Taxation of Derivative Gains and Losses

At a company's fiscal year end, gains and losses on unsettled derivative trades also go into the calculation of income. An individual calculates the gains and losses on certain futures trades in a final tax return, separately from other income.

Why the calculation differs for companies and individuals

How income is calculated on the gains and losses of a derivative trade depends on whether the person who made the trade is a company or an individual. Companies are subject to the provisions of the Corporation Tax Act, and individuals are subject to a special provision of the Act on Special Measures Concerning Taxation for certain trades.

Accounting gains and losses and the way they are valued are covered in Accounting Operations. Because the Corporation Tax Act contains separate provisions, taxable income does not always match accounting profit or loss¹.

Taxation of a company's derivative trades

A company's income is found by subtracting the amount of deductible expenses from the amount of taxable revenue. A company's revenue and expenses are, except where a separate provision applies, calculated in accordance with generally accepted accounting standards¹. For derivative trades, some provisions serve as this "separate provision" and set the treatment at fiscal year end.

Deemed settlement at fiscal year end

A derivative trade that a company has made and that has not been settled at the end of the fiscal year (an unsettled derivative trade) is treated as settled at that time. The gain or loss at that time (the deemed settlement gain or loss) is included in taxable revenue or deductible expenses when income for that fiscal year is calculated². Even for a trade that has not been settled, the gain or loss as of the closing date goes into income.

Two kinds of trades are excluded from this treatment: foreign exchange forward trades under forward foreign exchange contracts to which Article 61-8, paragraph 2 (translation of foreign currency transactions) applies, and trades set by Ministry of Finance ordinance². How the deemed settlement gain or loss is handled in the next fiscal year is set by Cabinet order².

When a company acquires an asset other than money under a derivative trade, the difference between the value of the asset at that time and the amount paid as consideration for it is included in taxable revenue or deductible expenses for the fiscal year in which the acquisition date falls. However, this treatment does not apply to an asset acquired under a derivative trade that is subject to the deferral hedge treatment in the next section².

Hedge treatment

A company that enters into a derivative trade to reduce a loss that could arise from changes in the value of assets or liabilities, or similar risks, can use deferral hedge treatment if it meets certain requirements. Under this treatment, the effective part of the gain or loss from deemed settlement at fiscal year end and similar treatment is not included in that year's income. The requirements are as follows³.

• The company records in its books and documents, as set by Ministry of Finance ordinance, that the derivative trade was made to reduce a loss or similar risk.
• Between the time of the derivative trade and the end of the fiscal year, there has been no transfer, disposal or settlement, receipt, or payment of the assets or liabilities whose loss the company intends to reduce, or of the money it plans to receive or pay.
• The derivative trade falls under a case that Cabinet order sets as effective for reducing the loss.

For a derivative trade made to reduce a loss from changes in the value of securities held for purposes other than trading, there is a separate provision for fair value hedge treatment, under which the valuation gain or loss is included in income⁴.

Consider a hypothetical example in which a derivative trade is unsettled at fiscal year end and the deemed settlement result is either a gain or a loss of 1 million yen. "Fully effective" in the table means the case where the effective part of the gain or loss (the amount calculated under Cabinet order) equals the whole of the gain or loss³.

The third and fourth rows are examples in which, when hedge treatment that meets the requirements is used, the effective part of the gain or loss on the derivative trade does not go into income for that fiscal year, unlike in the first and second rows. A hedge is meant to offset a possible opposite gain or loss on the hedged item. So, for example, if the derivative trade has a loss of 1 million yen and the hedged item has an unrealized gain of the same amount, the economic result in total is 0 yen. The tax treatment on the hedged item's side is not included in this table.

Consider a hypothetical example in which Company A holds an unsettled derivative trade at fiscal year end, and the deemed settlement gain or loss is either a gain of 1 million yen or a loss of 1 million yen. When the requirements are met, the effective part is the whole amount in both cases. As in the first table, the treatment on the hedged item's side is not included.

Under deferral hedge treatment, the amount is left out of income only in the calculation for that fiscal year. As the title of the provision indicates, the recognition of the gain or loss is deferred, and how it is treated in the next fiscal year and later is set by Cabinet order³. Compared with the case without hedge treatment, income for that fiscal year is smaller when there is a gain, and larger when there is a loss, because the loss does not go into deductible expenses either. In both cases, the recognition is deferred. If even one requirement is not met, the treatment is the same as in the rows with "None" under hedge treatment in the first table.

Hedge accounting in the accounting sense, with its requirements and treatment, is covered on the Hedge Accounting Basics page. The requirements for hedge treatment in tax law are set by the Corporation Tax Act provisions described here.

Taxation of an individual's derivative trades

When an individual makes a settlement of differences, etc. on certain futures trades (a general term for settlement, exercise, abandonment, and transfer), the gain or loss is taxed separately from other income. The rule covers residents and non-residents who have a permanent establishment in Japan⁵.

Miscellaneous income, etc. from futures trading and the tax rate

Figures such as tax rates follow the National Tax Agency's material, which reflects the laws and regulations in force on April 1, 2026.

The total of business income, capital gains, and miscellaneous income from eligible futures trades, calculated under Cabinet order, is called the "amount of miscellaneous income, etc. from futures trading." It is separated from other income. It is taxed under separate taxation upon filing a return (shinkoku bunri kazei) at 15% income tax and 5% local tax⁶. The rate is flat regardless of the size of the income.

A special income tax for reconstruction is added to income tax. The income tax and the special income tax for reconstruction are declared and paid together. The special income tax for reconstruction is 2.1% of the base income tax amount. From the 2027 tax year, it becomes 1.1% of the base income tax amount. A special defense income tax of 1% of the base income tax amount is declared and paid together with it⁶.

Eligible trades

The trades covered by the special provision are as follows⁶. In every case, trades whose settlement results in delivery of the physical asset are excluded.

The condition on the counterparty to an over-the-counter derivatives transaction is part of the requirements for coverage⁵. Trades relating to certain crypto-assets and financial indicators are excluded⁶.

Some foreign exchange margin trading (FX) is neither a market derivatives transaction nor an over-the-counter derivatives transaction. For the gain or loss on settlement of differences in such trading, the National Tax Agency says that in general it is miscellaneous income subject to aggregate taxation. It is taxed at progressive rates. A loss in that case can be offset within miscellaneous income, but not against other income or against miscellaneous income, etc. from futures trading⁷.

Figure description

The figure is a decision flow that checks, through three questions, whether an individual's trade is taxed as miscellaneous income, etc. from futures trading. If the first answer is no, it is not an individual's trade, so this figure does not decide. If all three answers are yes, separate taxation upon filing a return applies in principle.

The figure is only a rough guide. An over-the-counter derivatives transaction is covered only when the counterparty is a Type I financial instruments business operator or a registered financial institution, and trades relating to certain crypto-assets and financial indicators are excluded⁵⁶. The 15% at the end of the figure is the income tax rate, and the special income tax for reconstruction and similar surtaxes are added to income tax.

Offsetting losses and carrying them forward

When the calculation of the amount of miscellaneous income, etc. from futures trading produces a loss, it can be offset against the amount of miscellaneous income, etc. from other futures trading, but cannot be offset against income of any other kind⁶. For the purposes of the Income Tax Act and other laws, the amount of that loss is treated as not having arisen⁵.

A loss that cannot be fully absorbed even after offsetting can, under certain requirements, be carried forward for the following three years and deducted, up to the amount of miscellaneous income, etc. from futures trading for that year⁸. When there are losses from several years, they are deducted starting with the oldest year's loss⁸. There are three requirements⁸⁹.

• In the final return for the year the loss arose, the individual files a final return with the supplementary schedule for carried-forward futures trading losses and the statement of calculation of the amount of miscellaneous income, etc. from futures trading attached.
• After that, the individual files a final return with this supplementary schedule attached every year without a break.
• In the final return for the year in which the carryforward deduction is taken, the individual again attaches the supplementary schedule and the statement of calculation.

Consider a hypothetical example in which an individual's amount of miscellaneous income, etc. from futures trading changes from year to year. Each year's amount is the amount after offsetting against other futures trades, and the requirements are assumed to have been met continuously since the earlier years. Tax is calculated with income tax at 15% and local tax at 5%, and the special income tax for reconstruction and other items are not included.

The loss in year 1 cannot be offset against other kinds of income in the same year (for example, salary income), and it is deducted from the gain in year 2. If the carryforward deduction could not have been used in year 2, 3 million yen would be taxed, so income tax and local tax would come to 600,000 yen. The carryforward deduction lowers the tax in a year with a gain, but if there is no gain in the three years after the year the loss arose, the loss cannot be deducted and the period ends.

Taxation outside Japan is not covered on this page.

Notes

1. "法人税法" (Corporation Tax Act, our translation, in Japanese), Article 22, paragraphs 1, 2, 3, and 4. Paragraph 4 says that the amounts included in revenue and in deductible expenses are, except where a separate provision applies, calculated in accordance with generally accepted accounting standards. The text of the provisions as checked on e-Gov Law Search on October 2, 2026. ↩ ↩²

2. "法人税法" (Corporation Tax Act, in Japanese), Article 61-5 (Inclusion in taxable revenue or deductible expenses of the amount equivalent to a gain or a loss on derivative trades), paragraphs 1, 3, and 4. The parenthetical in paragraph 1 excludes foreign exchange forward trades and similar trades, such as trades under forward foreign exchange contracts to which Article 61-8, paragraph 2 applies, from deemed settlement. ↩ ↩² ↩³ ↩⁴

3. "法人税法" (Corporation Tax Act, in Japanese), Article 61-6 (Deferral of a gain or loss under deferral hedge treatment), paragraph 1. The amount of loss on the hedged asset, etc. is in items 1 and 2 of that paragraph, and the scope of derivative trades, etc. is in paragraph 4 of the same Article. The calculation of the effective part and the cases recognized as effective are left to Cabinet order. ↩ ↩² ↩³

4. "法人税法" (Corporation Tax Act, in Japanese), Article 61-7 (Recognition of a valuation gain or loss on securities held for purposes other than trading under fair value hedge treatment), paragraph 1. ↩

5. "租税特別措置法" (Act on Special Measures Concerning Taxation, our translation, in Japanese), Article 41-14 (Special provision for miscellaneous income, etc. from futures trading), paragraph 1. The statement that the amount of the loss is treated as not having arisen is in the latter part of that paragraph. The condition on the counterparty to an over-the-counter derivatives transaction is in item 2 of that paragraph. ↩ ↩² ↩³ ↩⁴

6. National Tax Agency, "No.1522 先物取引に係る雑所得等の課税の特例" (No. 1522 Special provision for the taxation of miscellaneous income, etc. from futures trading, our translation, in Japanese; laws and regulations as of April 1, 2026 (Reiwa 8)), the sections "概要" (Overview), "適用対象となる先物取引の差金等決済の範囲" (Scope of settlement of differences, etc. on futures trading covered), and "先物取引に係る雑所得等の金額の計算上、損失が生じた場合" (When a loss arises in calculating the amount of miscellaneous income, etc. from futures trading). ↩ ↩² ↩³ ↩⁴ ↩⁵ ↩⁶

7. National Tax Agency, "No.1521 外国為替証拠金取引(FX)の課税関係" (No. 1521 Taxation of foreign exchange margin trading (FX), our translation, in Japanese; laws and regulations as of April 1, 2026 (Reiwa 8)), the section "課税関係" (Tax treatment), item "（2）差金等決済による差損が生じた場合" (When a loss arises from settlement of differences, etc.), and the explanation that follows it of trades that are neither market derivatives transactions nor over-the-counter derivatives transactions. ↩

8. National Tax Agency, "No.1523 先物取引の差金等決済に係る損失の繰越控除" (No. 1523 Carryforward deduction of losses from settlement of differences, etc. on futures trading, our translation, in Japanese; laws and regulations as of April 1, 2026 (Reiwa 8)), the sections "概要" (Overview), "先物取引の差金等決済に係る損失の繰越控除の方法" (How the carryforward deduction is made), and "手続き" (Procedure). ↩ ↩² ↩³

9. "租税特別措置法" (Act on Special Measures Concerning Taxation, in Japanese), Article 41-15 (Carryforward deduction of losses from settlement of differences, etc. on futures trading), paragraphs 1 and 3. ↩