Taxation of Crypto Assets

Crypto assets are considered to be a highly promising technology with the potential to disrupt the traditional financial system. Their distinctive features and defiance of the conventional financial system have led people to reevaluate how financial transactions are typically conducted. The inefficiencies and costs associated with international transactions have further increased the interest in crypto assets. Many believe that these assets, along with blockchain technology, have the ability to significantly impact or even revolutionize the foundations of the traditional financial system.

Many people see crypto assets and blockchain technology as unregulated and risky. The anonymity and independence of blockchain technology also raise concerns about illegal activities like money laundering and terrorism financing. It is understandable that governments are worried about these issues.

In this scenario, states typically adopt one of two approaches. They either include crypto assets within existing regulations and subject them to established legal norms, or they create new legislation specifically for crypto assets and blockchain technology. Each approach is implemented in different states. It is interesting to note the diverse legislative processes in various countries, as well as the current trend towards regulating crypto assets and blockchain technology through law.

However, it is still common to find states or jurisdictions that do not have specific regulations for crypto assets and blockchain technology, and they also do not show a tendency to include them in their legal framework. This may give the impression of a lawless environment, but would not be entirely accurate. It is natural for the law to lag behind technological advancements. States cannot and should not regulate something they do not understand or cannot categorize. In order to regulate properly, states need to thoroughly examine and comprehend the potential benefits and risks of new technologies and their products. They should then decide whether new legislation is necessary or if existing laws can adequately address these technologies.

When there are no specific regulations, people may assume they can do whatever they want with new technologies. However, it is also unrealistic for lawmakers to create regulations for every new technology. Therefore, individuals should always seek out any existing regulations or potential regulations that may apply to their actions when conducting business or making money with these new technologies.

Taxable Events

When crypto assets are used for transactions, a taxable event may occur, and the taxation of crypto assets depends on how they are held and utilized. Please note that the following analysis of events, their definitions, and whether they can be taxable can change according to the tax regulations of any relevant jurisdiction and their understanding of such events.

Staking

Staking is a method of earning rewards for holding crypto assets and validating transactions. There are two main categories of staking, on-chain and off-chain, which can further be divided into subcategories. This complexity can make the analysis of staking methods challenging.

Staking is the active participation in transaction validation on a proof-of-stake (PoS) blockchain. Here, the participants lock up a specific amount of the crypto asset they hold as a stake, in other words as a collateral, to be eligible to create new blocks and verify transactions. The participant is also referred to as a validator, and the likelihood of being chosen as a validator is often proportional to the amount staked. Validators get rewarded with additional crypto assets for performing duties successfully. However, they may also face penalties like the loss of part of their staked funds if there is malicious behavior. Ultimately, staking is a key matter in PoS consensus mechanisms.

Generally, if a taxpayer uses their own hardware to validate transactions within a decentralized network, it can be considered active income. This requires an initial investment, technical knowledge, and a professional structure that generates charges. On the other hand, if the taxpayer uses a crypto assets trading platform to engage in staking and earn income, it can be considered passive income. This can be done without using personal hardware and can be accessed through a mobile device.

Airdrop

An airdrop is the distribution of tokens or coins to a group of wallet addresses as a form of promotion of community building initiated by blockchain projects that seek to raise awareness, reward loyal members, or attract new participants. Airdrops usually mean delivering a certain amount of tokens directly to the wallet of an eligible recipient, based on predetermined criteria like holding a specific crypto asset or even participating in an online activity or project with the goal of fostering engagement, increasing user base, and creating community within a project. Airdrops can be small in scale such as small giveaways but they can also vary to larger-scaled distributions tied to a project.

When it comes to airdrop activity, unless there is a consistent and stable promotional task that generates charges, it seems that we are not dealing with a business activity. Instead, it is the use of crypto-assets that generates occasional and irregular passive income.

Sometimes, taxpayers become beneficiaries of crypto-assets without intending to, and they may not even be aware of it. In these cases, there is no intention to make a profit from these assets.

Mining

When new units of digital assets are generated and transactions are added to the blockchain, this is called mining. In a proof-of-work system, miners compete, solving complex mathematical puzzles. The first to solve the puzzle gets granted the right to add a new block of transactions to the blockchain. Miners are then rewarded with newly created crypto assets and transaction fees for their efforts.

When crypto asset miners are paid for verifying transactions and adding them to the blockchain, it can lead to a taxable event. This means that the compensation they receive can be taxed as regular income, similar to how salaries are taxed. If the mining is done as part of a business, miners may be able to report the crypto asset as business income and deduct any expenses related to their mining operations from their tax obligations.

Capital Gains, Selling and Trading

If a person sells or trades crypto assets and makes a profit or loss, it is considered a capital gain or loss. This means that they may be required to pay taxes on the gain, similar to how investors are taxed on gains from other capital assets. Just like with stocks and other investments, if a person sells their crypto asset for a profit, they may be subject to capital gains taxes. However, if they sell the crypto asset at a loss, they do not owe any taxes, but they may still need to report the loss to the appropriate tax authorities.

Taxable events occur when investments are sold or exchanged, and also when different crypto assets are traded. The evidence indicates that the taxpayer is actively buying and selling crypto-assets with the goal of making a profit.

When selling crypto assets, individuals are required to report the income they made from the transaction based on the crypto asset’s value at the time of the sale. It is also taxable if the crypto asset is exchanged for fiat currencies like yen, euro, or U.S. dollars.

The cost basis of crypto assets traded for fiat money is determined by the amount of money and fees paid by the exchange. To calculate the capital gain or loss from the transaction, the cost basis is subtracted from the fair market value of the crypto asset.

Creation, Selling, Purchase, and Resale of NFTs

If someone consistently and intentionally creates and sells NFTs for profit, it can be considered a business or professional activity. In some cases, this can give the original creator similar rights to a copyright holder, and any income earned from this activity may be classified as intellectual property income.

Individuals who regularly buy and sell NFTs as their main business activity, and earn commissions or royalties through smart contracts, can be considered as generating income from intellectual property.

Depending on the country, such income may be exempt from taxes if certain conditions are met (e.g.: Türkiye).

The wide range of crypto-assets, including NFTs like digital collectibles and online game tools, raises questions about the taxation of gains from their sale. For example, if two children exchange NFT game tools and make a profit, it is unclear whether this should be considered a taxable event or just a personal transaction.

General Legal View on Taxation of Crypto Assets

Taxation is a major issue in the crypto asset industry because it has disrupted traditional economic structures and created new ways of earning and conducting business. However, the lack of clear regulations and definitions for crypto assets in certain jurisdictions complicates the process of determining how these assets should be taxed.

The tax implications of the crypto ecosystem depend on how crypto assets are legally classified. To determine if an asset or transaction is taxable, it is important to understand its legal nature. The classification of crypto assets as money, investment instruments, securities, commodities, or something else has different consequences for taxation. However, the OECD’s Crypto-Asset Reporting Framework and Amendments to the Common Reporting Standard acknowledges that it is difficult to have a single definition for all crypto assets due to their diverse characteristics. Instead, the report suggests considering the common features of crypto assets, such as their use of blockchain technology and the creation of financial assets through cryptography.

Taxation of crypto assets is still incomplete due to the differing approaches taken by different countries. Some countries consider crypto assets as intangible assets, while others view them as money, commodities, financial instruments, or derivatives. It is important for taxpayers to understand how their own jurisdiction treats crypto-assets.

The OECD’s Crypto Asset Reporting Framework and Amendments to the Common Reporting Standard

The OECD Committee on Fiscal Affairs approved the Amendments to the Crypto Asset Reporting Framework (“CARF”) and the Common Reporting Standard (“CRS”), through the International Standards for the Automatic Exchange of Information in Tax Matters for 2022/2023. The amendments to both the CARF and the CRS were adopted as part of a review of the International Standards for the Automatic Exchange of Financial Account Information in Tax Matters.

Unlike traditional financial products, without any central administration, crypto assets can be owned and transferred without the intervention of traditional financial intermediaries such as banks. New, unregulated intermediaries and service providers, such as crypto-asset exchanges and wallet providers, have also emerged as a result.

The OECD aimed to create a complementary compliance structure and this resulted in the emergence of the CARF, which contains model rules and interpretations similar to the CRS that can be enacted in national legislation that follows common reporting standards.

The CARF is designed to enable the collection and automatic exchange of information on transactions in Relevant Crypto Assets. According to the OECD report, “crypto asset” means a digital representation of value that relies on a cryptographically secured distributed ledger or a similar technology to validate and secure transactions.

“Reporting Crypto-Asset Service Provider” refers to any individual or Entity that, as a business, provides a service effectuating Exchange Transactions for or on behalf of customers, including by acting as a counterparty, or as an intermediary, to such Exchange Transactions, or by making available a trading platform.

On the other hand, a “Relevant Crypto Asset’’ is defined as any crypto asset that is not a Central Bank Digital Currency, a Specified Electronic Money Product, or any Crypto-Asset for which the Reporting CryptoAsset Service Provider has adequately determined that it cannot be used for payment or investment purposes. This term excludes three categories of crypto assets from reporting requirements that pose limited tax compliance risks.

“The first category is those Crypto-Assets which the Reporting Crypto-Asset Service Provider has adequately determined cannot be used for payment or investment purposes. This exclusion builds on the scope of the virtual asset definition of the Financial Action Task Force (“FATF”) and seeks to exclude Crypto-Assets that do not have the capacity to be used for payment or investment purposes.

The second category is Central Bank Digital Currencies, representing a claim in Fiat Currency on an issuing Central Bank, or monetary authority, which functions similarly to money held in a traditional bank account.

The third category covers Specified Electronic Money Products that represent a single Fiat Currency and are redeemable at any time in the same Fiat Currency at par value as a regulatory matter, in addition to meeting certain other requirements. Reporting on Central Bank Digital Currencies and certain Specified Electronic Money Products held in Financial Accounts will be included within the scope of the CRS.”

The CRS was introduced as a new information collection and reporting standard for financial institutions, and it envisages the collection of information from financial institutions in jurisdictions and the automatic sharing of this information with other jurisdictions every year, aiming to help combat tax evasion and protect the integrity of tax systems. It sets out the financial account information to be exchanged, the financial institutions required to report, the different types of accounts and taxpayers, and the common due diligence procedures to be followed by financial institutions.

The CARF is mainly composed of three main components;

• Rules and related Commentary that may be transposed to collect information from Reporting Crypto-Asset Service Providers that have a relevant connection to the jurisdiction implementing CARF. Reporting Crypto-Asset Service Provider indicates any person or entity that, as a business, provides a service that executes exchange transactions for or on behalf of clients, including acting as a counterparty or intermediary to exchange transactions or offering a trading platform. These Rules and Interpretations consist of four pillars:

a. The framework of Crypto Assets to be covered;

b. Legal Entities and natural persons subject to data collection and reporting requirements;

c. Transactions subject to reporting and the information to be reported in relation to these transactions; and

d. Due diligence procedures to identify users and controlling persons of crypto-assets and identify relevant tax jurisdictions for reporting and exchange purposes.

• CARF (CARF MCAA [Multilateral Competent Authority Agreement on Automatic Exchange of Information pursuant to the CARF]) and related Interpretations (or bilateral agreements or arrangements); and

• An electronic format (XML schema) that Delegated Authorities will use to exchange CARF information, as well as an XML schema that Reporting Crypto Asset Service Providers will use to report information to tax authorities, to the extent permitted by domestic law.

The reporting obligation under CARF applies to entities or individuals involved in the exchange of crypto-assets for clients. This includes exchanges, intermediaries, brokers, and dealers in Relevant Crypto Assets. The reporting obligation is determined based on factors such as tax residency, incorporation, management, regular place of business, and place of transaction in a jurisdiction that has adopted the standard.

The CARF defines three types of reportable transactions as (a) Exchange transactions between crypto-assets and fiat currencies, (b) Exchange transactions between different forms of crypto assets, and © Transfers of crypto assets, including large retail payment transactions.

Reporting is done on an aggregated basis, distinguishing between crypto-asset-to-crypto-asset and crypto-asset-to-fiat currency conversions.

The CARF also requires the reporting of holding and transfers of crypto-assets outside the scope of reporting, providing the number of units and aggregate value of transfers to wallets not associated with virtual asset service providers or financial institutions. Tax authorities may request further information on wallet addresses through the channels indicated by the OECD if they have compliance concerns.

Reporting Crypto Asset Service Providers will be subject to the rules set out in Section I (B) if they (i) are tax resident, (ii) are incorporated or organized, and have legal personality or are subject to tax reporting requirements, (iii) are managed, (iv) have a regular place of business, or (v) conduct Relevant Transactions through a branch located in a jurisdiction that has adopted the rules.

Legal Challenges of Double Taxation, Income Tax, and Value-Added Tax

Double Taxation

Double taxation occurs when a taxpayer gets subjected to a tax, on the same income or assets, in more than one jurisdiction. This can happen both on an international level and a domestic level. An international form of double taxation means two different countries or tax jurisdictions try to tax a taxpayer, at the same time or at different times, for the same income or asset.

A domestic form of double taxation can happen when different levels of government tax the taxpayer for the same income or asset. Double taxation can prove inefficient and burdensome results on taxpayers and often, most jurisdictions have laws preventing double taxation, and double taxation treaties are signed by governments to avert double taxation. International double taxation treaties are entered into with the aim of allocating taxing rights between the countries.

Double taxation of income occurs when the same income or profit made by a person is taxed by two or more tax authorities, either internationally or domestically. Double taxation of assets occurs in areas of real estate or financial assets. For example, if a person inherits an asset, they may be subject to an estate tax and later when the asset is sold or transferred, they might also be subject to a capital gains tax, thus taxing the same asset twice, at different times.

Commonly, tax credits, exemptions, and deductions are put in place to avoid double taxation of income or assets. It is also important to note that different jurisdictions may have different approaches to double taxation.

Double taxation of crypto assets can also occur when multiple jurisdictions impose taxes on the same crypto asset income or capital gain. Due to the global and decentralized nature of crypto assets, this also yields a more complicated playing ground. For example, when crypto asset transactions cross international borders, there is a likelihood of the taxpayer being subjected to tax liabilities in both their home country and where the transaction occurred. Here the existence of tax treaties that can offer tax credits, deductions, or exemptions can help avoid double taxation. Yet, this is not a given either as specific treaties may have different provisions depending on the countries involved. Therefore, taxpayers should keep records of their transactions, thoroughly, in order to avoid any penalties.

If a crypto asset is sold for profit, and is taxed as a capital gain, once the proceeds of the sale turn to fiat currency, the taxpayer may also be subject to income tax on the capital gains, which is seen in the US. Mining rewards are received typically as newly created crypto asset coins or transaction fees, which are also generally considered taxable income at their fair market value upon their receipt. Such mining reward being subject to income tax may later be subject to capital gains tax if the mined crypto asset is sold.

It is vital to keep detailed records of mining activities, with dates and values of rewards, expenses, etc. This will make it easier for compliance and reporting as well as international considerations. This means that if a crypto asset is mined in one country and sold in another, the taxpayer may be subject to tax obligations in both of these countries. Therefore, it is important to keep the details of the events.

Income Tax

Income tax is a tax that is imposed on the income of persons and entities within a certain jurisdiction. Wages, salaries, capital gains, interests, and business profits can all be forms of income that are taxed. Higher earners are often subject to higher taxes.

In order for income tax to be calculated, entities or individuals must report their income and their tax liability periodically in tax returns, determined by their specific jurisdictions. Then the tax authorities will determine the taxable income with, if any, specific deductions, exemptions, or credits to be applied. For example, in Türkiye and other jurisdictions, employers or financial institutions withhold taxes from the wages of employees and directly forward payments to the governmental tax authority on behalf of the employee/taxpayer. This can be helpful as missing filing deadlines or failing to comply with regulations will result in penalties or interests.

In the context of crypto assets, there can be a taxable event. Income tax is taken due to taxable events like receiving payment for services in the form of crypto assets or receiving mining rewards. These events can be considered taxable income. Further, the value of the crypto asset at the time of the taxable event is important in the determination of the taxable income. Again, it is important to keep records of the dates and details of the transactions in order to ensure accuracy and compliance.

In certain jurisdictions, deductions are made according to expenses. Therefore, taxpayers may be allowed to deduct certain expenses that occur as a result of activity relating to crypto assets. According to regulation or the approach of the tax authority, mining costs, transaction fees, expenses… etc. can be deducted from taxable income.

The actual payment of income tax resulting from crypto asset earnings is typically paid in the regulating country’s fiat currency. Here, the date of receipt and dates of transactions are highlighted again as the fiat currency equivalent of transactions being calculated accurately will save taxpayers from losses.

Value Added Tax

Value Added Tax (VAT) is a consumption tax put on the value added at each stage of production and distribution of goods and services, typically collected from end consumers. However, businesses in the supply chain can also pay VAT to the government. VAT offers a source of revenue for governments and, therefore, is based pretty broadly amongst jurisdictions. VAT is similar in most countries but can vary in its rate, exemptions, and requirements.

VAT differs from income tax in that it is levied based on the destination where the final consumption of the good or service being taxed occurs and is not based on the location of the taxpayer. There are double taxation treaties that address VAT and aim to avoid VAT being paid in multiple countries. In international trade, for example, VAT is imposed on the imports of goods and services, and the VAT payment is often made by the importer. Ultimately, VAT compliance can be complex, especially within the context of cross-border compliance.

The treatment of VAT on crypto assets can vary from jurisdiction to jurisdiction. In some countries, goods and services cannot be purchased with crypto assets thereby eliminating a conversation on VAT altogether. However, if the purchase of goods and services through crypto assets is allowed, the transactions may be subject to VAT, making the seller and the buyer have VAT obligations.

The Court of Justice of the European Union has previously issued an opinion in 2015 in the case of David Hedqvist where it ruled that the services of a Bitcoin Exchange in exchanging Bitcoin for a fiat currency is exempt from VAT on the basis of the currency exemption. In the VAT Committee Working Paper №892, it is stated by the EU Commission that this exemption could apply to the transfer of crypto assets. However, there are also events that don’t involve the transfer of an asset per se.

Article 135 of COUNCIL DIRECTIVE 2006/112/EC of 28 November 2006 on The Common System of Value Added Tax is as follows,

“Member States shall exempt the following transactions:

(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents;

(b) the granting and the negotiation of credit and the management of credit by the person granting it;

© the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;

(d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques, and other negotiable instruments, but excluding debt collection;

(e) transactions, including negotiation, concerning currency, bank notes, and coins used as legal tender, with the exception of collectors’ items, that is to say, gold, silver, or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest;…”

It can be argued that still, a majority of transactions can fall under this article of the VAT Directive, thereby exempting them from VAT payments.

EU countries have different views on the taxation of mining activities. In Germany, Ireland, Slovenia, and Sweden, mining activities are not subject to VAT. However, in France, income from mining activities is taxed as a provision of services.

The EU Member States have different approaches to taxing certain services related to digital assets. For example, Germany considers wallet services and clearing services for crypto assets as taxable events for VAT, while other countries exempt these services from taxation. Slovenia taxes online foreign exchange services but excludes wallet services and virtual currency exchanges from VAT. Italy exempts foreign exchange services from VAT, similar to other foreign currencies.

If we were to give examples of how VAT is applied to virtual currencies in non-EU European countries like the UK, we can see that mining is not subject to VAT because there is no direct connection between the services provided and the price, and there is no customer involvement in mining services.

On the other hand, exchanges involving virtual currencies are not subject to VAT, but VAT can be paid for goods or services that are exchanged using virtual currencies. In Norway, virtual currencies are used as a form of payment, and the exchange of virtual currencies is exempt from VAT if the virtual currency is used as an alternative payment method. Mining rewards are also exempt from VAT, but those who sell data processing power to others for mining purposes are subject to VAT.

In several countries, including Switzerland and Australia, the exchange of virtual currencies for other currencies or goods and services is not subject to VAT. Instead, the purchase of goods and services with virtual currencies is treated as a taxable sale. In Israel, individual investors in virtual currencies are not subject to VAT, but those involved in mining activities are considered sellers and liable for VAT. Overall, virtual currencies are generally treated as tax-oriented financial businesses exempt from VAT.

Prior to July 2017, the sales of virtual currencies in Japan were subject to VAT if the buyer was in Japan. However, a regulation was implemented in July 2017 that exempted stock exchanges from charging VAT on virtual currencies, as long as they met the criteria of being classified as crypto assets under the relevant law. Essentially, virtual currencies in Japan are now treated similarly to government currencies in terms of VAT.

As of January 1, 2020, Singapore does not impose taxes on the exchange of virtual currencies with other virtual currencies or legal currencies, and using virtual currencies as a means of payment for goods and services is also tax-exempt. However, mining services provided to identifiable parties are subject to tax. In South Africa, all transactions involving crypto assets are considered financial services and are exempt from VAT. In New Zealand, the taxation of crypto asset transactions is determined on a case-by-case basis, and crypto asset exchanges are exempt from GST. However, other related services such as mining or computing services may still be subject to GST.

Taxation of Crypto Assets According to Jurisdictions

When creating a legal framework in any area of law, it is important to first define the key terms and entities that will be regulated. This is particularly crucial in tax law, as it is necessary to establish clarity and certainty for taxpayers since tax law inherently restricts the rights of individuals.

To protect the interests of taxpayers and establish clear guidelines, it is important to define the rights and obligations of individuals in the realm of crypto asset taxation. The technical aspects of crypto assets, such as their classification as property or contracts, present challenges for effective tax assessment and collection. Additionally, the treatment of crypto assets varies between global tax systems and schedular tax systems. While gains from speculative trading can be easily taxed under a global tax system, categorizing these gains becomes more difficult in schedular tax systems where they may not fit into specific income categories.

Understanding the definition of crypto assets is crucial in comprehending their alignment with existing tax structures. In a majority of jurisdictions, these assets are deemed as property for tax purposes, falling under the category of crypto assets. However, countries adopt diverse approaches in categorizing these currencies within the established definition. While many refer to them as intangible assets, others classify them as commodities or financial instruments. Interestingly, some countries take a distinct stance, regarding these currencies as “a digital representation of value” (for instance, Poland) or as foreign fiat currencies (like Italy).

For example in South Africa, crypto assets are not seen as official currencies for tax purposes. Any profits made from crypto assets are subject to taxation. The South African Revenue Service categorizes crypto assets as intangible assets rather than currency or property. This means that selling crypto assets is considered a capital gains tax event.

In contrast, several nations advocate for distinct taxation protocols based on the scale of individual crypto asset mining ventures, distinguishing between small-scale endeavors often regarded as hobbies, larger-scale operations, and those conducted on a commercial level. Notably, countries like Finland and Denmark view mining as taxable income only if it surpasses the realm of a mere hobby, whereas Norway imposes taxes on both mining revenues and profits derived from crypto asset sales conducted on a commercial scale. Conversely, engaging in mining as a leisurely pursuit typically remains exempt from taxation.

Once again, it is worth noting that numerous nations have explicitly incorporated provisions in their legislation to exempt individuals who engage in small-scale production of reward tokens or pursue crypto asset mining as a hobby from taxation unless these tokens are subsequently traded or utilized in any manner. For instance, in countries such as Australia and Canada, individuals involved in the hobbyist mining of crypto assets are not subjected to tax obligations until they decide to trade their tokens. However, it is important to highlight that when these tokens are eventually traded, they become subject to taxation under the esteemed “capital gain tax” framework.

In Singapore, mining activities are considered hobbies and not taxed unless the person consistently and intentionally profits from them. In other countries like New Zealand and the UK, taxes may be imposed on mining rewards and the sale of crypto assets. In the US, crypto sales are subject to capital gains tax. Virtual currencies are not widely accepted as a form of currency for tax purposes, and most countries treat crypto assets as property for income tax purposes.

Several countries have different definitions for virtual currencies for tax purposes. Australia, France, Chile, Czech Republic, Luxembourg, Nigeria, Spain, Sweden, Switzerland, and the United Kingdom consider virtual currencies to be intangible assets. Argentina, Brazil, Croatia, Denmark, Israel, Japan, Slovak Republic, and South Africa classify virtual currencies as financial instruments or assets. Austria, Canada, China, and Indonesia define virtual currencies as commodities. Belgium, Côte d’Ivoire, Italy, and Poland view virtual currencies as currency. Japan considers virtual currencies as legal tender. The United States may define virtual currencies as capital assets.

Some countries, including Belgium, Ivory Coast, Italy, and Poland, consider virtual currencies to be similar to traditional currencies for tax purposes. Portugal does not tax crypto asset sales because it sees them as a form of payment rather than an asset. France taxes earnings from converting virtual currencies into traditional currency but exempts transactions between different crypto assets. Overall, there is no uniform approach among countries when it comes to taxing virtual currencies. Let’s have a more detailed look at some jurisdictions.

Türkiye

As much similarly to other jurisdictions, within Türkiye, tax can only be applied in accordance with legislation. There are three main forms of taxation in Türkiye. Income tax, taxes on expenditures (VAT, stamp duty), and taxes on wealth (inheritance tax, real estate tax). Turkish law also distinguishes between a fully-fledged taxpayer and a limited taxpayer. Fully fledged taxpayers are taxpayers who are residents of Türkiye or have resided in Türkiye continuously for more than six months of a calendar year, or Turkish citizens who reside in foreign countries due to the works of offices or establishments which are affiliated with official establishments headquartered in Türkiye. On the other hand, a limited taxpayer is a person who is not a resident of the country and is only taxed on their earnings and revenues in Türkiye.

According to article 65/1 of the Income Tax Law Numbered 193, earnings arising from all kinds of self-employment activities are regarded as self-employment income. The law then goes forward and defines what self-employment activity is, as the performance of non-commercial works based on personal work, scientific or professional knowledge rather than capital, under personal responsibility, on one’s own behalf and account, without being subject to an employer.

In other words, in order to be considered as self-employment there are four elements that the law sets out. Firstly, the performance of the activity should be that of non-commercial work. Secondly, the performance of the activity must be based on personal work, scientific or personal knowledge without being based on capital. Thirdly, the self-employment activity shall be performed under the person’s own personal responsibility, and finally, the person performing the self-employment activity shall not be subject to an employer.

Within the Regulation on the Non-Usage of Crypto Assets in Payments, crypto assets are defined as non-material assets created virtually using distributed ledger technology and similar technology, distributed over digital networks, but not classified as fiat money, book money, electronic money, a means of payment, securities, or other capital assets.

If crypto assets are considered intangible assets, under the Income Tax Law it is still not certain which of the types of income and revenue can apply to crypto assets. However, due to a lack of direct legislative text on this, crypto assets are yet to be evaluated within the scope of Income Tax Law. It can be said that within the framework of the Income Tax Law, the income and revenue of crypto assets falls under the “commercial income” subject to income tax.

Here is a list of gains and revenues that constitute an income in terms of the Income Tax Law of Türkiye:

• Commercial profits,

• Agricultural profits,

• Wages,

• Self-employment earnings,

• Income from real estate capital,

• Income from movable capital (securities, bonds, etc.)

• Other gains and incomes.”

Excluding the special exemptions, if a taxable event falls into the list provided above, then, such income whether it is crypto or not will be most probably taxable.

To sum it up, if a taxable event occurs, then, whether or not such a taxable event occurs via a crypto asset or not is irrelevant. For example, if a person acts in a way that entitles that person to receive a payment that may be considered as a self-employment income, then, self-employment income tax will be most probably applicable to that payment which may in fact be a crypto asset.

In April 2020, the Central Bank of Turkey implemented regulations that banned the use of crypto assets for payments of goods and services. The Banking Regulation and Supervision Agency also stated that crypto assets are not considered virtual money under the relevant laws.

Furthermore, even though it is strictly forbidden for anyone to use crypto assets as a means of payment, if a person or entity sells goods or services via crypto assets, or basically receives payment via crypto assets, then this received payment may be taxable depending on the nature of the transactions.

Crypto assets are considered an asset in Turkey but cannot be used for payments as aforementioned. The country has implemented regulations requiring crypto firms to comply with anti-money laundering and terrorism financing standards in regards to KYC and AML. Previously, these companies were not subject to such regulations, but now they must adhere to the same policies as other financial institutions. The Financial Crimes Investigation Board supervises crypto firms in Türkiye, and according to the new rules, goods and services cannot be paid for with crypto assets. However, trading crypto assets as investment tools is still allowed, while buying, selling, or transferring crypto assets through payment services on crypto platforms is now prohibited.

Türkiye, along with other countries, is still debating how to classify and tax crypto assets. The main concern is determining which earnings should be subject to taxation. We are seeing that such transfers can be subject to income tax within Türkiye for now.

The U.S.A

The Internal Revenue Service (IRS) treats virtual currency as property for federal tax purposes. This means that the general tax rules for property transactions apply to transactions involving virtual currency. The IRS specifically defines convertible virtual currency as any virtual currency that has an equivalent value in real currency or acts as a substitute for real currency. Bitcoin is given as an example of a convertible virtual currency. The reason why Bitcoin is not taxed as a foreign currency in the United States is because it is not considered a legal tender in any country, and therefore cannot be classified as a foreign currency. Although some countries accept crypto assets as legal tenders, the IRS still considers them as property based on the IRS Notice.

The IRS uses guidance from FinCEN to provide a detailed explanation of convertible virtual currencies. This guidance confirms that virtual currencies are legal in the US and defines various entities involved in crypto-asset transactions.

The IRS Notice clarified that crypto assets in the US are considered property, not foreign currency. However, it was uncertain what kind of tax should be paid on purchased crypto assets. The New York State Department of Taxation and Finance answered the question regarding sales taxes in crypto-asset transactions. They stated that although crypto asset trades are considered barter agreements, no sales tax would be applied because virtual currencies are considered intangible property. This tax status does not affect capital gains taxation, which is based on the increase in value of the asset from acquisition to disposal.

The IRS has stated that the type of gain or loss from selling or exchanging crypto assets depends on whether the virtual currency is considered a capital asset for the taxpayer. If it is a capital asset, the taxpayer will realize capital gain or loss. If it is not a capital asset, the taxpayer will realize ordinary gain or loss. Additionally, if a taxpayer successfully mines virtual currency, the fair market value of the currency at the time it is received is considered taxable income.

Profits made from selling crypto-assets that are not considered securities will now be taxed as capital gains at a rate set by the IRS. However, if these profits come from selling crypto-assets that have been held for 365 days or more, they will not be subject to this tax. This rule applies to both assets acquired before and after January 1, 2023. The capital gain will be calculated by subtracting the acquisition value from the realization value. Any losses can be carried forward for up to 5 years.

The meaning of “profitable disposal” is uncertain in this context. It is unclear whether it refers to exchanging crypto-assets for legal tender or stablecoin, converting crypto-assets to other crypto-assets, or only the first option. The answer to this question depends on when the tax obligation begins. If the moment when the crypto-assets gains are available on the platform is considered, then converting crypto-assets to other crypto-assets could be included. However, if only the moment of conversion to stablecoin or exchange of crypto-assets for legal tender within the platform is considered, it does not currently seem possible.

The IRS allows taxpayers to differentiate their transactions with crypto assets, but they must report all of these transactions for the year. Failure to comply with tax laws, including underpayment, may result in penalties. Taxpayers can avoid penalties if they amend their tax returns in accordance with IRS Notice 2014–21 unless they can show reasonable cause to the Commissioner of the IRS.

The US tax system for crypto assets is comprehensive but lacks answers for certain issues. There are arguments against taxing “miners” who earn bitcoins through validating transactions, as their efforts are not directly comparable to artists creating art. It is suggested that the IRS may be too broad in categorizing miners’ rewards as income.

The Tax Authority may ask individuals to provide proof of income obtained through crypto-assets, even if they are not required to report them to the IRS. It is important to keep comprehensive documentation, such as bank account transfers, correspondence with the platform, email confirmations, chat messages, and various file types, including Excel files, screenshots, and statements from the platform.

The treatment of crypto assets by the IRS may seem beneficial to taxpayers, but it creates difficulties in record-keeping and enforcement. This hinders the use of crypto assets as a transactional currency. The IRS’s requirements for crypto asset users to track purchases and calculate the changing value of the relevant crypto asset are burdensome. Additionally, the complex and unclear tax reporting requirements create confusion for consumers, businesses, and service providers. The lack of guidance on determining the cost basis of crypto assets can result in tax penalties for taxpayers. The IRS needs to provide more clarification, which puts strain on an already resource-limited agency. These challenges will ultimately limit the growth and use of crypto assets.

The European Union

The European Commission proposed the establishment of a framework that would make crypto asset service providers (“CASPs”) report transactions conducted by their clients in the European Union, on December 8th, 2022. The primary goal of this proposal is to assist tax authorities in monitoring the trading of crypto-assets and the resulting profits, ultimately reducing the risk of tax fraud and evasion. Subsequently, on October 17, 2023, the Council approved a directive that amends the European Union’s Directive on Administrative Cooperation (“DAC”) in taxation.

The amendments to the DAC come in the form of DAC8 with a focus on reporting and the automatic exchange of information related to income from crypto-asset transactions and advance tax rulings for high-net-worth individuals. The directive’s overarching objective is to enhance the existing legislative framework by expanding the scope of registration and reporting obligations, and promoting greater administrative cooperation among tax authorities.

DAC8 also encompasses a wider range of assets and income sources, including crypto assets. The automatic exchange of information between tax authorities, which must be provided by crypto-asset service providers is mandated. This directive encompasses various types of crypto-assets, building upon the definitions established in the Regulation on Markets in Crypto-Assets (MiCA). It encompasses crypto-assets issued in a decentralized manner, stablecoins, including e-money tokens, and specific non-fungible tokens (NFTs).

The key objectives of DAC8 are:

• Expanding the scope of automatic information exchange under DAC to include data that must be reported by CASPs regarding transactions involving crypto-assets and e-money. This addresses the challenges posed by the digitalization of the economy. The provisions related to due diligence, reporting requirements, and other rules for CASPs will align with the Crypto-Asset Reporting Framework (CARF) and amendments to the Common Reporting Standard (CRS) prepared by the OECD at the G20’s request.

• Extending the current rules on the exchange of tax-relevant information to include the exchange of advance cross-border rulings for high-net-worth individuals and the automatic exchange of information on non-custodial dividends and similar income. These changes aim to reduce the risks of tax evasion, avoidance, and fraud, as the existing DAC provisions do not cover this type of income.

• Modifying various existing provisions in DAC, such as improving the rules for reporting and communicating Tax Identification Numbers (TIN) to facilitate tax authorities’ tasks in identifying taxpayers and assessing taxes accurately.

The directive was unanimously adopted by member states in the Council and will soon be published in the Official Journal. It will come into effect on the twentieth day following its publication.

Germany

The German Ministry of Finance has stated that crypto assets are not electronic money or foreign currency, but rather a measuring unit. While they cannot be considered money in the traditional sense due to their volatility and limited acceptance, individuals can still use them as a medium of exchange if all parties agree. Therefore, for tax purposes, crypto assets may be considered foreign currencies and subject to taxation. Users will be taxed on the income or profit they gain within one year, but any income or profit from selling crypto assets after one year of acquiring them will be tax-free.

In Germany, crypto assets are considered a type of intangible asset with specific tax implications when sold. If individuals sell their crypto assets within a year of acquiring them, it is considered a taxable sales transaction with a minimum tax-free threshold of EUR 600. However, if the sale occurs more than a year after acquiring the asset, it is not subject to taxation as aforementioned.

The UK

The UK did not initially have any specific regulations for crypto assets and instead relied on existing laws. The Bank of England also did not provide any official statements about virtual currencies for a while. However, the taxation of crypto assets was one of the first topics addressed and has been continuously developed by the HM Revenue and Customs (“HMRC”).

The Bank of England acknowledges the three primary functions of money according to modern economics: its use as a medium of exchange, its function as a store of value, and its ability to be used as a unit of account or to price goods and services.

There is disagreement among experts and authorities on whether crypto assets serve the same functions as traditional money. While most agencies are hesitant to consider crypto assets as money, some courts have recognized them as such in order to subject crypto asset transactions to specific regulations.

For tax purposes, crypto assets are considered unique and cannot be compared to other forms of investment or payment. For example: the taxation of bitcoin transactions in the UK depends on the activities and parties involved, with potential taxes including corporate tax, income tax, and capital gains tax. The HMRC recognizes that some transactions may be so speculative that they are not taxable, similar to gambling winnings. The tax treatment of crypto assets has become more refined, with capital gains tax applying to gains and losses and similar exemptions as other types of assets.

The government does not consider crypto assets to be money for tax purposes. The Governor of the Bank of England acknowledges that crypto assets can only act as money for some people and to a limited extent. Other international policymakers believe that crypto-assets do not have the essential qualities of sovereign currencies. Further, there is concern that crypto assets could be used for tax evasion due to their anonymity.

According to UK authorities, crypto assets are a type of asset that is digitally secured and can be transferred, stored, or traded electronically. Crypto assets include different types of tokens, such as exchange tokens, security tokens, and utility tokens. Exchange and security tokens are of particular regulatory interest because they are likely to be traded or generated in ways that have tax implications.

The UK taxation instructions for crypto assets focus on individuals and their income tax obligations. Companies holding crypto assets are subject to corporate income tax rules. The HMRC takes a practical approach to the evolving technology of crypto assets and bases its tax treatment on facts rather than terminology. The HMRC considers crypto assets as a personal investment and charges Capital Gains Tax when they are disposed of. The concept of disposal includes selling, exchanging, using for payments, or donating. The UK system has pooling rules that determine the cost of disposed assets, making it more advanced than the US system. Treating crypto assets as property instead of currency may reduce transaction volume due to increased reporting requirements.

Taxing crypto assets as property requires individuals to keep detailed records of all their transactions, as it is difficult for the authority to gather this information on its own due to the decentralized nature of the tokens. This means that even buying a drink with a crypto asset would be considered a disposal scenario, requiring individuals to calculate capital gains or losses and report any obligations that may arise. Therefore, anyone using crypto assets as currency on a daily basis would need to keep track of all transactions, as the volatility of crypto assets could result in different disposal prices for each transaction. Treating crypto assets as property does have some potential benefits, such as a lower tax rate compared to general income tax.

Firstly, it allows individuals to benefit from the yearly capital gains tax-free allowance of GBP 12,000. This means that they can make up to GBP 1,000 of capital gains each month from selling crypto assets without paying any taxes. This benefit can even be doubled if the crypto assets are donated to a spouse or civil partner. However, these tax advantages primarily benefit investors using crypto assets as investments rather than as a currency. Investors can easily keep track of their transactions and take advantage of reduced tax rates and exemptions.

On the other hand, consumers using crypto assets for transactions may struggle with their reporting obligations, as marketplaces may not have the required transaction record structure. Additionally, the volatility of crypto assets can result in smaller gains or even losses. Treating crypto assets as property instead of as currency may discourage their adoption and usage as a means of exchange, as it could drive out investors seeking long-term tax advantages.

Canada

In Canada, crypto assets are considered to be digital representations of value and may be used as a medium of exchange if the parties wish. The Canada Revenue Agency (“CRA”) often is seen to treat crypto assets as commodities.

The CRA assumes the incomes that arise from transactions made with crypto assets to be business incomes or capital gains. However, depending on the nature and circumstances of the transaction this approach may change. Furthermore, if earnings through crypto assets may qualify as business income or capital gain, then they might as well be considered losses to be treated as business losses or capital losses.

Taxpayers who are subject to Canadian Tax Law must 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.

Ultimately, crypto assets are subject to capital gains and ordinary income tax in Canada. In regard to ordinary income tax, when a crypto asset is earned the income will be recognized on the fair market value of the crypto asset at the time of the receipt. This can be seen in staking and mining events. Regarding capital gains tax, depending on how the price of the crypto asset has changed since when it was received to when it was disposed of, the taxpayer can make gains or incur loss.

Australia

The Australian Taxation Office (“ATO”) finds that crypto assets are to be treated as digital representations of value that are transferable, storable, or tradeable electronically. ATO’s Crypto Asset Investments page draws the groundwork for the taxation of crypto assets.

The ATO states that crypto assets used as investments become a capital gains tax (CGT) asset. If a crypto asset is acquired as an investment, transactions like disposal, exchange, and swap are considered CGT and the acquirer may obtain capital gain or capital loss. ATO states that net capital loss cannot be deducted from other incomes but capital gains can be reduced by using the CGT discount if the crypto asset is held by the acquirer for at least 12 months.

Income made from crypto assets can be subject to income taxes at the ordinary marginal rate of the taxpayer. Therefore, income made through mining, staking, airdrops, interest, rewards, etc. is taxable.

Singapore

Singapore has established itself as a major global trade hub and has implemented tax policies to facilitate trade and e-commerce. The legal status of crypto assets in Singapore is not clearly defined. According to the Singaporean Currency Act, crypto assets are not considered legal tender or currency.

The Singaporean income tax law includes crypto assets. Income derived from crypto asset sales and initial coin offerings (ICOs) are subject to taxation. This applies to both individuals and issuing entities. Realization gains from the sale of the issued crypto asset and other crypto assets obtained from an ICO are also taxable.

Singapore does not have a capital gains tax, but if the proceeds from selling crypto assets are considered income, they are subject to income tax. Whether or not crypto asset sales are considered income depends on certain factors, such as the nature of the subject matter, how long it was owned, how frequently transactions occurred, and other relevant circumstances.

If the income from selling crypto assets is considered income in Singapore, the next question is whether this income is sourced in Singapore. However, it may be difficult to determine the source of income for decentralized crypto assets. The Inland Revenue Authority of Singapore (IRAS) will likely consider factors such as the exchange used to sell the crypto asset and the location of the individuals making the decision to sell. If the individuals are located in Singapore, the gains will be considered Singapore sourced income. Additionally, there is no fringe benefits tax (FBT) in Singapore, and all gains and benefits received by an employee related to their employment are considered taxable income, with some limited exceptions.

The IRAS does not clearly define whether crypto assets are considered assets or currencies for income tax purposes. Instead, they state that crypto assets are subject to normal income tax rules and provide guidance on how to determine capital gains and income from crypto-asset exchanges and sales. Generally, individuals who buy and sell crypto assets as a business are taxed based on the profits from their sales. However, if the crypto assets are purchased for long-term investment, any profits from selling them will be considered capital gains and will not be taxed.

UAE, Dubai

The UAE is considered the third-largest crypto asset market in the Middle East, with transactions worth around $26 billion. The Dubai Financial Services Authority has included regulations for crypto assets in its business plan for 2021. The Securities and Commodities Authority in the UAE issued regulations in 2020 to clarify the use of crypto assets as a form of payment for goods and services.

Dubai stands out in comparison to the other jurisdictions that have been discussed. While there have been many steps taken in forming up-to-date regulations on crypto assets in Dubai, as of the date of this paper, Dubai has no income tax, capital gains tax, or staking tax put in place for crypto assets. This makes Dubai a hotspot, with an influx of investors moving to the city to continue their operations.

LEGAL DISCLAIMER

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 LOCAL EXPERTS IN RELEVANT AREAS BEFORE TAKING ANY ACTION BASED ON ANY INFORMATION CONTAINED HEREIN.