Tax Authorities Wake Up to LatAm’s Increasing Crypto Adoption

Latin America mobilized $353.8 billion in cryptocurrencies between July 2020 and June 2021 as the region’s tax authorities begin to take an interest

Latin America mobilized $353.8 billion in cryptocurrencies between July of last year and June 2021, according to Chainalysis.
December 28, 2021 | 06:23 PM

Bloomberg Línea — The world of crypto is not only famous due to Google searches, where it achieved maximum popularity in 2021 according to the company’s data, but also for the amount of money it moves. Transactions have already surpassed the billions of dollars, making it more and more difficult for the world’s governments to ignore the burgeoning business. And it is not only central banks that have started paying attention to the development of the sector, but also the region’s tax authorities.

The U.S. is an example of that. Together with Canada, the country mobilized $756 billion in cryptocurrency between July 2020 and June 2021, according to a report by Chainalysis. That represented 18% of the global value, and which is equivalent to 3% of the U.S. economy, as the authorities get round to the idea of regulating the sector.

In President Joe Biden’s infrastructure package, one of the flagship programs of his government, there is an article that obligates that all transactions carried out in digital assets with a value of over $10,000 be reported to the Internal Revenue Service (IRS). It is estimated that the requirement could bring in revenues of $28 billion over 10 years.

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Read More: 2021: Crypto’s Wild Year Will Go Down as One for the Ages

Latin America has also been part of this trend. The region, according to the Chainalysis report, mobilized $353.8 billion in cryptocurrencies between July 2020 and June 2021. Not only is that more than some economies of the region produce in one year, such as Colombia or Chile, but it represents approximately 9% of all crypto transactions globally.

That is why, if countries are trying to widen their tax base, these transactions in the region begin to appear on the radar. According to the Annual Global Crypto Tax Report drawn up by PwC, there are six Latin American countries on its index of evaluation of how tax has been imposed on cryptocurrencies, and which have begun to be considered as the patrimony of those who use them.

The Clearest Regulators

In Latin America, Colombia leads the ranking drawn up by PwC, and which measures the degree to which taxes on transactions of digital assets are clear, despite there not being specific legislation to impose taxes on crypto.

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These tokens are considered intangible assets that form part of a person’s wealth, and when a transaction is carried out it is subject to tax on revenues, according to the PwC analysis. Something similar occurs with cryptocurrency mining, an activity that allows them to be obtained in exchange for resolving mathematical problems. Colombia’s tax authority has established that this activity is a service and that cryptocurrencies are a payment in kind that should be subject to income tax.

An analysis by Amcham Colombia adds that activities related to the buying and selling of cryptocurrencies have no bearing on value-added tax, as “as it is not related to intellectual property and therefore does not comply with VAT”.

The U.S. and Canada mobilized $756 billion in cryptocurrencies between July 2020 and June 2021, according to a report by Chainalysisdfd

For Carlos Mesa, president of the Fundación Colombia Bitcoin, there has not been clarity with regards to the fiscal responsibilities of trading in these digital assets. Colombia began a pilot project for handling crypto assets, regulated by the country’s financial watchdog and in which the country’s largest banks participate, although, as far as Mesa is concerned, there has been a lack of directives regarding taxes.

At this time there is a lack of clarity, or a special bracket needs to be created for cryptocurrencies so that there are some specifics and to make tax payment easier. It would be much more interesting, we are keen for that to happen, and it would be a result of the pilot project, Mesa added.

Another of the countries that comes out well in the ranking drawn up by PwC is El Salvador, which this year became the first country to accept crypto as legal tender. And it was precisely the law that allowed that which made it clear that it could be used for tax payments, and which establishes that transactions in cryptocurrencies are not subject to capital gains tax.

Furthermore, President Nayib Bukele announced at the end of November the first ‘Bitcoin City’, located in the coastal city of Conchagua, and which will be financed by funds based on crypto. Bukele promised that the city would not have to pay practically any taxes, except for VAT, while taxes on housing, income, capital and municipal rates would have a 0% tax rate.

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“The only taxes that ‘Bitcoin City’ will have is VAT, half will be used to pay the municipality’s bonds and the rest will be used on public infrastructure,” Bukele said.

Read More: Crypto Is the ‘Obvious’ Latin America Investment, SoftBank Says

In the continent’s southern cone, Argentina has also showed signs of imposing fiscal responsibilities on cryptocurrencies. According to a decree published on November 17, transactions involving cryptocurrencies will now be subject to a so-called check tax, and which were not previously treated as cash transactions.

This tax is charged at a rate of 0.6% on banking transactions. In addition, according to Bloomberg, capital gains obtained from crypto will be subject to income tax from 2017.

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Other Cases in Latin America

Colombia and Argentina are not the only countries that are headed toward imposing taxes in the region.

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The guide to taxation on cryptocurrency and bitcoin drawn up by Buda, one of the region’s largest crypto exchange agencies, indicates that in the case of Chile, if a person received earnings from the sale of such assets, the person would be subject to taxation. The same happens when they are purchased or when goods and services are paid for with cryptocurrencies.

In the event of receiving a payment with these tokens, it would be considered payment in kind, and could be used to calculate the taxable income.

Something similar occurs in Peru, where the disposal of cryptocurrencies counts for income tax purposes, just as they would have a tax liability if these mined assets are received.

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Paraguay, although it does not appear in the PwC index, has a law regarding intangible assets, which establishes that any crypto holder should enter the currency into accounts as an exchangeable asset. However, according to Juanjo Benítez Rickman, CEO of Digital Assets, a crypto company operating in that country, there is still a lack of knowledge regarding this regulation.

“The tax to be paid would be 10% at the time of selling, if it is sold at a higher price than it was bought for, and in that way generates profit,” he said.

Clarity is Not a Norm

Panama and Mexico are also included in the index prepared by PwC, although they are ranked at the bottom. In the case of the former, despite the fact that a bill has been drawn up to regulate cryptocurrencies, the consulting firm’s analysis considers there is no clarity on how the tax regime should be applied to this industry.

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“Activities carried out through this or any other instrument of that category are not under the jurisdiction of the Superintendency of Banks of Panama, or the Superintendency of the Securities Market of Panama. However, these regulators do not prohibit cryptocurrencies and are currently neutral,” the report warns.

Mexico also has no regulation or fiscal guidelines on the taxation of cryptocurrencies and even the central bank has said that cryptocurrencies are not a recognized means of payment, although there is no express restriction of their use.

In addition, there is no VAT or goods and services tax regime for the industry, the PwC document adds.

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Despite this, the consulting firm stresses that the pace at which cryptocurrencies have advanced has gone hand in hand with the regulations that governments around the world are beginning to develop, including the taxes they charge, because the adoption of crypto is beginning to be such that the tax authorities, which until now had remained silent, will have to start talking about it.

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