the Act and subsequently settles by purchasing or selling crypto assets of the same type, the amount in Article 61(1)(ii), for purposes of applying paragraph (1), shall be the consideration for the crypto assets purchased.”

Thus, the amount under Article 61(1)(ii)—transfer cost—is the consideration paid for the purchase, rather than an amount calculated under the selected book-value-per-unit method. Margin settlement gains and losses are calculated separately from the average unit cost of crypto holdings.

How Are Individuals Treated?

Individuals have one provision, Article 119-7 of the income tax Order. When settlement occurs through a sale and purchase, the acquisition expense deductible for the assets sold is “notwithstanding Articles 119-2 through the preceding article, the amount incurred to acquire the assets purchased in that margin transaction.”

The referenced Articles 119-2 through 119-6 specify crypto valuation methods and acquisition cost (The average method and moving average method — how to evaluate individual crypto assets and how to report them and How is the acquisition price of crypto assets held by individuals determined?). Article 119-7 declares that those provisions do not apply to margin settlement. The calculation uses only the amount incurred for that purchase, without mixing it with the pool of existing holdings. This follows the same direction as Article 118-6(10) of the corporation tax Order.

What if a position remains unsettled at year-end? Individuals have no provision corresponding to Article 61(7) of the Corporation Tax Act. Article 119-7 of the income tax Order applies “where the crypto asset margin transaction is settled through sales and purchases.” It addresses only necessary expenses upon actual settlement. There is no fiction deeming unsettled transactions settled. Searching the full Income Tax Act and its Enforcement Order, the phrase “crypto asset margin transaction” appears only in Article 119-7 of the Order.

How Do Corporations and Individuals Differ?

The greatest difference is the first row. Corporations must recognize year-end gains or losses even without settlement; individuals do not recognize them until settlement. Identical transactions at identical times may enter different years' income depending on whether the holder is a corporation or an individual.

Points that require care in practice

• Determining whether an exchange product falls within the statutory definition of a crypto margin transaction. Names vary, but the statute focuses on substance: buying and selling using credit from another person.
• Calculating deemed settlement gains or losses on positions open at year-end. Article 61(7) delegates calculation methods to a Ministry of Finance Order, so the statute alone does not determine the amount.
• Forgetting the following-year reversal. Recognizing actual settlement gains or losses without reversing the prior deemed amount counts the same gain or loss twice.
• Confusing market valuation of holdings under Article 61(3) with deemed settlement of outstanding margin transactions under paragraph (7). They concern different subjects and must be aggregated separately.
• Records when individuals carry positions over year-end. Even if excluded from that year's income, the purchase amount must be retained to calculate necessary expenses upon settlement the following year.

These situations cannot be decided from statutory wording alone; they require examining the actual transactions and records. For filing, confirm the treatment in light of individual circumstances.

Legal basis

• Corporation Tax Act, Article 61(7) (Gains and Losses on Transfers and Market Valuation of Short-Term Trading Commodities, etc.) / Quoted wording: “purchases and sales of crypto assets using credit provided by another person”; “where any such transactions remain unsettled at fiscal year-end, the amount equivalent to the gain or loss calculated as prescribed by Ministry of Finance Order, deeming those transactions settled at that time.”
• Corporation Tax Act, Article 61(1) / Quoted wording: “the transfer gain relating to that transfer”; “the cost relating to the transfer of those short-term trading commodities and similar assets.”
• Corporation Tax Act, Article 61(3) / Quoted wording: “valuation gains relating to those short-term trading commodities and similar assets.”
• Corporation Tax Act, Article 61(9) / Quoted wording: “The difference between the crypto assets' value at acquisition and the consideration paid under the margin transaction agreement giving rise to the acquisition shall be included in gross income or deductible expenses in calculating income for the fiscal year containing the acquisition date.”
• Order for Enforcement of the Corporation Tax Act, Article 118-12(1) (Treatment in the Following Fiscal Year of Amounts Equivalent to Gains or Losses on Unsettled Crypto Asset Margin Transactions) / Quoted wording: “shall be included in deductible expenses or gross income in calculating income for the following fiscal year.”
• Order for Enforcement of the Corporation Tax Act, Article 118-6(10) (Methods for Calculating Book Value per Unit of Short-Term Trading Commodities, etc., and Selection Procedures) / Quoted wording: “The amount specified in item (ii) of that paragraph shall be the consideration for the crypto assets purchased.”
• Order for Enforcement of the Corporation Tax Act, Article 118-10(1) (Treatment in the Following Fiscal Year of Valuation Gains or Losses on Short-Term Trading Commodities, etc.) / Quoted wording: “An amount equivalent to the amount included by a domestic corporation in gross income or deductible expenses for a fiscal year under Article 61(3) of the Act (Gains and Losses on Transfers and Market Valuation of Short-Term Trading Commodities, etc.) shall be included in deductible expenses or gross income in calculating income for the following fiscal year.”
• Order for Enforcement of the Income Tax Act, Article 119-7 (Acquisition Cost of Crypto Assets in Margin Transactions) / Quoted wording: “where that margin transaction is settled through sales and purchases of crypto assets”; “notwithstanding Articles 119-2 through the preceding article, the amount shall be the amount incurred to acquire the crypto assets purchased in that margin transaction.”
• Order for Enforcement of the Income Tax Act, Articles 119-2 (Methods of Valuation of Crypto Assets) through 119-6 (Acquisition Cost of Crypto Assets) / These are the provisions excluded by Article 119-7.