When it comes to investment taxes, the terms "offsetting of gains and losses" (loss offsetting) and "loss carryforward" come up frequently. Both are systems that let investors reflect losses in their tax calculations, but the way they work — and how they are applied — differs significantly. This distinction is especially important when it comes to the taxation of crypto assets (also known as virtual currencies) in Japan. Some systems available to stock investors are not available to crypto investors, which makes the difference worth understanding.
This article organizes the difference between loss offsetting and loss carryforward, then explains how each works using Japan's crypto tax rules as an example. It also touches on how these rules differ from stock investing, so readers can build a solid foundation in the basics of crypto taxation in Japan.
The Difference Between Loss Offsetting and Loss Carryforward
Both loss offsetting and loss carryforward (also called carryforward deduction) are systems designed to factor investment losses into tax calculations and ease an investor's overall tax burden. However, the two systems are built on fundamentally different concepts. The key difference lies in the timing of when a loss can be offset against income.
Let's look at how each system works, one at a time.
What Is Loss Offsetting?
Loss offsetting (also known as offsetting of gains and losses) is a system that allows a loss incurred in one category of income to be deducted from gains in other categories of income earned in the same year. Under Japan's income tax system, tax is calculated based on various types of income earned over the course of a year, and for certain categories of income, taxpayers are permitted to offset losses against gains from other categories.
For example, if a taxpayer records a loss in business income, that loss can be deducted from gains in employment income or real estate income, among others. Reducing taxable income in this way also reduces the final amount subject to tax. However, not all types of income are eligible for loss offsetting. Under Japan's tax code, the following four categories of income are generally eligible for loss offsetting:
- Real estate income
- Business income
- Capital gains (transfer income)
- Forestry income
On the other hand, categories such as employment income and miscellaneous income cannot be offset against other categories of income even if a loss occurs. Because gains from crypto assets are, in principle, classified as miscellaneous income, losses from crypto asset trading cannot be offset against employment income, business income, or other categories of income.
As shown here, loss offsetting is an important mechanism in tax calculation, but the tax code specifies in detail which categories of income are eligible.
What Is Loss Carryforward?
Loss carryforward is a system that allows a loss incurred in a given year to be carried over into future years and offset against future gains. In investing, it is common for a large loss in one year to be followed by gains in subsequent years. Loss carryforward is the mechanism that allows past losses to be reflected in tax calculations in such cases.
For example, suppose a taxpayer incurs a loss of 1 million yen (roughly $6,700 USD) in one year and then earns a gain of 800,000 yen (roughly $5,300 USD) the following year. If loss carryforward is permitted, that gain can be offset against the prior year's loss, bringing the following year's taxable gain down to zero.
However, whether loss carryforward is available depends on the category of income involved. For example, capital losses on listed stocks can be carried forward under certain conditions, but under the current tax system, losses from crypto asset trading cannot be carried forward at all.
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Why Loss Offsetting Isn't Available for Crypto Assets
Loss offsetting — offsetting a trading loss against other income such as employment income — is not available for crypto assets in Japan. This means that even if an investor incurs a large loss on crypto asset trading, that loss cannot be used to reduce tax on employment income or other income categories.
For example, if a taxpayer has 5 million yen (roughly $33,300 USD) in employment income and incurs a loss of 1 million yen (roughly $6,700 USD) on crypto asset trading in the same year, that loss cannot be deducted from the employment income, and income tax is calculated on the full 5 million yen as usual.
That said, gains and losses generated within crypto asset trading itself can be offset against one another within the same year. For example, if an investor earns a gain on Bitcoin but incurs a loss on Ethereum, the two can be combined when calculating the year's total taxable income.
In short, crypto asset losses cannot be offset against other categories of income, but gains and losses generated within crypto asset trading can still be netted against each other.
The "Loss Carryforward" Enacted in Crypto Tax Reform
Under Japan's current crypto tax rules, "loss carryforward" — carrying a trading loss over into future years — is also not permitted. This means that even if an investor incurs a large loss in a given year, that loss currently cannot be offset against gains in the following year.
That said, Japan's crypto tax system is now set to change. Following the tax reform outline compiled by the government and ruling coalition, the tax reform law enacted on March 31, 2026 introduces a loss carryforward system: losses from selling "specified crypto assets" (crypto assets whose names are registered in the registry under the Financial Instruments and Exchange Act) through registered crypto asset trading businesses can be offset only against gains from other specified crypto assets and carried forward for three years.
Where an amount of loss arising from a transfer, etc. of a specified crypto asset to a crypto-asset-related business operator cannot be fully deducted from the amount of transfer gains, etc. relating to specified crypto assets for the year in which the transfer, etc. took place, the remaining, non-deductible amount may — subject to certain conditions — be carried forward and deducted from the amount of transfer gains, etc. relating to specified crypto assets in each of the three years following that year.
Source: Fiscal Year 2026 (Reiwa 8) Tax Reform Outline | Ministry of Finance (MOF)
Once this system takes effect, a loss incurred in one year could be offset against gains in future years — something that is not possible under the current system, and a change that could meaningfully reshape the environment for crypto investors in Japan. The carryforward itself is already law; what has not yet been decided is when it starts. It applies to sales made on or after January 1 of the year following the date the amended Financial Instruments and Exchange Act takes effect — that is, from January 2027 or January 2028, depending on that date — and losses incurred before the start date cannot be carried forward.
For context, as of July 2026, crypto asset gains in Japan are taxed as miscellaneous income under aggregate (progressive) taxation — the loss carryforward discussed above has not yet taken effect. On July 15, 2026, Japan's House of Councillors passed an amended Financial Instruments and Exchange Act (FIEA) that will reclassify crypto assets as financial instruments under the FIEA; a flat 20% separate self-assessment tax rate will take effect on January 1 of the year after the amended law is enforced — that is, in January 2027 or January 2028.
Summary
Loss offsetting and loss carryforward are both systems that reflect investment losses in tax calculations, but they work in different ways. Loss offsetting nets gains and losses within the same year, while loss carryforward carries an unused loss forward into future years.
Under Japan's crypto tax rules, these systems are treated differently than they are for stock investing. Under current law, crypto asset losses cannot be offset against other income such as employment income, and they also cannot be carried forward into future years. As a reminder, crypto losses can only be offset within the miscellaneous income category itself — that is, against crypto gains and other miscellaneous income in the same year — and never against income from other categories such as salary.
At the same time, Japan's crypto tax system is set to change significantly. Under the tax reform law enacted on March 31, 2026, gains from selling specified crypto assets through registered crypto asset trading businesses will be taxed separately at 20%, and losses from such sales can be carried forward for three years. These rules start in January 2027 or January 2028, depending on when the amended Financial Instruments and Exchange Act takes effect. For anyone investing in crypto assets, it's important to understand these distinctions and stay informed on when the new rules take effect.
This article is for informational purposes only and does not constitute financial or investment advice. Please consult a qualified professional before making investment decisions.
