Statutory definition

Corporations generally mark market crypto assets to market at year-end and include unrealized gains or losses in gross income or deductible expenses. Appreciation increases taxable income without a sale. For a long time, the exception was available only for self-issued tokens. The FY2024 reforms opened a route for other issuers' tokens. The key is “specified transfer-restricted crypto assets” under Article 61(2)(i)(a).

“Specified transfer-restricted crypto assets: crypto assets subject to transfer restrictions or other conditions, prescribed by Cabinet Order as having undergone procedures for appropriate publication of those conditions; the same applies in the following item.”

The brief definition has two elements: restrictions or other conditions on transfer, and procedures for their appropriate publication. Restrictions alone are insufficient; procedures making them externally visible are required. Article 118-7(2) of the Order specifies the details in two separate items.

Overview

How Does This Differ from Self-Issued Tokens?

The FY2023 reforms first addressed self-issued tokens continuously held: specified self-issued crypto assets under Article 61(2)(i)(b). Their treatment was examined in Will there be any inclusion income tax charged on tokens issued by myself?. The FY2024 reform introduced a separate, adjacent route.

The provisions also resolve apparent overlap. Article 118-7(4) deems self-issued assets not to be specified self-issued assets if they qualify or previously qualified as specified transfer-restricted crypto assets.

Requirement 1: Transfer Restrictions

“(2) Assets prescribed by Cabinet Order in Article 61(2)(i)(a) shall be crypto assets meeting all of the following requirements: (i) transfer restrictions or other conditions prescribed by Ministry of Finance Order (‘specified conditions’ in the following item) apply.”

Item (i) delegates the content of restrictions to a Ministry of Finance Order. Item (ii) then uses the term “specified conditions” established here. The structure identifies conditions first and requires publication second. The FY2024 outline's note indicates the direction.

“(1) Specified restrictions apply to transfer, such as technical measures preventing transfer to another person.”

The phrase is “such as technical measures.” Unlike the self-issued rules expressly limited to technical measures or a trust, this leaves room for other cases. Their scope depends on the Ministry of Finance Order. Its original text has not been verified here, so details are not addressed.

Requirement 2: Procedures for Publication through the Association

“(ii) The domestic corporation under Article 61(2) has notified a crypto asset exchange service provider under Article 2(16) of the Payment Services Act of specified conditions (notification that they apply or are scheduled to apply), or completed other procedures prescribed by Ministry of Finance Order, so that the provider publishes those conditions through an accredited payment service providers association under Article 2(25) of that Act.”

There are three parties: the association provides publication, the exchange provider publishes through it, and the domestic corporation holding the tokens performs notification or other procedures to the provider. The opening words “the domestic corporation under Article 61(2)” support this reading. The parentheses define notification as stating that conditions apply or are scheduled to apply.

Why require publication? Transfer restrictions can be created by agreement between parties. If exemption from year-end market valuation depended only on arrangements outsiders could not verify, no clear boundary would exist. Publication through the association can be read as establishing that boundary.

A Choice between Cost and Market Value

This choice was introduced by the FY2024 reforms. Chapter III, Corporate Taxation, Expansions and Other Changes, states:

“(4) The year-end value of market crypto assets held subject to transfer restrictions or other conditions shall be calculated using the corporation's selected method from the following (for self-issued assets continuously held since issuance, method (1)), and other necessary measures shall be taken.”

“(1) Cost method”

“(2) Market value method”

This became the distinction between items (i) and (ii) in Article 61(2). Item (ii) provides:

“(ii) Specified transfer-restricted crypto assets qualifying as market crypto assets (excluding self-issued crypto assets): either (a) or (b). (a) Market value method. (b) Cost method (using the book value at fiscal year-end as the valuation amount at that time for assets held then; the same applies in the following item).”

The cost method retains year-end book value, so no valuation gain arises despite unrealized appreciation. Under an election of market value, Article 61(3) includes valuation gains or losses in gross income or deductible expenses for that fiscal year. Market value may suit a corporation wishing to recognize a loss in a declining year. Those valuation amounts are reversed in the following fiscal year under Article 118-10(1).

No Notification Means Cost Method

A choice entails a procedure. Article 118-9(1) applies Article 118-6(4) through (6) mutatis mutandis. Paragraph (5) specifies the deadline and recipient.

“The deadline for filing the return under Article 74(1) (Final Return) for the fiscal year containing the acquisition date (or the date specified in the relevant item in the cases listed therein; collectively the ‘acquisition date or equivalent’ in this paragraph).”

“Written notification of the method to be used among those listed in paragraph (1) must be made to the district director of the tax office having jurisdiction over the place of tax payment.”

The deadline is the final return deadline for the acquisition fiscal year—not the following fiscal year's return. Under paragraph (4), selection is by type and crypto asset category. Paragraph (2) has four categories; non-self-issued specified transfer-restricted assets appear in item (i).

The result of failing to notify is in the opening provision of Article 61(2).

“(For assets under item (ii), the method selected by the domestic corporation from those specified in that item; if no method was selected, the method in subitem (b).)”

Subitem (b) is cost. For a corporation seeking to avoid market valuation, forgetting notification does not change the result. For one intending to select market value to recognize valuation losses, however, omission loses that choice.

An easily missed provision is Article 118-9(2): even assets not qualifying as market crypto assets when acquired are treated as eligible specified transfer-restricted assets for notification purposes. Paragraph (4) makes the previously notified method the selected method if they later qualify. Thus, tokens acquired before a market develops can be notified by the acquisition year's return deadline. Paragraph (3) applies inventory provisions to subsequent method changes.

Points that require care in practice

• When a lockup ends and specified transfer-restricted status is lost. Article 61(6) and Article 118-11 of the Order calculate income by deeming a transfer and reacquisition upon specified events. Conversely, restrictions imposed after acquisition are also listed events.
• Who submits the specified-conditions notice? The statutory subject is the domestic corporation, while the association publishes. Evidence of having given notice matters.
• Whether notification that conditions are scheduled to apply is enough, or restrictions must actually exist at year-end: a timing question.
• This notification differs from the election of moving average or total average for book value per unit. Both use Article 118-6, but the subject of the election differs.

These issues require checking contracts, technical arrangements, and treatment by exchanges and the association, rather than statutory wording alone. Confirm individual circumstances before filing.

Legal basis

• Corporation Tax Act, Article 61(2)(i)(a) (Gains and Losses on Transfers and Market Valuation of Short-Term Trading Commodities, etc.) / Quoted wording: “Specified transfer-restricted crypto assets: crypto assets subject to transfer restrictions or other conditions, prescribed by Cabinet Order as having undergone procedures for appropriate publication of those conditions; the same applies in the following item.”
• Corporation Tax Act, Article 61(2), Opening Provision / Quoted wording: “The year-end valuation amount shall be determined using the method specified for the asset category in each of the following items (for item (ii), the corporation's selected method, or, if none was selected, the method in subitem (b)).”
• Corporation Tax Act, Article 61(2)(i) / Quoted wording: “(i) Short-term trading commodities and similar assets (for crypto assets, limited to market crypto assets (those prescribed by Cabinet Order as having an active market; the same applies in the following item), excluding the following): market value method.”
• Corporation Tax Act, Article 61(2)(i)(b) / Quoted wording: “Specified self-issued crypto assets (crypto assets issued by that domestic corporation and continuously held since issuance.”
• Corporation Tax Act, Article 61(2)(ii) / Quoted wording: “(ii) Specified transfer-restricted crypto assets qualifying as market crypto assets (excluding self-issued crypto assets): either (a) market value or (b) cost method (using year-end book value as the valuation amount for assets held at that time; the same applies in the following item).”
• Corporation Tax Act, Article 61(3) / Quoted wording: “shall be included in gross income or deductible expenses in calculating income for the fiscal year containing that year-end.”
• Corporation Tax Act, Article 61(6) / Quoted wording: “deeming the crypto assets transferred and reacquired.”
• Order for Enforcement of the Corporation Tax Act, Article 118-7(2) (Scope of Market Crypto Assets, etc.) / Quoted wording: “Assets prescribed by Cabinet Order in Article 61(2)(i)(a) must meet all following requirements: (i) transfer restrictions or other conditions prescribed by Ministry of Finance Order (‘specified conditions’) apply”; “(ii) the domestic corporation under Article 61(2) has notified a crypto exchange service provider under Article 2(16) of the Payment Services Act that specified conditions apply or are scheduled to apply, or performed other prescribed procedures, so that the provider publishes them through an accredited payment service providers association under Article 2(25).”
• Order for Enforcement of the Corporation Tax Act, Article 118-7(3) / Quoted wording: “Crypto assets continuously meeting either of the following requirements from issuance: (i) technical measures prescribed by Ministry of Finance Order preventing transfer to another person have been taken.”
• Order for Enforcement of the Corporation Tax Act, Article 118-7(4) / Quoted wording: “Where the crypto assets qualify or previously qualified as specified transfer-restricted crypto assets under subitem (a), those assets shall … specified self-issued crypto assets under subitem (b).”
• Order for Enforcement of the Corporation Tax Act, Article 118-6(4) (Methods for Calculating Book Value per Unit of Short-Term Trading Commodities, etc., and Selection Procedures) / Quoted wording: “The method for calculating book value per unit 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(5) / Quoted wording: “By the deadline for the return under Article 74(1) (Final Return) for the fiscal year containing the acquisition date (or the date specified in the relevant item; collectively the ‘acquisition date or equivalent’), written notification must be made to the tax office director having jurisdiction over the place of tax payment of the method to be used among those in paragraph (1), for assets of the same type and category under the preceding paragraph.”
• Order for Enforcement of the Corporation Tax Act, Article 118-9(1) (Selection Procedures for Valuation of Specified Transfer-Restricted Crypto Assets) / Quoted wording: “Article 118-6(4) through (6) (Methods for Calculating Book Value per Unit and Selection Procedures) … specified transfer-restricted crypto assets under Article 61(2)(ii) of the Act.”
• Order for Enforcement of the Corporation Tax Act, Article 118-9(2) / Quoted wording: “Even where these specified transfer-restricted crypto assets do not qualify as market crypto assets under Article 61(2)(i), Article 118-6(5), applied through the preceding paragraph, applies treating them as specified transfer-restricted crypto assets eligible for an election.”
• Order for Enforcement of the Corporation Tax Act, Article 118-9(3) / Quoted wording: “Article 30 (Procedure for Changing Inventory Valuation Methods) … specified transfer-restricted crypto assets eligible for an election.”
• Order for Enforcement of the Corporation Tax Act, Article 118-9(4) / Quoted wording: “The method notified under Article 118-6(5), applied through paragraph (1) (or the changed method where approval for change was obtained under Article 30(1), applied through the preceding paragraph), shall be the valuation method selected under Article 61(2) for crypto assets that have come to qualify as specified transfer-restricted crypto assets eligible for an election.”
• 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: “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 118-11(1) (Deemed Transfers upon Changes in Crypto Asset Classification, etc.) / Quoted wording: “(a) The assets come to qualify as specified transfer-restricted crypto assets. (b) The assets cease to qualify as specified transfer-restricted crypto assets.”
• FY2024 Tax Reform Outline, III Corporate Taxation, Expansions and Other Changes, (4) / Quoted wording: “The year-end value of market crypto assets held subject to transfer restrictions or other conditions shall be calculated using the corporation's selected method (for self-issued assets continuously held since issuance, method (1)), and other necessary measures shall be taken”; “(1) Cost method”; “(2) Market value method.”
• FY2024 Tax Reform Outline, III Corporate Taxation, Expansions and Other Changes, (4), Note 1, (1) / Quoted wording: “Specified transfer restrictions apply, such as technical measures preventing transfer to another person.”
• FY2024 Tax Reform Outline, III Corporate Taxation, Expansions and Other Changes, (4), Note 2 / Quoted wording: “Where no valuation method is selected, the year-end value shall be calculated under the cost method (method (1) above).”