Yasuhigto Yagihashi（Certified public tax accountant at CryptoLinC）
In this chapter of Japan’s Taxation System Series, we will introduce “Timing and Calculation of profit and Loss of Crypto Assets’. We will look at how exactly loss and profits occur, and when taxes arise.
In the previous article, “Definition of Crypto Assets and Tax Division” was introduced.
In the last article, we discussed how profits are generated when crypto assets are used or sold, but exactly how profits or losses are generated is as described below.
■When profit and loss of Crypto assets are generated
Gains and losses from Crypto Assets can occur in the following cases.
- Sale of Crypto Assets
- 1BTC purchased for 500,000 Yen and sold for 1 million Yen = 500,00Yen profit
- Purchasing Goods with Crypto Assets
- 1BTC purchased at a rate of 1BTC=500,000 Yen, and buying a TV for 1 million Yen when the rate 1BTC is 1 million Yen, means a profit of 500,000 Yen has been generated.
- Exchanges between Crypto Assets
- Purchasing 1 BTC for 500,000Yen, and exchange it for 50ETH when the rate of 1ETH is 20,000Yen (In total 1 million Yen) = 500,000 Yen profit generated
- Crypto Assets Split (Forking)
- The purchasing cost of the newly acquired crypto asset shall be 0 Yen at the time of purchase. Profit generation will incur at the time of sale or use.
- Crypto Asset Mining etc.,
- Earnings will be generated at the market value at the time of acquisition of crypto assets acquired through mining, and this amount shall be the cost of acquisition.
- In case you sold the acquired crypto assets through mining afterwards, profit or loss will be generated by the balance of price of the crypto assets value at time of sale and the cost of acquisition when the sale is made.
Mining etc. costs can be deducted from your earnings as a necessary expense.
In case of crypto assets are acquired by inheritance or as a gift
If the crypto assets are acquired by inheritance, bequest or gifted to you from a deceased, inheritance tax or gift tax will be imposed.
In case of a gift, if the price of the purchased crypto assets have risen since the time of the purchase, the donor shall calculate the profit or loss at the time of transfer of the gift. Income tax is due if there is a profit. The recipient will be subjected to a gift tax as he or she will receive a gift of the same amount. Hence, both the donor and the done will be taxed.
In case of misdirected money transfer or fraud
There are no clear guidelines by authorities regarding misdirect transfers or frauds.
Currently, the decisions will be concluded based on case by case, however I think the following is more of a general approach of the process.
This support is for individuals. Support for corporations will be introduced in the next article.
In case of misdirected money transfer
Currently, since it is difficult to prove whether the address of the recipient (deposit account) is correct or wrong, it is difficult to record the loss.
In case of Fraud
In case of a private person, it is difficult to record a loss incurred due to a scam due to it not being deductible as a miscellaneous loss (as part of Act. 72)
■Calculation Method of Crypto Asset Price Acquisition
Either the total average method or the moving average method will be chosen.
In case of a private person, the total average method will be the basis. In the case of a corporation, the moving average method will be the basis. You can only change the calculation method if you submit a notification.
■Submit Notification Method here
National Tax Agency (process name) Notification process for evaluation of Crypto Assets for income tax
In case of a private person, the chosen calculation method cannot be altered for 3 years. Please think about your trading method very carefully before making a decision.
Now, each calculation method’s characteristics will be introduced in a simple manner.
■Total Average Method (総平均法)
The sum of “the amount of held crypto assets” and “the cost of held crypto assets”at the end of the previous year, plus “the total number of crypto assets” and “the amount of crypto assets purchased” at the end of the previous year, subtracted with “the total number of crypto assets” and “the total amount of sold crypto assets” during the year. And this is how the calculation is done.
① Calculate the average cost per unit of your crypto assets
② Calculate the total number of sales and the number of sales
③ Calculate profit and loss by subtracting what you have sold and what you have purchased
The calculation is simple and very easy to do. However, as the profits and the losses are not determined on a transaction-by-trade basis, the results of the calculation may differ from what was expected.
■ Moving Average Method (移動平均法)
Calculate the “cost-per-unit” of the crypto assets you have traded for each transaction, and calculate the profit and loss for each transaction.
Calculate “crypto assets cost-per-unit” for each translation. Due to that the price of crypto assets has to be calculated for each transaction, and profit and loss have to be calculated for each transaction as well, and so the calculation can become quite difficult. However, as the profit and loss are calculated for each transaction, the profit and loss calculation is close to the actual state of the transaction.
■Necessary Costs of Crypto Assets
The following is an overview of what has to be considered an expense in a crypto asset transaction.
For crypto asset transactions, the following items can be recorded as expenses.
Based on the sold crypto assets’ acquisition price and
the handling fee paid at the time of the sale, you can include the necessary expenditures in the calculation only if the amount of a portion of the expenditure is deemed as necessary for the sale of the crypto assets such as purchase expenses of computers or internet and smartphone line usage fees, etc.
In case of corporations will be introduced in the next article
■Handling in case of loss occurrence due to Crypto Asset Trade
If losses incurred due to crypto assets trading, in case of the investment was made by a private person, the declaration shall be reported as miscellaneous income. Regarding the incurred loss, it cannot be deducted from other earned incomes. If you do not have any other miscellaneous income streams, the loss will occur just as it is. Profit and loss cannot be carried over to the next fiscal year, so any profit earned in the following year cannot be counterbalanced.
Hence, even if you experience loss or profit at the end of the year, we recommend that you trade for the adjustment in the next fiscal year.
Japan’s tax system regarding corporations will be introduced in more detail next time.Unlike the tax rules for a private person, profits and losses can be combined with other revenues at corporations, so the incurred loss balance can be brought forward. Hence, I think this is the part where corporations have an advantage in terms of trading.
■Margin Trading of Crypto Assets
This will be a part of the annual agenda for Japan’s tax reform requests, but in case of private transactions, they will not be subjected to Self-Assessed Separation Taxation. Just like cash transactions, taxation on aggregated income shall be reported as miscellaneous income. In case of loss, it cannot be offset by any other earnings, thus just like cash transactions,you cannot carry over losses.
In this “Timing and Calculation of Gains and Losses on Crypto Assets” article, exact calculation methods were introduced.
At CryptoLinc, you can calculate income and expenditure just by uploading data that can be acquired from the exchange. Moreover, by connecting to the exchange’s API, the exchange offers a free portfolio feature that allows you to confirm your assets in real time. We hope you will use this service to check your income and expenses and to monitor and manage your assets.
In time, We will cover “ Corporation Taxation”, where we will discuss the handling of crypto assets in case of a corporation.
This article has been translated by Lina Kamada
The Article published on this our Homepage are only for the purpose of providing information. This is not intended as a solicitation for cryptocurrency trading. Also, this article is the author’s personal opinions, and this does not represent opinion for the Company BTCBOX co.,Ltd.