The topic of cryptocurrencies was brought to us by advances in society and technology without giving us time to prepare and analyze their tax treatment. We will focus on cryptocurrencies and not on other types of crypto assets and we will ignore the issue of the territorial application of the tax so as not to complicate the issue.
There are different ways for taxpayers to acquire cryptocurrencies: they can buy them, they can receive them as capital contributions, they can receive them as payment in a purchase transaction, etc.
We will not exhaust ourselves in analyzing the income tax treatment of these transactions, purchases, contributions, purchases with payment in cryptocurrency, etc.
In general, in fact your use of cryptocurrency is no different than if you receive any other good such as stocks, dogs, cats, works of art, currency, etc. We will focus on the implications of having them. The most interesting questions in my opinion would be whether VAT (value added tax) should be charged when transferring cryptocurrencies.
Also if the holding of cryptocurrencies requires that exchange differences be calculated due to fluctuations in their value, or if these fluctuations do not have a tax effect until they have been made.
The answer to that question will depend on the nature of these cryptocurrencies. So let’s look at our options:
If they are considered foreign currency, they are not subject to VAT when they are traded (article 9, paragraph 11 of the VAT Law), and exchange fluctuations must be considered (article 5, ISR Law).
The treatment of these exchange fluctuations (according to the Income Tax Law) will be taxable or deductible at the time of their accrual. This is an asset used in the taxpayer’s lucrative activity (although there is an institutional criterion that says that it is according to the realization criterion and not accrual).Or at the time it is made if it is an asset that is subject to the capital income regime.
If it were securities (we can discard this option, since they do not have the legal nature of securities).Likewise, it would not be subject to VAT when trading, and its value fluctuations would not have a tax impact as long as these gains or losses are not realized.
Like other types of assets
Finally, if it were other types of assets, such as intangible assets or financial assets, their transfer would in principle be generally subject to VAT (since there is no exemption that covers them).
The fluctuation of its value would have no effect on income tax and it would not be until the asset is disposed of and the latent capital gain or loss is realized that there would be a gain or loss.
Which of these is the correct option then?
There is some kind of consensus that cryptocurrencies should not be considered currencies, they do not go into cash and bank accounts, so to speak.Mr. Rodrigo Cubero, former president of the Central Bank of Costa Rica, concluded that: “In short, cryptocurrencies do not really represent money in the strict sense, since they do not perform well with any of the three essential functions of money: serving as a means of payment generally accepted, as a unit of account and as a store of value”.
So, by default, if it is not currency, the conclusion seems to be that it should be considered as another type of asset (an intangible, or eventually a financial asset, as indicated above).
This whose transfer is subject to VAT and whose gains or losses will be taxed only at the time they are made. That being the case, this seems to be the answer in the current state of the law.
As is well known, the General Directorate of Taxation submitted for consultation in November 2021 a draft resolution called “Interpretive resolution in relation to the tax treatment of virtual assets and related activities”.
This project to date has not been officially issued as a resolution, but in its text it reaches a conclusion similar to the one we reached here.Now, is that the most convenient answer? Probably not, especially from the point of view of VAT and formal duties.
This is because every time someone pays with cryptocurrencies or transfers cryptocurrencies, they should collect that tax and also issue an invoice. It is treated exactly like a barter. That certainly does not facilitate its adoption and use.
While many jurisdictions have treated cryptocurrencies as an intangible asset or a financial asset for income tax purposes, they have opted for a different and pragmatic solution from a value-added standpoint.They have treated cryptocurrencies as fiat currency thus avoiding the dire consequences of treating cryptocurrency payment transactions as barter.
Anyway, this is a first sketch of what it can be. Stay tuned because this regulation will be defined over time. It will be interesting at that time to reread this article and see if it correctly predicted the future.