LEGAL STATUS AND TAXATION OF EARNING THROUGH PROJECT CATALYST
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Beware! You might be subject to self employment income tax especially in Turkey and other countries as well. Even though there is generally no specific piece of legislation regarding crypto assets, this does not mean that there is no relevant legislation that might be applicable to your situation. In case of the absence of specific regulation, you shall look for general rules of law that might be applicable to the type of taxable income that you generate. If the nature of the work results in income for you, then it is taxable in principle.
Cryptocurrencies, or more accurately crypto assets are one of the most promising technologies of our time, and possibly of the future. Its unique features and rebellious nature to the classic financial system, forces people to reconsider the way our classic financial system generally works. The fact that it takes so much time and money to conclude a simple oversea transaction only amplifies the exponentially-growing attention that crypto assets get. This attention is no coincidence. Some believe that with solutions that they promise, crypto assets and blockchain technology rocked or at least have the potential to rock the classical financial systemās foundations.
Despite the benefits crypto assets and blockchain technology provide or promise to provide, by some they are unfortunately perceived as a āwild westā. This is due to the fact that these new crypto assets and blockchain technology generally lack a complete regulation. In addition to foretold, blockchain technologiesā anonymous, independent and unsupervised nature raises some serious concerns, especially regarding money laundering, combatting the financing of terrorism and tax evasions. When it comes to these concerns, it is only natural for states to wave the red flag.
In this situation, states generally tend to follow one of the two ways. They are either going to find crypto assets a place in its classic regulations and make crypto assets subject to general legal norms or they introduce a new legislation specific to crypto assets and blockchain technology. Each tendency has applications in different states. It is possible and pleasing to find discrete legislation processes throughout different countries, as well as the tendency to regulate crypto assets and blockchain technology in law currently in force.
However, it is still common to come across a state or a jurisdiction which neither have discrete regulation for crypto assets and blockchain nor a tendency to find those a place in their legal structure. Even though this situation is suggestive of a wild west, it is substantially inaccurate. Because, it is only natural for law to be one or two steps behind of developing technology. States neither can nor shall regulate something that they cannot comprehend and classify. In order to properly regulate, states must closely examine and understand the possible benefits and threats of new technologies and their products. Then, they shall decide whether they are in need of a new legislation or it is better to interpret and evaluate them amongst the legal norms that are currently in force.
One other thing that shall be crucially stated is the fact that when there is no specific regulation, people tend to think and even believe that there is no rule regarding these new technologies and that they can do whatever they want. It is neither possible nor longed-for for lawmakers to come up with a specific piece of regulation for each new technology. So, while conducting business and earning an income through these new technologies, one shall always look for a specific regulation, if there is none, then, one shall go look for possible regulations that he/she/they and their act may be subjected to.
During 2017-2018, after the rise of demand and supply in crypto assets, International Organization of Securities Commissions (IOSCO) and Financial Stability Board (FSB) has concluded that the total volume and technology of crypto assets has not yet reached a size that would affect the financial system and thus, rather than implementing regulations on crypto assets, observing its technology and informing users would be sufficient. However, as the economy that revolves around crypto assets continues to grow even bigger, this āwait and seeā approach started to slowly fade away. One of the main reasons that this āwait and seeā approach is gradually forsaken is the possible tax evasions and stateās desire to tax this fast-growing sector.
Due to its enormous economic aspect, taxation is one of the hottest topics when it comes to crypto assets. As the crypto assets and blockchain technology shook the classic economic structure, they also created new methods of income, payment, employment and business models. However, taxation of the crypto ecosystem is not always so easy. Because in some jurisdictions, crypto assets currently do not have a clear regulation nor definition in the legislations, this creates hesitations in terms of defining these assets and related transactions in tax law.
The main determining factor in taxation of the crypto ecosystem is how they are legally qualified. In order for an asset or transaction to be taxable in terms of tax law, it is essential to reveal its legal nature first. In terms of taxation, the classification of crypto assets as money, investment instruments, securities, commodities or otherwise causes different consequences. In this respect, the definition of crypto assets is important in terms of revealing the elements of legal qualification. However, in the OECD report, it was stated that the very different characteristics of crypto assets make it impossible to make a single definition valid for all of them. Instead, by adopting the approach that it would be appropriate to consider the common features of crypto assets, the use of distributed ledger technology, namely blockchain, and the revealing of financial assets based on cryptography formed in this way are determined as common features.
Although the said regulations are not yet found sufficient and satisfactory by the public, it seems that they have made the necessary qualification in terms of taxation and revealing the definition in this regard. On the other hand, taxation of the crypto-assets or their trading is not complete with the formation of the definition. The most important obstacle to taxation in this area is that different approaches continue to exist in different countries. Some countries treat crypto assets as intangible assets, while others treat them as money or commodities, and some as financial instruments and derivatives. That's why it is crucial for taxpayers to closely examine the approach of their jurisdictions which they are subject to.
Since we are done with laying out the basics of the taxation of crypto assets, it is time to investigate earning methods through Project Catalyst. We investigate these earning methods through Project Catalyst, namely, earning through accepted proposals (aka funding), participating in the voting processes, as a proposal assessor (āPAā) and as a veteran proposal assessor (āvPAā).
First earning method from Project Catalyst is through creating an impactful proposal. Cardano enables its community and blockchain ecosystem to propose creative and innovative ideas. This funding project is crucial for many members of this ecosystem. In these times, ideas are free to come up with but most of the time it requires a significant amount of capital, which some members of this community unfortunately donāt have access to. In this regard, Project Catalystās main function is funding those proposals which are worthy of funding.
Second earning method from Project Catalyst is to become an assessor and assess proposals based on the guidelines. The assessors are categorized in two as PA and vPA. PAs assess proposals which are in the assessment phase and determine whether the proposals carry the relevant criterias which are different for each proposal. The assessments of PAs are very important since it carries the role of guidance for the voters in making decisions regarding the proposal. The vPAs role is to review the assessments of PAs and make sure the PAsā assessments are accurate and in line with the guidelines.
Third earning method from Project Catalyst creates a relatively democratic process for the voting process. Experts and those with valuable experience take an active role in assessing proposals and community members vote on proposals based on the proposalsā impact value. And those who participate in these processes get rewarded for their precious contributions.
In our opinion, earning methods that are briefly examined in previous paragraphs fall under the scope of a self-employment income and our opinions will be built upon that assumption regarding the issue of taxation of crypto assets.
In order to name the earning method as an employment relationship, one has to carefully examine and bear the necessities listed below:
There has to be a command chain between the employer and employee, meaning the employees are obliged to follow instructions and orders of the employer,
The employee is paid on a monthly or regular basis in return of their work,
For the employment relations that exceed one year, there must be a written employment contract between the employer and employee.
If there is an employee-employer relation between project assessors and Catalyst, then, it would be considered as income tax. However, as far as we know, the relationship between the veteran proposal assessors and proposal assessor and Catalyst does not fall in the category of employment relation. Also, income tax in such situations is paid by the employer as a deduction at source, which means the employer pays the relevant income taxes on behalf of the employee.
After this brief introduction, firstly, we will examine the taxation approaches of Turkish Law, US Law, and EU Law regarding crypto assets. As we examine those, we will also evaluate the possible taxation situations of foretold earning methods through Project Catalyst.
First of all, in Turkish Law, like in other similar law systems, tax can only be applied in accordance with the legislation. Like no punishment without law, there can be no tax without law. In the earning through Project Catalyst context, the aforementioned incomes of the proposers shall be regarded as self-employment incomes. According to the article 65/1 of the Income Tax Law (numbered 193): āEarnings arising from all kinds of self-employment activities are regarded as self-employment income.ā Also, subparagraph 2 of the same article states that āSelf-employment activity is the performance of non-commercial works based on personal work, scientific or professional knowledge rather than capital, under personal responsibility, on its own behalf and account, without being subject to the employer.ā From the definition itself, one shall look for four criteria. These are as follows:
Self-employment activity shall be performance of a non-commercial work
This non-commercial work shall be based on personal work, scientific or personal knowledge and it shall not be based on capital.
This self-employment activity shall be performed under personal responsibility and on behalf and account of the one who performs the self-employment activity.
The one who performs the self-employment activity shall not perform that activity as being subject to the employer.
In order to be considered as self-employed, all of these four criterias that are explained below shall be adhered to.
For the first criteria, as we closely examine the nature of earning through Project Catalyst as a proposer, we can argue that the performances that the proposer undertakes are not of commercial nature but more of a donation or a grant. So, the first criteria is clearly met.
For the second criteria, the proposed activity is generally based on personal work or scientific or personal knowledge. Proposers are generally using their personal or professional knowledge during the performance of their proposal. Therefore, it is clear that proposers fall in this criteria.
For the third criteria, these proposals are proposed and performed under personal responsibility and on behalf and account of the proposer himself/herself/themselves.
For the forth criteria, there is clearly no employment relationship between the proposer party and the Project Catalyst or its funder. As a conclusion for this part, since the proposers, veteran proposal assessors and proposal assessors adhere to all the criterias set forth above, it is clear that this kind of earning method is regarded as self-employment income.
All these assessments are also valid for the other earning methods, namely, veteran proposal assessor and proposal assessors mentioned above.
In Turkish Law, there is a distinction such as fully fledged taxpayer and limited taxpayer. Fully fledged taxpayers are as follows:
Those who are resident in Turkey
Those who continuously resided in Turkey more than six months within a calendar year
Turkish citizens that reside in foreign countries due to the works of offices, establishments, associations and undertakings, which are affiliated with official offices and institutions or establishments and undertakings headquartered in Turkey
Real persons who are not resident in Turkey are considered as limited taxpayers and they are only taxed on their earnings and revenues in Turkey.
In order for one to pay self-employment income tax, one shall issue an annual income tax form. This form is to be issued to the Turkish Revenue Administration to declare oneās income during a fiscal year. This form shall be issued till the evening of the last day of March, otherwise one may face a serious fine. Fines to be applied due to not issuing annual income tax form, or tax-evasions in some sort, are basically as follows:
Fine due to not issuing income tax form,
The tax that has not been paid,
Interest of default or late fee (%2,5 per month)
If one is accused of tax evasion, then, one may be subject to carry out the listed three payments.
Tax rates gradually rise, and here is how:
Till 32.000 Turkish Lira (TL) tax rate is 15%
32.000 - 70.000 TL tax is 4800 TL + (income-32.000) * %20
70.000 - 170.000 TL tax is 12.400 TL + (income-70.000) *%27
170.000 - 880.000 TL tax is 39.400 TL +(income-170.000)* %35
880.000 and above tax is 287.900 TL + (income- 880.000) * %40
With the recent amendments made in relevant legislations, crypto asset service providers are now subject to the anti-money laundering, prevention of financing of terrorism regulations and etc. The Financial Crimes Investigation Board (aka āMASAKā) is the leading public authority on the application and audition of the legislation related to these matters. The main obligation of the crypto asset service providers is to report suspicious transactions to MASAK. Thus, according to the legislation, crypto asset service providers are obliged to report suspicious transactions of their users. Such suspicious transactions can be related to the amount of transfer, the frequency of transaction, sides and nature of the transaction and ID confirmations etc.
First of all, the USA makes a differentiation between virtual currencies and cryptocurrencies. According to the IRS (Internal Revenue Service) virtual currencies are a digital representation of value that functions as a unit of account, a store of value and medium of an exchange. These virtual currencies are treated as property. There, it concludes that general tax principles applicable to property transactions also apply to transactions of virtual currencies.
Crypto currencies on the other hand are recognized as a type of virtual currency. Difference in categorization is mainly due to the fact that crypto currencies generally use cryptography to secure the transactions.
Since we laid out how the USA treats virtual and crypto currencies, now, it is time to examine their possible taxations. The IRS states the possible transactions that may result in tax consequences. These are as follows:
Sale of a digital asset
Exchange of digital assets for property, goods or services
Exchange of trade of one digital asset for another
Receipt of a digital asset as payment for goods or services
Receipt of a new digital asset as a result of mining and staking activities
Receipt of a digital asset as a result of an airdrop
Use of digital assets to pay for goods and services
Any other disposition of a financial interest in digital asset
Receipt or transfer of a digital asset for free (without providing and consideration) that does not qualify as bona fide gift
Additionally, we shall examine the approach of the IRS in regards to income purposes. Here is how the IRS sees incomes through crypto currencies (with direct quotes):
āWhen you receive property, including virtual currency, in exchange for performing services, whether or not you perform the services as an employee, you recognize ordinary income.ā
āThe fair market value of virtual currency received for services performed as an independent contractor, measured in U.S. dollars as of the date of receipt, constitutes self-employment income and is subject to the self-employment tax.ā
āThe medium in which remuneration for services is paid is immaterial to the determination of whether the remuneration constitutes wages for employment tax purposes. Consequently, the fair market value of virtual currency paid as wages, measured in U.S. dollars at the date of receipt, is subject to Federal income tax withholding, Federal Insurance Contributions Act (FICA) tax, and Federal Unemployment Tax Act (FUTA) tax and must be reported.ā
By receiving crypto currency in exchange for performing services, whether or not performing the services as an employee, this would be considered recognizing an ordinary income. Following this, the fair market value of the crypto currency received for services performed as an independent contractor would constitute a self-employment income and can be subject to self-employment tax.
So, as one may clearly see, the IRS does not generally make a differentiation depending on which medium of exchange the income is earned. What it really focuses on is whether there is a taxable income or not. In conclusion, similar to the Turkish Law, earning through Project Catalyst as a proposer has a strong probability of being treated as an income. So, where there is income, there is also income tax.
Activities of the voters or proposal assessors are not really different. Their earnings through such activities are also subject to taxation due to the fact that the IRS sees āreceipt of a new digital asset as a result of mining and staking activitiesā taxable.
For U.S. tax purposes, transactions using crypto currency must be reported in U.S. dollars. The calculation of income is the fair market value of the crypto currency in U.S. dollars at the date it is received.
Information reporting requirements apply to payments made in crypto currency as they do to payments made in other forms of property. For instance, if someone pays a U.S. non-exempt recipient fixed and determinable income in crypto currency worth at least $600 throughout the course of a trade or company, they must notify both the IRS and the recipient of the payment. Rent, wages, premiums, annuities, and compensation are a few examples of payments of fixed and determinable income.
In general, anybody who pays an independent contractor for services rendered in the course of their trade or company $600 or more in a tax year is obliged to record that payment to the IRS and the payee on Form 1099-MISC, Miscellaneous Income. Crypto currency payments that must be reported on Form 1099-MISC shall be reported using the crypto currency's fair market value in US dollars as of the payment date.
Tax law violations may result in fines for the taxpayer. For instance, fines like accuracy-related penalties under section 6662 may be applied to underpayments linked to transactions involving crypto currencies. Additionally, information reporting fines under sections 6721 and 6722 may apply if crypto currency transactions are not immediately or accurately reported when obliged to do so. Taxpayers and individuals required to file information returns, however, may be eligible for penalty relief if they can demonstrate that an underpayment or improper filing of information returns was caused by a valid reason.
Through the markets in crypto assets framework, policymakers in the European Union have advanced efforts to regulate the crypto currency industry. EU authorities use the term "virtual currency" instead of the term "crypto currency", while it is considered, among other things, as a means of payment. Depending on the type of cryptocurrency transaction, the taxation of crypto currencies and transactions using them is governed by the national regulations of each Member State. In this instance, a digital currency is typically considered for tax reasons as an intangible asset or commodity rather than as money or currency. Value added tax is not applied to the exchange of crypto currencies for conventional currencies in either the buying or selling process. Also, according to the Markets in Crypto-assets (MiCA) (dated 05.10.2022) proposal, crypto assets are recognized as ādigital representations of a value or a right which may be transferred and stored electronically, using distributed ledger technology or similar technologyā. However, these proposals are yet to enter into force. Since there is no common decision to cover EU countries yet, EU countries apply their local legal regulations as aforementioned.
Recently, on 4 October 2022, the European Parliament adopted the resolution on theā impact of new technologies on taxation: crypto and blockchainā. First of all, the text states that different types of crypto assets may result in different types of tax treatments. With that being said, it also states EU member states lack of uniform tax legislation regarding crypto assets. Since the binding legislation for taxation of crypto assets is yet to be found in the EU, the text states that Member States are responsible for determining how to tax crypto assets in accordance with the treaties. Additionally, it calls for authorities to take into account a simplified tax treatment for sporadic or small traders. The text also states that crypto assets must be subject to fair, transparent, and effective taxation in order to ensure fair competition and a level playing field between financial services providers and the tax treatment of assets and financial products.
Since there is currently no internationally agreed-upon standard definition of crypto-assets and the types of assets that the term should include, The EU understands the need for such a definition as a main priority in the European legislative framework in order to guarantee a leading position for the Union at an international level and that the OECD is tasked with defining the tax base for crypto assets.
Even though the EU calls on Member States to treat different types of crypto-assets in a manner that is consistent with the tax treatment of similar non-crypto assets, there is no uniform approach throughout EU states. Since there is no uniform approach or legislation, one shall carefully examine the specific and individual approach and legislation of the relevant state which the one is subject to.
According to the Australian Taxation Office, crypto assets are treated as digital representations of value that one may transfer, store or trade electronically. Since we laid out how the Australian Tax Office treats crypto assets, it is time to examine taxation of these crypto assets.
First of all, it is safe to state that there is no specific or discrete legislation in Australian Law regarding taxation of crypto assets. However, this does not mean that these crypto assets are not taxable. Even though these crypto assets generally operate differently than classical instruments, they are taxable. After all, these crypto assets neither function nor operate under central banks or governments. Despite their differences, these crypto assets are subject to the same tax rules as other general assets. Tax treatment of crypto assets will be determined according to their nature and how and why they are acquired.
Additionally, it is worthwhile to note that there is a tendency to tax crypto assets as capital gains taxed assets. However, this tendency is generally applied to acquisitions of crypto assets for investment purposes. Also, rewards that members of the ecosystem may get for staking their crypto assets are eligible to be taxed as ordinary income.
As a conclusion, one who earns crypto currency and is subject to Australian Tax Law shall act in the same way as one who does not earn crypto. Their tax regime is the same. So, it is possible for proposers and participants of the Project Catalyst to be subject to relevant income tax rules.
Like in Australia, crypto assets are accepted as digital representations of value in Canada. They may be used as a medium of exchange if the parties are willing. The Canada Revenue Agency on the other hand, has the tendency to treat crypto assets as commodities.
When it comes to taxation of crypto assets in Canada, the Canada Revenue Agency generally assumes incomes that arise from transactions concluded with crypto assets as business income or as capital gain. However, this assumption may differentiate depending on the circumstances and nature of that said transaction. Additionally, it is important to state that as earnings through crypto assets may qualify as business income or capital gain, it is possible for losses to be treated as business losses or capital losses. Furthermore, taxpayers who are subject to Canadian Tax Law shall establish the nature of their crypto asset activity. Whether these activities result in income or capital gain directly affects the way these revenues are treated for tax purposes.
As a conclusion, it is possible for proposers and participants of the Project Catalyst to be subject to relevant income tax rules.
According to the Her Majestyās Revenue and Customs (HMRC), crypto assets are considered as digital representations of value or contractual rights which can be stored, transferred or traded electronically. Also, it clearly states that tax treatment of crypto assets depends on the nature and use of these crypto assets. So, it is not really important how the issuer or user of the crypto asset defines that asset. What really matters when it comes to taxation is how and why these crypto assets are used.
Additionally, it is worthwhile to note that there is neither specific nor discrete legislation for taxation of crypto assets. Earnings through crypto assets are basically subject to general tax rules and principles, such as income tax or capital gains tax. Furthermore, it is crucial to state that as earnings through crypto assets may qualify as taxable revenue.
So, for one who is subject to UK Law, it is essential to determine the nature of his/her/their revenue through crypto assets. If the nature of their relationship or transaction constitutes a taxable action, then they are subject to general tax rules and principles of the UK, regardless of whether they earn through a crypto asset or not.
As a conclusion, it is possible for proposers and participants of the Project Catalyst to be subject to relevant income tax rules.
Crypto assets are taxed in Germany. In Germany, crypto assets are viewed as a private asset unlike property. The Bundeszentralamt fĆ¼r Steuern (āBSZtā) states that any additional income from crypto assets, such as mining, staking or airdrop, as well as short-term capital gains from crypto assets which are held for less than a year are subject to income tax. Therefore, rather than being subject to capital gains tax, crypto assets are subject to individual income tax.
When you dispose of a private asset such as a crypto asset, the tax rules change depending on how long you held the crypto asset. In addition to taxation on disposal of a crypto asset, you might be subject to pay income tax on crypto received or earned.
All short-term crypto asset gains are subject to income tax in Germany at the applicable individual rate. This implies that you are subject to from 0 to 45% tax on your crypto asset gains, also depending on your total income for that tax year. Germany wonāt require you to pay any tax at all on your crypto asset gains if the assets are held for a year.
Tax-free situations in Germany are as follows:
If you hold your cryptocurrency for one year or longer
If your total profits from short-term gains are less than ā¬600 during the tax year
If your total income from crypto (staking, mining, airdrop etc) is less than ā¬256 during the tax year
BZTs clarified that receiving or earning crypto assets are taxed as income tax only if it has been received in exchange for a service. This means that if one received or earned the crypto asset without providing any service or doing any specific action, such earning can be considered tax-free. In conclusion, it is possible for proposers and participants of the Project Catalyst to be subject to relevant income tax rules.
In Belgium, crypto assets still remain unregulated and raising questions regarding their taxation. The Special Tax Inspectorate (STI) treats incomes which are subject to taxation from the sale of crypto assests as āmiscellaneous incomeā. According to Belgian Tax Law the categories for taxable income is as follows:
Earned income (eg: employment income)
Self-employment, retirement, business income
Investment income
Other miscellaneous income
Real estate income
As of today, Belgium has an ongoing implementation of 33% taxation policy on capital gains or speculating on crypto assets. Such income is subject to declaration under the section of āmiscellaneous incomeā on their tax returns. Nevertheless, the implementation of such taxation is difficult since such transactions take place over foreign platforms.
For individuals such as exchangers, payment processors, traders, miners and other service providers which are not working with a company or an establishment could potentially be subject to Belgian personal income tax. For personel income tax, the tax rates are between 25% and 50% plus communal tax.
One should examine the Prudent Man principle in order to remain tax-free. Prudent Man principle can be considered by the following conditions:
The individual has never been active in finance;
The individualās education or profession is not related to crypto assets;
Such investment is made with her/his own gains and a loan is not used in this manner;
The individual didnāt use any automated software or engage in mining;
The crypto assets had never been sold;
The transactions over the years cannot qualify as a business activity;
āBuy and holdā method has been used and the crypto asset was kept for several years.
If the conditions are met, one can remain tax-free. This being said, it should also be considered that these conditions are evaluated by the relevant authorities in order to be deemed tax-free from transactions of crypto assets.
THE INFORMATION PROVIDED IN THIS PAPER PROVIDES GENERAL INFORMATION AS TO THE POSSIBILITIES IN MULTIPLE JURISDICTIONS. PLEASE KEEP IN MIND THAT LAWS THAT APPLY TO THE SUBJECT HEREIN MAY DIFFER IN EACH JURISDICTION. THUS, NOTHING CONTAINED HEREIN CONSTITUTES ANY LEGAL OPINION OR SUGGESTION OF ANY KIND. PLEASE CONSULT TO LOCAL EXPERTS IN RELEVANT AREAS BEFORE TAKING ANY ACTION BASED ON ANY INFORMATION CONTAINED HEREIN.