Blockchain and Cryptocurrency Law Part II

5- Cryptocurrencies

Cryptocurrency, on the other hand, emerged as part of blockchain technology, representing a digital currency system that is not subject to any country or central authority, enabling direct peer-to-peer transactions without intermediaries. In this decentralized system based on a peer-to-peer network, there is no central authority regulating the money supply. Transactions occur through the Proof of Work (POW) system (e.g., Bitcoin) where miners repeatedly apply a cryptographic hash algorithm to the selected block, finding a hash value that conforms to the chain rules and adding a new block to the chain. Miners who find the correct hash value are rewarded with a certain amount of newly minted cryptocurrency. In recent times, some blockchains have transitioned to the Proof of Stake (POS) system (e.g., Ethereum), where miners propose new blocks by demonstrating their stake (placing assets at risk) in the cryptocurrency. If they propose the wrong block or fail to comply with the chain rules, they automatically have a portion of their staked cryptocurrency reduced (slashing). If they propose the correct block, the system rewards them with newly minted cryptocurrency. This approach ensures that miners cannot disrupt the chain significantly without incurring significant losses, thus confirming the system's secure operation.

Bitcoin, introduced in 2009, is one of the most well-known and oldest cryptocurrencies, but today there are hundreds of different cryptocurrencies with names such as Ethereum, Ripple (XRP), Litecoin, Bitcoin Cash, and Cardano.

While Turkish law and regulations encompass the concept of "electronic money," there has been no regulation or definition to date regarding cryptocurrencies in Turkey, except for the exception made by the Central Bank of the Republic of Turkey ("CBRT") in the Regulation on the Non-Use of Crypto Assets in Payments dated April 16, 2021. However, as cryptocurrencies gain increasing importance and given technological developments, it is inevitable that detailed regulations will be made in this field in the near future.

6- Taxation of Cryptocurrencies

When we have a look at our tax law regulations, there is currently no tax regulation regarding cryptocurrencies. Essentially, due to the principle of legality of taxation, it can be said that gains derived from cryptocurrencies are not subject to income tax under the existing legislation. In this context, firstly, the relevant legal regulation is required for the taxation of cryptocurrency gains. Otherwise, it will be in violation of Article 73 of the Turkish Constitution, which states that taxes will be enacted and abolished by law. Due to the principle of non-retroactivity of tax laws, the new regulation can only be applied to events occurring after its publication.

While it is understood that the authorities are considering this matter in the same direction, in a Ruling provided by the administration, it has been stated that sales of coins (game tokens) made in a manner that does not demonstrate continuity with the aim of generating profits, but is in accordance with our current tax regulations, are considered as incidental commercial income. However, it is indicated that if coin sales are made within a continuous organizational framework, this income should be taxed as commercial income. By analogy, it is possible to consider cryptocurrencies within the scope of this interpretation.

In lending transactions taking place in the blockchain environment, the taxation of interest income obtained by lenders in exchange for the funds they provide may vary depending on the definition of crypto assets. Since these incomes are considered passive income, depending on the definition of crypto assets, it is possible to consider such income as capital gains from movable or immovable property.

The United States, which is a hub for global technology leaders, considers cryptocurrencies not as money but as "property." Therefore, "crypto assets" that are not considered as currency are not subject to income tax. Nevertheless, American taxpayers declare their transactions with crypto assets in their annual tax returns using the dollar exchange rate. Cryptocurrencies considered as movable property are subject to "property/capital gains tax," and crypto assets purchased from other countries are also declared and taxed. This system has created confusion for American taxpayers, so a permanent solution is expected to be developed in the future.

As mentioned above, cryptocurrency transactions, which are generally conducted on exchanges, are subject to commission income for these exchanges in exchange for the fee they charge per transaction. In some countries, these commissions are not subject to Value Added Tax (VAT) because they are considered financial services. However, in Turkish tax regulations, this is different. Although there is an exception for financial services in the context of the VAT Law, this exception applies only to certain institutions such as banks, insurance companies, and bankers. Cryptocurrency platforms cannot benefit from this exception since there is no specific regulation for them in current legislation. However, if cryptocurrency platforms are regulated by the Capital Markets Board (CMB), changes may be made in existing legislation, and cryptocurrency platforms may be classified as bankers. In this case, commission income earned by cryptocurrency platforms may be subject to the Banking and Insurance Transactions Tax (BITT).

In the United States, which is at the forefront of global technology, cryptocurrencies are considered "property" rather than "currency." Therefore, cryptocurrencies that are not considered as "currency" are not subject to income tax. Nevertheless, American taxpayers declare their transactions with cryptocurrencies in their annual tax returns based on the dollar exchange rate. Although considered as property, cryptocurrencies classified as "capital property" are subject to capital gains tax. This system has created confusion for American taxpayers, and it is expected that a permanent solution will be established in the future.

As mentioned earlier, cryptocurrency transactions often take place on exchanges, and these exchanges earn commission income per transaction. While some countries do not apply Value Added Tax (VAT) to these commissions because they are considered financial services, Turkish tax regulations differ. Despite the exception for financial services under the VAT Law, this exception applies only to specific entities such as banks, insurance companies, and bankers. Cryptocurrency platforms cannot benefit from this exception due to the lack of specific regulations for them in the current legislation. However, if cryptocurrency platforms are regulated by the Capital Markets Board (CMB), changes may be made in existing legislation, and cryptocurrency platforms may be classified as bankers. In this case, the commission income earned by cryptocurrency platforms may be subject to the Banking and Insurance Transactions Tax (BITT).

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