New 10% Tax on Cryptocurrencies in Brazil is Unconstitutional, Declares Association Involving Itaú, Visa, Mercado Bitcoin, and Others
Written by CASSIO GUSSON, translated from Cointelegraph Brasil
In a statement sent to Cointelegraph, the ABCripto, the Brazilian Association of Cryptoeconomics, highlighted that the proposal to create a new tax on cryptocurrencies in Brazil is illegal.
The proposal emerged in the wake of discussions about tax reform, the provisional measure (MP 1171 and 1172, of 2023) that defined the minimum wage readjustment, included provisions to establish new taxation rules for overseas investments involving crypto assets and digital assets.
The joint committee analyzing the provisional measure approved the new text last Tuesday (08), incorporating provisions originally outlined in the measure into the Conversion Bill (PL) 15/2023.
The bill addresses the qualification of crypto assets and digital wallets with earnings as financial applications; the qualification of cryptocurrency variation against the national currency and earnings from deposits in digital wallets, similar to earnings from overseas financial investments.
With the change to the provisional measure, the sending and receiving of crypto assets are now equated, for tax purposes, to transactions involving other financial assets, potentially subject to the new tax rate regimes and other definitions of tax reform.
In a technical note, ABCripto, with support from lawyers Daniel and Eduardo de Paiva Gomes, partners at VDV Advogados, argues that the parliamentary amendment inserted into the minimum wage measure tags along with an agenda unrelated to the initial proposal's theme, referred to as a "rider" in legal jargon.
"The indiscriminate inclusion of crypto assets in the category of financial applications is a controversial, improper, illegal, and potentially unconstitutional issue," emphasizes Daniel Paiva.
New Tax is Illegal
According to the expert, crypto assets cannot be treated broadly and indiscriminately as traditional financial applications, and it is essential to adapt them to the current reality, respecting their peculiarities and ensuring a safe and coherent legal environment.
"Digital wallets are essential for the functioning and management of crypto assets, but they are not financial applications. They are tools or infrastructures that allow the storage of private keys and the transaction of crypto assets. Categorizing them as financial applications is an oversimplification and imprecise representation of their true function and nature," explains Paiva.
For the lawyer, while traditional applications have clear relationships with third parties – such as the relationship between an investor – digital wallets serve as a means for users to manage their own assets.
Furthermore, Eduardo Paiva highlights, "The value of a crypto asset within a digital wallet may fluctuate based on the market, but the wallet itself does not influence this appreciation or devaluation. It is neutral and merely reflects the current value of the asset."
Each type of digital wallet is designed to meet different needs and levels of security. In Eduardo's view, categorizing crypto assets as financial applications in a generic manner reduces legal security and ignores the nuances of these assets.
"The consequence is the possibility of inappropriate regulatory policies, harming both investors and sector development," he concludes.
Moreover, crypto assets are not necessarily tied to a valuation in the national or foreign currency.
"Because of this, the price of a crypto asset simply corresponds to market demand at a given moment, as is the case with any type of asset. A bitcoin can be acquired for the price practiced on a specific exchange, while it can also be traded directly between parties for a different price, either lower or higher," explains Eduardo Paiva.
Daniel also points out that operations involving crypto assets are already taxed according to current rules and that Law 14.478/2022, the Legal Framework of Crypto Assets, already addresses the notion of virtual assets. "Therefore, including crypto assets as financial applications and earnings in another Provisional Measure only adds complexity to the issue and, from a revenue perspective, will not yield practical results," he says.
As an alternative, the expert suggests that virtual assets, when equated to overseas financial applications, be merely digital representations of financial assets, restricting the application of the norm solely to security tokens or digital securities traded through virtual asset service providers domiciled abroad, with taxation limited to the moment of conversion into fiat currency.