Taxation in the digital economy is becoming a phenomenon and is rather complex, particularly bitcoin gains. Taxation of bitcoin gains varies significantly-some countries treat bitcoin as a currency, whilst other countries, such as the U.S. and Australia, consider it an asset or a commodity.
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 The money issued by central banks may be now out of date.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 Hurriyetdated 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 tax 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 policies. 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
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 tax. Because any kind of income the institutions get is subject to the corporation tax 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 Tax Law, 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.
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.”
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.
In the 70th Article of the Income Tax Law, income from real estate or assets capital income is defined. However, the definitions in this article are far 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 gains 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 administration.
Abdulkadir Kahraman is Partner and Head of Tax at KPMG Turkey.