Changes in Cryptocurrency and income tax

Increasingly present in the most diverse types of transaction, cryptocurrencies have experienced enormous volatility in recent months, many of them with an intense decline. Bitcoin, for example, hit its lowest level since December 2020, reaching $25,000, a decline of nearly 20% in value over the last five trading days and 45% year-to-date.

This rapid evolution of cryptocurrencies and their volatility raise questions about the future of these assets, more specifically about how tax relationships will look in the face of the emergence of new technologies.

The fact is that real-world transformations, such as the more frequent use of cryptocurrencies, are advancing very quickly and leaving tax rules obsolete. How can we adapt existing norms to what was once futuristic and is now real in our lives?

The Brazilian currency is the Real (Law nº 9.069/95), so cryptocurrencies cannot be used as currency in our transactions. This is a legal limitation. Cryptocurrencies, like the Dollar and the Euro, can be measured using the Real, but cannot be confused with it.

Last April 26, the Federal Senate approved Bill No. 4,401, better known as the Cryptocurrency Regulatory Framework, which must now be reassessed by the Chamber of Deputies. Under this regulatory framework, cryptocurrencies are virtual assets, defined as the digital representation of value that can be traded or transferred by electronic means and used for making payments or for investment purposes.

But the legal nature of cryptocurrencies is still under discussion: the Federal Revenue Service of Brazil (RFB), for example, defined cryptocurrency as a financial asset, which can be subject to transactions, thus using the same concept with which it defines shares. Based on this interpretation, the tax rules would apply.

On the one hand, we have a legal/regulatory limitation. On the other hand, an interpretation by the tax authorities, corroborated by the text of PL 4.401, that it would be possible to use cryptocurrency as a financial asset in transactions. What, after all, should we consider? Will we be able to use cryptocurrencies, and be subject to tax rules? Or will cryptocurrencies just be a benchmark, just like foreign currencies? The answer goes beyond the IRS’s claim to tax.

The ownership of cryptocurrency, per se, should not be subject to taxation, after all it is an asset. Amounts greater than BRL 5,000 invested in cryptocurrencies (like any asset) must be declared to the Tax Authorities in the “Assets and Rights” form of the income tax return, constituting a portion of the taxpayer’s assets. And, as with any good, upon disposal, with its exchange for national currency (real), one must assess whether or not there was a capital gain – comparing the purchase value and the sale value. Income tax is levied when there is a gain on these sales, like any good.

 

In the exchange of one cryptocurrency for another, would there be the application of income tax?

In COSIT Consultation Solution nº 214/21, the Federal Revenue interprets the exchange of cryptocurrencies as a hypothesis of income tax incidence. It’s a confusion of concepts. Exchange, without return, does not represent gain and, therefore, there is no hypothesis of tax incidence. Only when the cryptocurrency is converted into Reais and the gain is verified would the tax be due.

The rationale lies in the fact that cryptocurrencies are not treated as currencies, despite being used and often referred to as such. As a financial (or virtual) asset, cryptocurrencies must be taxed if, and only, when their disposal takes place with income (currency), at which time their owner will be subject to the verification of capital gain in the event and the payment of income tax on the respective gain.

Applying tax rules to a technology as surprisingly fast as cryptocurrencies is a challenge for all of us. The discussions are valid and important to follow the developments of new technologies and the effects of the applications of pre-existing law.

For now, watch out for exaggerations.

By Ana Helena Morello Teixeira

Attorney at Candido Martins Advogados.

anahelena@candidomartins.com.br