Are there methods to minimize taxes through offsetting gains and losses from crypto assets (virtual currencies)?

What Is Loss and Gain Offset in Crypto Asset Trading?

Profits from crypto asset trading are generally taxable. However, if you incur losses, whether you can offset them against other types of income (loss and gain offset eligibility) becomes important. Tax treatment for crypto assets, including Bitcoin (BTC), is complex—especially regarding offsetting losses, which is often misunderstood. Many investors assume they can offset crypto trading losses against other income, but in reality, these losses cannot be applied to other income categories.

First, let’s clarify what “loss and gain offset” means. For crypto assets, loss and gain offset refers to balancing profits and losses within a defined period, adjusting your taxable income accordingly. For example, if you earn a profit from one crypto trade but incur a loss on another, you can subtract the loss from your profit, reducing the taxable amount. This system means you only pay tax on your net positive income, allowing you to compress your taxable income even in years with substantial gains.

However, because losses from crypto asset trading cannot be offset against other income categories, misunderstanding this rule may lead to unexpected tax burdens.

Income Categories for Crypto Assets

Income from crypto asset trading falls into one of the following categories. Understanding the features of each is essential for proper tax compliance.

Because crypto asset trading profits are categorized as miscellaneous income, a key distinction is that you cannot offset them against salary or business income. Physical crypto assets are subject to a maximum tax rate of 55% as miscellaneous income, but if a spot ETF is listed, they become eligible for separate self-assessment at a reduced rate of 20.315%. If treated as capital gains, you can also carry forward losses and offset them for up to three years.

Rules and Scope of Loss and Gain Offset

Crypto asset trading generates several types of income. Understanding each helps ensure proper tax treatment.

• Trading Profits/Losses: Gains or losses realized when selling crypto assets or exchanging them for other currencies
• Profits from Use as Payment: Gains generated when using crypto assets to purchase goods or services if the asset’s value has increased since acquisition
• Mining or Staking Rewards: Rewards from mining or staking crypto assets (generally classified as miscellaneous income; may be business income if conducted at scale)

All these crypto-related incomes are generally classified as miscellaneous income (subject to comprehensive taxation). Therefore, all profits and losses from crypto assets within the same tax year are aggregated, and you can offset them against each other within the category.

For example, consider the following transactions in a given year:

• Bitcoin profit: ¥1,000,000
• Ethereum loss: -¥2,000,000
• Ripple profit: ¥500,000

The total is a loss of ¥500,000, so the crypto asset income for that year is ¥0 (the loss exceeds the gains). In this way, you can offset multiple crypto asset gains and losses within miscellaneous income.

If you also have other miscellaneous income (such as affiliate income from a side business) in the same year, you can aggregate those as well. For example:

• Affiliate income (miscellaneous): ¥500,000
• Crypto asset loss: -¥500,000

In this case, you can offset them, resulting in zero miscellaneous income.

When Loss and Gain Offset Is Not Permitted

The scope for loss and gain offset with crypto assets is clearly defined. As noted, you cannot offset crypto asset income against other income categories (such as salary, business, or real estate income). The National Tax Agency states:

Losses arising in the calculation of miscellaneous income cannot be deducted from other income, such as salary income.

This means you cannot reduce your tax liability on salary or business income by offsetting them with crypto asset losses. You also cannot offset these losses with profits from financial income like stocks or futures FX because they fall under different categories.

Loss and Gain Offset Eligibility Table

By understanding when loss and gain offset is permitted or not, you can plan your taxes appropriately.

Therefore, you can only use crypto asset losses within the same tax year and within miscellaneous income. If you only trade crypto assets and your annual total is negative, your miscellaneous income for tax purposes is zero, and you cannot carry the loss forward or offset it with other income.

If your total miscellaneous income is small (¥200,000 or less) or your side-business income as a salaried employee is below a certain threshold, you may not need to file a tax return. However, you must generally report crypto asset gains appropriately. To avoid uncertain tax treatment, it’s essential to understand the rules of loss and gain offset for crypto assets.

Common Misconceptions about Loss and Gain Offset

Trading crypto assets without adequate knowledge of loss and gain offset can lead to the following scenarios. Consider the case of Employee A:

Mr. A has an annual salary of ¥8,000,000 and trades crypto assets as a side business. He made a ¥1,000,000 profit in one year, which was taxable, but suffered a ¥1,000,000 loss the next year when the market declined. Mr. A believed he could offset the prior year’s tax with this year’s loss, but crypto asset losses cannot be carried forward or offset with salary income. As a result, he had to pay tax on the previous year’s gains, and the loss for the following year was not recoverable.

Suppose, in the following year, Mr. A earns ¥200,000 from side-business activities. He can offset this crypto asset loss to bring miscellaneous income to zero, but the remaining ¥800,000 loss cannot be used and is wasted. Because crypto asset losses are only usable within the same year’s miscellaneous income, check for other miscellaneous income and offset as much as possible where possible.

In reality, crypto asset transaction histories are recorded on the blockchain, and exchanges in Japan reportedly provide information to tax authorities. The National Tax Agency has increased tax audits for unreported crypto asset gains in recent years, making non-filing or underreporting likely to be detected.

Crypto Asset Income Categories and Taxation

Profits from crypto assets are classified as “miscellaneous income” under tax law and are subject to comprehensive taxation, meaning your tax is calculated alongside other income like salary. Miscellaneous income is not subject to withholding like salary, so you must file your own tax return and pay the taxes yourself.

Your taxable profit from crypto assets is the amount remaining after deducting necessary expenses from your revenue, and the entire amount is taxable. There is no special deduction threshold as with capital gains from stocks—taxes apply on the full profit after expenses.

How Crypto Asset Taxation Differs from Other Major Investment Income

To understand crypto asset taxation, compare it with other investment products like stocks and FX.

Tax System Differences and Key Considerations

• Stock capital gains are taxed separately at about 20%, and you can carry forward losses for up to three years
• FX (margin trading) is also taxed separately at 20% as financial derivatives, and allows for loss and gain offset and carryforward (3 years)
• Crypto assets are subject to miscellaneous income (comprehensive taxation), so higher total income means a higher tax rate (progressive)
• The top tax rate is 45% income tax (for taxable income over ¥40 million) plus 10% local tax, for a maximum combined rate of 55%

Crypto assets are subject to higher tax burdens and lack the favorable tax treatment (such as low rates, loss and gain offset, or carryforward) available for stocks and FX. These differences can be especially significant for high earners, making proactive tax planning essential. Most individual investors use the average cost method for their calculations.

Handling Losses and Loss Carryforward

Special attention is required when incurring losses from crypto asset trading. As described above, if you have positive miscellaneous income in the same year, you may offset it, but even if your annual miscellaneous income is negative, you cannot carry losses forward to future years.

Loss carryforward allows you to offset unused losses against future income, but crypto asset income does not qualify. Only limited types of income, such as real estate or business income, are eligible. For example, business income (from sole proprietorships) allows loss carryforward for up to three years if you file a blue return. Similarly, capital gains and futures-related miscellaneous income (like FX) allow loss carryforward for up to three years if you file a tax return. However, crypto asset income does not benefit from these provisions, so you cannot use losses in future years.

So, what can you do if you incur losses from crypto asset trading? The next section details practical tax-saving strategies.

How to Use Losses to Reduce Taxes

Strategic use of annual losses in crypto asset trading can help reduce your tax burden. Here are three practical tax-saving approaches.

1. Tax-Loss Harvesting (Realizing Losses)

Tax-loss harvesting involves selling crypto assets at a loss near year-end to realize the loss. Specifically:

• Sell crypto assets with unrealized losses at year-end to realize the loss
• Offset the realized loss against profits in the same year, reducing your tax burden
• Immediately buy back the same currency after selling to maintain your position, while recording the loss

For example, if your Bitcoin (BTC) holding is at a ¥300,000 unrealized loss in December, selling BTC before year-end realizes the loss, which you can then offset against crypto asset profits for the year, reducing your tax liability.

How to Perform Tax-Loss Harvesting

• Sell crypto assets with unrealized losses before year-end
• Immediately buy back the same currency (to realize the loss/gain)
• Report the loss in your tax return

2. Properly Record Business Expenses

If you incur a loss from crypto asset trading, you can lower your taxable income—and tax burden—by properly recording allowable expenses. Common deductible expenses include:

• Trading Fees: Commissions and spreads from trading
• Internet Fees: Costs for internet access used in trading
• Research Expenses: Fees for paid news services and books
• Equipment Costs: Cost of trading computers, smartphones, or wallets (proportional to business use)

When recording expenses, clearly separate business and personal uses, and only deduct the appropriate share. Keep all receipts and transaction records for audit purposes, and file accurately. By strategically using losses and expenses, you can significantly lower your final tax bill.

3. Consider Incorporation

For individuals, crypto asset trading is classified as “miscellaneous income,” but incorporation allows you to treat it as “business income” and access loss and gain offset and carryforward. Main benefits include:

Incorporation is an effective option for using crypto asset trading losses to reduce your tax liability. Individuals cannot carry forward crypto asset losses, but corporations can carry net operating losses forward (in principle, up to 10 years), allowing future profits to be offset. Corporations can also offset losses from the crypto asset business against profits from other lines of business in the same fiscal year, reducing overall taxable income. For example, if you incur a ¥10,000,000 loss from crypto asset trading but earn a ¥10,000,000 profit from another business, your corporation’s taxable profit is zero.

If you engage in crypto asset trading continuously for profit and it is recognized as business income by tax authorities, you may be able to use loss carryforward by filing a blue return. However, the threshold for individual crypto trading to be recognized as business income is high, and in practice, it is usually classified as miscellaneous income. In most cases, crypto asset losses must be used within the same tax year.

Risks of Misunderstanding Loss and Gain Offset

If you fail to declare or underpay taxes, you may face penalties in addition to the taxes owed. Key penalties include:

• Delinquent Tax: Interest on late payments, up to 14.6% annual rate (varies by period and situation)
• Non-filing Additional Tax: Charged for failure to file by the deadline—5–20% of unpaid tax (reduced to 5% for voluntary late filing, up to 20% for serious cases)
• Underreporting Additional Tax: Charged when declared tax is less than required—10% of the shortfall (15% on amounts over ¥500,000)
• Heavy Additional Tax: Imposed for willful concealment or fraud—40% of unpaid tax (up to 50% for repeat offenses)

These penalties are added to the principal tax. For example, with heavy additional tax on malicious non-filing, the total can reach 1.4 times the original tax. Delinquent tax accrues daily for late payments, so the longer you delay, the greater the cost. In the worst case, criminal prosecution for tax evasion is possible.

Since crypto asset transaction history is recorded on the blockchain and exchanges in Japan share information with tax authorities, undeclared income is likely to be discovered. Proper tax compliance and risk management are essential.

Summary: Understand the Complexity of Crypto Asset Loss and Gain Offset for Effective Tax Planning

Loss and gain offset in crypto asset trading means balancing profits and losses within a certain period to adjust taxable income. Unlike stocks or FX, crypto asset gains are classified as “miscellaneous income,” so you cannot offset them against salary or business income, and you cannot carry forward losses.

However, you can offset profits and losses from crypto asset trades, mining, and staking rewards within the same year. As a tax-saving measure, selling crypto assets with unrealized losses during the year—known as tax-loss harvesting—is effective. Incorporation also allows you to use loss and gain offset and carryforward, reducing your overall tax burden.

When investing in crypto assets, it’s essential to understand tax risks and file correctly. Consult a certified tax professional as needed and use legitimate tax-saving strategies to invest with confidence. Proper tax knowledge and accurate loss and gain offset management are critical for successful crypto asset investing.

FAQ

What is loss and gain offset for crypto assets, and when is it applicable?

Loss and gain offset for crypto assets is the process of offsetting profits and losses from trades to adjust taxable income. It is only applicable within miscellaneous income—such as offsetting Bitcoin trading losses with Ethereum trading profits. If your annual net gain is ¥200,000 or less, or you have a net loss, you do not need to file a tax return.

How can you specifically offset crypto asset trading losses against other profits?

You may only offset crypto asset trading losses within the same tax year’s miscellaneous income. For example, you can offset Bitcoin profits against Ethereum losses or offset losses with miscellaneous income from a side business. You cannot offset with income from stocks or FX, which are subject to separate self-assessment. Consult a tax professional for guidance.

What should you watch for and what are the limitations when using loss and gain offset for crypto asset tax savings?

Loss and gain offset for crypto asset trading losses is only allowed within the same miscellaneous income category. Offsetting with salary or other income is not permitted. Carryforward of losses is also not allowed, so be careful.

Can you carry forward crypto asset losses to future years?

Normally, no. You may only carry forward losses if your income is recognized as business income under specific conditions.

How does loss and gain offset for crypto assets relate to other investment products like stocks?

Loss and gain offset for crypto assets is only allowed within the miscellaneous income category. You cannot offset with stocks or FX, which are subject to separate self-assessment. You may offset gains and losses among crypto assets and other miscellaneous income.

How should you organize your crypto asset trading records for tax filing?

Keep transaction records and supporting documents for seven years. Blue return filers must retain books for seven years and documents for at least five. White return filers should organize records by date, amount, and type for proper management.