What is Bitcoin and its taxation consequences
Abdulkadir Kahraman is Partner and Head of Tax at KPMG Turkey
Reality of the Digital Economy
With the 21st century the doors of the world opened up to a new age: the digital era. Digitization rapidly transforms the nature of economic activities by reducing the cost of goods and services to a significant extent, data aggregation, storage, and the speed with which computers process information. Nowadays, everything is affected by digitization.
According to the 2017 Information Economy Report published by UNCTAD, ICT sector products reached 6.5 percent of global gross domestic product (“GDP”) in 2015. 100 million people are working in the ICT services sector. Exports of these services have increased by 40 percent since 2010. In 2015, worldwide e-commerce sales reached $25.3 trillion and 90 percent of e-commerce sales are between businesses. 10 percent is from businesses to consumer (“B2C”). Cross-border B2C e-commerce is worth about $189 billion in 2015, reaching 7 percent of e-commerce.
In this environment “money or currency” is also digitized. The money issued by central banks may be now out of date. The most popular crypto or virtual currency is “bitcoin.” Bitcoin is a product of the digital economy.
However, bitcoin is fluctuating unpredictably. The price of bitcoin on February 21, 2018 is $10,725.90 while it was close to 20,000.00 last quarter of 2017.
Like other country residents, residents/citizens of Turkey trades bitcoin. According to the daily newspaper Hurriyet dated December 15, 2017, while Turkish bitcoin investors/traders were 9,600 in May 2017, this figure reached 42,600 in November 2017.
On the other hand taxation in the digital economy is becoming a phenomenon and rather complex including bitcoin gains. For this reason, where are we in the world where the income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable... is derived from bitcoin? Let’s see.
What is the Money? Can Anyone Print Money?
In economic theory, money is a payment instrument. It is not a property. The authority to issue money is a task belonging to “Central Banks”.
Therefore, the authority to issue money is given by law. It belongs only to central banks. Whenever the money is printed, it depends on macroeconomic parameters and fiscal policiesTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public.... In the functioning of the financial system, money or money is given to central banks, whereas banking/financing activities are subject to the supervision and control of regulatory agencies. The bank cannot open deposits. For instance, the money printing authority was transferred to the Turkish Central Bank indefinitely.
On the other hand, the value of the money that states are repaying is determined by “the reserve currency” and “the strength of the country’s economy” with the most basic maneuver. Money supply can be increased depending on the political preferences of governments.
What is Bitcoin?
According to the definition at https://www.investopedia.com: “Bitcoin is a digital currency created in 2009. It follows the ideas set out in a white paper by the mysterious Satoshi Nakamoto, whose true identity has yet to be verified.”
Issuing bitcoin is a kind of encryption process. The balance is stored using open and special “keys,” which are long letter and digit strings linked together by the mathematical encryption algorithm used to construct them. A public key (such as a bank account number) serves as an address that is broadcast worldwide and sends a stream of funds to others. A private key (such as an ATM password) is a protected secret and can only be used to authorize a bitcoin transfer.
A person or entity does not control the system. The nature of the supply side is that it can not be increased or decreased without being connected to a company or person. Similar to precious metals, bitcoins are called “mining.” However, this mining can be done using computer power in a scattered network.
The supply of bitcoin, like gold, is also limited. The supply of bitcoin is limited to 21 million bitcoins. The amount of bitcoins in circulation is 16.67 million. In other words, the supply of bitcoins can only be increased in the coming years thanks to the miners by 20.61 percent from today’s retention.
How are Countries Taxing Income from Bitcoin? How is Bitcoin Perceived in Case Law?
Bitcoin is not new in the developed western economies. Although new in Turkey. For this reason, we have taken quite a bit of income from the bitcoin transactions, especially in the U.S. In fact, the judiciary has moved on whether the delivery is subject to VAT.
Now let’s take a quick look at the practices of other countries.
| Country | Direct Taxation Approach |
| U.S. | According to the statement made by the U.S. Tax AdministrationTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is... (“IRS”) “Virtual Currency Guide” (IRS Virtual Currency Guidance, Notice 2014 – 21), virtual currencies like bitcoin are considered assets/goods. In other words, bitcoin is considered in the U.S. as an asset or a property in terms of taxation. The nature of the gain or loss arising from the sale or exchange of bitcoins depends on whether the virtual currency has a “capital asset” in the hands of the taxpayer. A taxpayer is often exposed to an increase or loss in the purchase or sale of bitcoin, a capital asset owned by the taxpayer. For example, stocks, bonds and other investment properties are usually capital assets. A taxpayer usually makes ordinary gains or losses in virtual money exchange or exchange where there is no capital asset in the hands of the taxpayer. Payments made by the employers to workers who have worked with bitcoin or to self-employed persons for whom they have received services are deemed to be the income of these persons. |
| EU | According to the decision of the European Court of Justice (CJEU Public Release No. 128/15, 22.11.2015), bitcoin transactions are exempted from VAT under the provision of “money, banknotes and coins” asset or property currency.
However, even though bitcoin trading is exempt from VAT, any gain in bitcoin transactions may be subject to other taxes such as “capital appreciation or income taxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable...” and the taxation depends on the EU country. United Kingdom: “Bitcoin” is considered foreign currency. The rules governing currency gains and losses apply to “bitcoin” transactions. However, “speculative bitcoin transactions” may not be subject to any taxation, and the U.K.’s HM Revenue and Customs (“HMRC”) provides unclear information on tax practices relating to bitcoin transactions (Revenue and Customs Brief 9/2014: Bitcoin and other cryptocurrencies). Every case related to bitboin “will be assessed according to its own personal facts and circumstances.” The relevant legislation and jurisprudence will be applied for proper taxation. |
| Japan | Bitcoin sales are exempt from consumption tax starting from July 1, 2017.• Virtual money is accepted as a commodity. Virtual currencies are considered asset-like values that can be “used and made digitally payable.” For this reason, the gains from the bitcoin trade are attributable to the business earnings. Accordingly, income and capital gainsCapital gains refer to the profit earned when an asset, such as real estate, stocks, bonds, or even a collectible, is sold or exchanged for a price that exceeds its original purchase cost. These gains are a critical component of personal and corporate finance, as they influence investment strategies and tax obligations. Capital gains are realised when an asset is... are treated for tax purposes. |
| Australia | According to the Australian Tax AdministrationTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is..., bitcoin is not a “money or foreign currency,” but an asset that can generate value-added earnings. On the other hand, the bitcoin transaction for personal use is exempted from taxation under two conditions: (i) Bitcoin is used as a payment instrument for personal use goods and services; and (ii) The value of the transaction is less than AU$10,000. The end result of bitcoin is the emergence of bitcoin and the exchange of commercial purposes in Australia is considered to be stock trading and taxed accordingly. |
| Canada | The Canadian Revenue Administration (“CRA”) announced in 2013 that crypto currencies like bitcoin are “commodities” such as gold, silver or natural gas, according to the legislation. Accordingly, bitcoin will be taxed either as a commercial gain or as a gain of value (in case of loss, this approach is also valid). |
In summary, taxation of bitcoin gains in countries vary significantly. Some countries treat bitcoin as a currency, while countries such as the U.S. and Australia consider it an asset or a commodity.
Bitcoin Overview of the Regulatory Agencies in Turkey and Buying/Selling Earnings Genre
I will evaluate the topic in terms of real persons and corporate entities. For corporate entities, assessment is easy as the subject is corporation taxCorporate Tax refers to the tax imposed by governments on the income or capital of corporations. Corporations, considered separate legal entities, are taxed on their profits, meaning the income generated from their operational activities, investments, and other financial undertakings. This tax is generally a key revenue source for governments, helping to fund public services, infrastructure, and other essential functions. The.... Because any kind of income the institutions get is subject to the corporation taxCorporate Tax refers to the tax imposed by governments on the income or capital of corporations. Corporations, considered separate legal entities, are taxed on their profits, meaning the income generated from their operational activities, investments, and other financial undertakings. This tax is generally a key revenue source for governments, helping to fund public services, infrastructure, and other essential functions. The... including exchange gains arising currency valuation and trading.
The problem becomes complicated when the “real person” is the owner of bitcoin gain. Why? In Turkey, there are seven types of gains or types in the Individual Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable...Tax LawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public..., according to which the types of gains is classified one by one.
The income for taxation must be covered by one of these.
On the other hand, the value increases of any foreign currency are not subject to taxation.
According to the news in the media, the Capital Markets Board (“CMB”), the Banking Regulatory and Supervisory Agency (“BRSA”) and the Central Bank of Turkish Republic (“CBTR”) are evaluating bitcoin. Alternatives of bitcoin definitions are “securities”, “commodity” or “money/currency.” However, there is no official announcement yet.
Let’s consider these three alternatives according to their bases.
Is there a Definition of Bitcoin According to CMB Legislation?
According to Article 3 of the Capital Markets Law, “money, checks, policies and bonds” are not covered by “securities definition.” The definition of “capital market instruments” in the same item is “other capital market instruments that are determined to be included in the CMB, including securities and derivative instruments and investment contracts.”
Is there a Definition of Bitcoin in Foreign Exchange Legislation?
According to Article 2 of the Decree No. 32 on the Protection of the Value of Turkish Currency, numbered 1567, “all foreign countries in the form of banknotes” are “effective,” “all kinds of accounts, documents and instruments that provide payment by foreign currency including effective.”
“All kinds of Turkish and foreign securities traded in the capital and money markets” in the same article are made of “securities,” “gold, silver, platinum and palladium in all kinds and shapes,” “precious metals,” “precious metals or precious stones” goods containing them “is defined as” valuables.“ Bitcoin does not belong to a country, so it does not fit the foreign currency or its effective definition.
Is there a Definition of Bitcoin in the Tax LegislationTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public...?
In the 70th Article of the Income TaxIncome Tax is a direct levy imposed by governments on the income generated by individuals, corporations, and other entities within a specific jurisdiction. It serves as a major source of revenue for governments and funds various public expenditures, such as infrastructure projects, healthcare, education, national security, and welfare programs. The tax is generally calculated as a percentage of the taxable...Tax LawTax laws form the backbone of any nation’s revenue system, setting the rules that govern how individuals and corporations contribute financially to support government functions. These laws define the types of taxes, the applicable rates, and the regulations regarding payment and compliance. They also outline the rights and obligations of taxpayers, ensuring a balanced and fair approach to funding public..., income from real estate or assets capital income is defined. However, the definitions in this article are farFunctional analysis is the cornerstone of transfer pricing and international tax compliance, ensuring that intercompany transactions adhere to the arm’s length principle. It evaluates the roles, contributions, and risk profiles of entities within a multinational enterprise (MNE) to determine how profits and costs should be allocated. This process ensures that related-party transactions reflect the pricing that independent enterprises would establish... from the concept of “digital age” goods, rights and services.
Nevertheless, can the definition of “rights such as the right to use, or the right to use on a secret formula or a manufacturing procedure, with knowledge gained from industry, commerce and science …” in Chapter 5 of this article be used for bitcoin? It’s hard to say anything clear. But when you look at the operation of bitcoin it is obvious that there is an encrption or a secret code.
If this approach is accepted, the gains on the purchase and sale of bitcoin may be considered as capital gainsCapital gains refer to the profit earned when an asset, such as real estate, stocks, bonds, or even a collectible, is sold or exchanged for a price that exceeds its original purchase cost. These gains are a critical component of personal and corporate finance, as they influence investment strategies and tax obligations. Capital gains are realised when an asset is... in the Law.
If bitcoin is accepted as a commodity, such transactions will be subject to VAT under a continuing business, i.e. number of transactions in any calendar year.
In summary, it is difficult to quantify bitcoin gains within the definition of seven income types unless there is an amendment. Therefore, any effort/approach based on existing legislation is more likely to create dispute between individuals from bitcoin and tax administrationTax authorities are fundamental institutions within government frameworks, overseeing tax assessment, collection, and administration. Their operations ensure that tax laws are enforced and public funds are collected efficiently. This article delves into tax authorities' purpose, responsibilities, and structure, offering insights into their essential role in supporting government functions and economic stability. What is a Tax Authority? A tax authority is....
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Abdulkadir Kahraman is Partner and Head of Tax at KPMG Turkey.
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