The rise of crypto-assets (暗号資産 - angō shisan) has introduced new complexities into financial record-keeping, particularly for tax purposes. In Japan, both individuals engaging in crypto-asset transactions that generate income and corporations incorporating crypto-assets into their operations are expected to maintain meticulous records. The National Tax Agency (NTA) (国税庁 - Kokuzei-chō) requires taxpayers to substantiate the figures reported on their tax returns, and crypto-asset transactions are no exception. Failure to maintain adequate records can lead to difficulties in accurately calculating taxable income, challenges during tax audits, and potential penalties.

This article outlines the key considerations for businesses and individuals in Japan regarding the types of records to keep for crypto-asset transactions, the recommended duration for retention, and practical methods for maintaining this information to ensure tax compliance.

General Principles of Tax Record-Keeping in Japan

Under Japanese tax law, all businesses, whether sole proprietorships (individuals) or corporations, are obligated to maintain accurate and comprehensive books and records related to their income and expenses. These records form the basis for calculating taxable income and must be available for inspection by tax authorities. This fundamental principle extends fully to transactions involving crypto-assets. Given the unique characteristics of crypto-assets—such as their volatility, the variety of transaction types, and the decentralized nature of some platforms—diligent record-keeping is even more critical.

For Crypto-Asset Exchange Service Providers (CAESPs), specific record-keeping obligations are also mandated under the Payment Services Act (PSA), which, while primarily for regulatory oversight and user protection, also support their own tax compliance.

Record-Keeping for Individuals Engaging in Crypto-Asset Transactions

Individuals in Japan who derive income from crypto-asset transactions (typically classified as "miscellaneous income" - 雑所得, zatsu shotoku, unless it constitutes business income) must keep detailed records to accurately calculate their gains and losses.

Types of Information to Record for Each Transaction:

For every crypto-asset transaction, individuals should meticulously record:

1. Date and Time: The exact date and time the transaction occurred. This is crucial for determining the correct market value at the time of the transaction.
2. Type of Crypto-Asset: The specific name and symbol of the crypto-asset involved (e.g., Bitcoin (BTC), Ethereum (ETH)).
3. Transaction Type: The nature of the transaction (e.g., purchase, sale for fiat, exchange for another crypto-asset, use as payment for goods/services, receipt as mining reward, staking reward, airdrop).
4. Quantity: The amount of the crypto-asset bought, sold, exchanged, or received.
5. Price per Unit and Total Value:
   • For transactions involving fiat currency (e.g., JPY), the price per unit and the total transaction value in JPY.
   • For crypto-to-crypto exchanges, the fair market value (FMV) in JPY of both the crypto-asset disposed of and the crypto-asset acquired at the time of the transaction.
   • For payments made using crypto-assets, the JPY value of the goods or services received, which is generally considered the FMV of the crypto-asset used.
6. Counterparty Information: While often challenging for exchange-traded transactions, any available information about the counterparty (e.g., exchange name, wallet address if a P2P transaction) can be useful.
7. Transaction Fees: Any fees paid for the transaction, whether in fiat currency or crypto-assets (noting the JPY equivalent if paid in crypto). These are generally deductible as necessary expenses.
8. Wallet Addresses: The source and destination wallet addresses involved in the transaction.

Calculating Acquisition Cost (取得価額 - shutoku kagaku)

Accurately tracking the acquisition cost of crypto-assets is essential for calculating taxable gains or losses upon their disposal.

• Methods: The NTA generally permits the use of either the moving average method (移動平均法 - idō heikin hō) or the total average method (総平均法 - sō heikin hō) for calculating the cost basis of crypto-assets.
  • Moving Average Method: The average cost is recalculated after each new purchase.
  • Total Average Method: The total cost of all units held is divided by the total number of units at the end of the taxable year (or at the time of sale if all units are sold mid-year).
• Consistency: Once a method is chosen, it must be applied consistently for that particular crypto-asset. If no method is selected and reported, the total average method is typically assumed by the NTA.
• Record Requirements: Detailed records of each purchase (date, quantity, price, fees) are necessary to apply these methods correctly.

Records for Specific Activities:

• Trading: All buy/sell/exchange orders, trade execution confirmations from exchanges, and wallet transaction histories clearly linking inflows and outflows.
• Mining: Date and time of receipt of mined crypto-assets, quantity received, FMV in JPY at the time of receipt, and detailed records of all mining-related expenses (e.g., electricity bills, hardware purchase invoices, depreciation calculations for equipment).
• Staking and Lending: Records of rewards or interest received, including the date, quantity, type of crypto-asset, and its FMV in JPY at the time of receipt.
• Airdrops and Hard Forks: Documentation regarding the event, date of receipt of new tokens, quantity received, and any FMV at the time of receipt (if ascertainable).
• Using Crypto-Assets for Payments: Invoices or receipts for the goods or services purchased, along with records of the FMV of the crypto-asset used at the transaction date.

Supporting Documentation:

Beyond transactional data, individuals should retain:

• Annual transaction reports and statements provided by CAESPs.
• Screenshots or downloaded logs from personal wallets.
• Bank statements showing fiat movements related to crypto transactions.
• Any correspondence with exchanges or counterparties regarding transactions.
• Invoices for software or hardware used for crypto activities if claiming them as expenses.

Record-Keeping for Corporations Engaging in Crypto-Asset Transactions

Corporations dealing with crypto-assets face similar record-keeping needs to individuals for calculating gains/losses and income, but their obligations are generally more formal and must integrate with their overall corporate accounting and tax compliance systems.

Integration with General Ledger and Accounting Systems

All crypto-asset transactions must be accurately and promptly recorded in the company's general ledger and supporting accounting records, adhering to Japanese GAAP.

Information to Record:

Corporations should maintain detailed records for each transaction, including:

• All the information points listed for individuals (date, type, quantity, value, fees, etc.).
• Records supporting the valuation of crypto-assets, especially for year-end mark-to-market purposes where applicable.
• Detailed calculations for the acquisition cost of crypto-assets sold or exchanged.
• Internal approvals and authorizations for crypto-asset transactions.
• Records related to the impairment testing of crypto-assets not subject to mark-to-market valuation.

Specific Records for Crypto-Asset Exchange Service Providers (CAESPs)

CAESPs have specific and extensive record-keeping obligations mandated by Article 63-13 of the PSA (帳簿書類 - chōbo shorui) and related Cabinet Office Ordinances. While these are primarily for regulatory oversight of their exchange business and user protection, these records are also fundamental for their own corporate tax calculations. Key records include:

• Transaction Journal (取引日記帳 - torihiki nikki-chō): A daily record of all crypto-asset exchange transactions.
• Order Book (注文控え - chūmon hikae): Records of all orders received from users.
• Customer Ledger (顧客元帳 - kokyaku motochō): Records detailing transactions and balances for each customer.
• Crypto-Asset Ledger (仮想通貨の相対元帳 - kasō tsūka no sōtai motochō): Ledgers tracking the flow and balance of each type of crypto-asset.
• Records of Segregated Management: Detailed records demonstrating compliance with the rules for segregating user assets (both fiat and crypto). This includes records of daily reconciliations.
• Customer Identification Records (本人確認記録 - honnin kakunin kiroku): All documents and information obtained through KYC/CDD procedures.
• Records Related to Suspicious Transaction Reports (STRs).
• Financial Statements and Audit Reports: Including the annual segregated management audit report.
• Records of matters reported to the FSA.
• Records concerning complaints from users.

These records are crucial for demonstrating regulatory compliance and also form the backbone of the data needed for calculating corporate income tax.

Methods of Recording Crypto-Asset Transactions

The method of recording will depend on the volume and complexity of transactions:

• Spreadsheets: May be sufficient for individuals with a very small number of transactions. However, they are prone to errors and can become unwieldy quickly.
• Specialized Crypto Tax Software / Portfolio Trackers: For individuals and businesses with more active trading, dedicated software solutions are highly recommended. These tools can often import transaction data directly from exchanges and wallets, automate cost basis calculations using chosen methods (moving average, total average), and generate reports suitable for tax preparation.
• Accounting Software (for Corporations): Corporations should integrate crypto-asset transactions into their existing accounting software. This may require custom configurations or add-on modules depending on the software's capabilities. For CAESPs, specialized industry software is often necessary to manage the high volume of transactions and complex regulatory reporting requirements.
• Importance of Source Data: Regardless of the system used, it's crucial to retain original source data, such as CSV files downloaded from exchanges, wallet transaction exports, and blockchain transaction IDs. This allows for verification and reconstruction of records if needed.

Duration of Record Retention

The required retention period for tax-related records in Japan varies:

• Individuals:
  • For general income tax purposes, documents supporting income calculations (like those for miscellaneous income from crypto) should generally be kept for five years from the statutory due date of the final tax return.
  • If an individual is engaged in a business that generates "business income" (事業所得 - jigyō shotoku) or significant real estate income, more formal bookkeeping is required, and books of account and supporting documents generally need to be retained for seven years. Whether crypto activities rise to the level of "business income" depends on the scale, continuity, and organization of the activities.
• Corporations:
  • For corporate tax purposes, corporations are generally required to retain their accounting books and records, along with supporting documents, for seven years from the end of the fiscal year to which they relate.
  • This period can be extended to ten years for documents related to tax loss carryforwards.
• CAESPs (under PSA):
  • Article 63-13 of the PSA, along with related ordinances, requires CAESPs to preserve many of their specific operational books and documents (帳簿書類) for ten years from the date they are created or closed. This includes transaction records, customer ledgers, and records related to segregated management.

Given the potential for tax audits to look back several years and the complexity of crypto-asset transactions, it is often prudent for both individuals and corporations to err on the side of caution and retain records for at least seven years, and for CAESPs, to adhere to the ten-year requirement under the PSA for relevant documents.

Why Meticulous Record-Keeping is Crucial

Maintaining thorough and accurate records for all crypto-asset transactions is not merely an administrative burden; it is essential for several reasons:

1. Accurate Tax Calculation: Without detailed records, it is extremely difficult, if not impossible, to accurately calculate taxable income, gains, losses, acquisition costs, and deductible expenses. This can lead to incorrect tax filings and potential under or overpayment of taxes.
2. Substantiation for Tax Audits: In the event of a tax audit by the NTA, taxpayers must be able to provide supporting documentation for the figures reported on their tax returns. Well-organized records are the best defense against adjustments, additional taxes, and penalties. If records are insufficient, the NTA may make estimations that are unfavorable to the taxpayer.
3. Compliance with Legal Obligations: Beyond general tax law, CAESPs have specific statutory obligations under the PSA to maintain detailed books and records of their operations. Failure to do so can result in regulatory sanctions.
4. Effective Risk Management: Good records can help businesses identify and manage financial and operational risks associated with their crypto-asset activities.
5. Dispute Resolution: In case of discrepancies with exchanges or counterparties, detailed transaction records can be invaluable.

Conclusion: The Foundation of Crypto-Asset Tax Compliance

Meticulous and systematic record-keeping is the bedrock of tax compliance for any individual or business involved in crypto-asset transactions in Japan. The unique nature of crypto-assets—their volatility, the variety of transaction types, and the methods of acquisition—necessitates a diligent approach to tracking every movement and event.

Businesses, especially CAESPs, must establish robust systems from the outset to capture all relevant data accurately and ensure its preservation for the required periods. For individuals, while the task can seem daunting, leveraging available software tools can significantly simplify the process.

Given the evolving nature of crypto-assets and the intricacies of Japanese tax law, consulting with tax professionals or accountants who specialize in crypto-asset taxation is highly recommended. They can provide guidance on appropriate record-keeping methods, assist with complex calculations, and help ensure full compliance with all applicable tax obligations, thereby minimizing risks and ensuring peace of mind.