Indeed, the digital economy has transformed several previous legal concepts. In the IDPCast's Tax Law season, we have an episode entirely dedicated to Taxation and Cryptoassets.

In this episode, IDP professors Miquerlam Cavalcante and Tarsila Fernandes welcomed two experts in taxation and crypto assets: Hadassah Santana, PhD in Law and legislative advisor on tax matters in the Federal Chamber, lawyer, professor at IDP and FGV; and Rebeca Muller, Master in Tax Law and Economic Development from IDP and lawyer.

Here are some of the topics discussed in the chat:

What are crypto assets?

– Income tax: who must declare crypto assets?

Is the Brazilian tax system ready for digital assets?

What is BEPS and what is its connection to the OECD?

Is Brazil lagging behind in updating its tax system?

What are crypto assets?

So, what exactly are crypto assets? That's the million-dollar question! As our guest Hadassah Santana rightly said. That's because the big discussion in the crypto asset field, when we talk about the legal aspect, is understanding its functionality. 

“When we talk about cryptocurrency, are we talking about a currency? Not necessarily. When we talk about smart purchases, are we talking about a contract? No,” explains Hadassa.

In short, it sounds like a smart contract based on the name, doesn't it? Perhaps because of the accurate description of the terms you have, however, when you look at it within the Brazilian legal system, it doesn't qualify as a contract.

According to Hadassa, the Central Bank is holding several hearings to discuss the crypto real, the digital currency, the digital real, and they are always bringing in collaborations to understand what the future, which is already the present, will be like. 

“When you ask me what a crypto asset is, perhaps you want a conceptual answer. A crypto asset is… it has the nature of… but that’s not the case in the digital economy, because in the digital economy, a crypto asset depends on its functionality, and that can change throughout the history of the context, in short,” the professor points out.

“Sometimes we need to look to the future. And, the perception I have when we talk about crypto assets is that we want to fit the concept into our perception of the past,” Hadassa concludes.

Income tax: who must declare crypto assets?

Within this entire cryptocurrency universe we are navigating, amidst many uncertainties, the Brazilian Federal Revenue Service recently adopted guidelines regarding taxation, as lawyer Rebeca Muller explains during the episode.

In practice, there will be individuals and legal entities that must declare, fulfill certain ancillary obligations or instrumental duties with the tax authorities. 

Capital gains from the sale of cryptocurrencies are exempt from income tax if the total value of sales in a given month, of all types of crypto assets or virtual currencies, regardless of their name, is equal to or less than R$ 35.000,00 (thirty-five thousand reais). ( Revenue Service )

Rebeca further adds that exchanges – as those intermediaries that buy and sell with individuals are called – also have some obligations related not only to the Central Bank, but also to the Federal Revenue Service. After all, these companies must report information monthly on the transmission of all operations that occur with cryptocurrencies.

Is the Brazilian tax system ready for digital assets?

And now, in the face of so many changes in the landscape brought about by so-called Taxation 4.0, how is the current Brazilian tax system behaving?

According to lawyer Rebeca, our tax system is outdated even for the challenges that exist today, let alone what is to come with the emergence of new technologies.

“Today we are talking about tax reform, modifications to the tax system. Certainly, the tax system would have to adapt and modernize for this. Note that we will have discussions regarding federal taxes such as corporate income tax (IRPJ), personal income tax (IRPF), and income tax, but we may also have room for taxation of ICMS and ISS,” he explains. 

“We have seen with regard to software that it is also part of this digital economy, of taxation 4.0, and the Supreme Court has already addressed this issue as well, and in some situations there was even double taxation; states and municipalities competing alongside the federal government to tax forms of software. So, for sure, crypto assets will face this as well, there is much room for discussion and modernization of the tax system as well,” concludes the Master of Laws.

What is BEPS and what is its link to the OECD?

The Organisation for Economic Co-operation and Development (OECD), along with member countries and non-member countries like Brazil, is trying to develop plans and actions so that each can collectively align all their legislation and reach a minimally common ground for taxing wealth, and crypto assets represent precisely this challenge.

BEPS is an action plan to combat the erosion of the domestic tax base and profit shifting. While this practice can affect the national treasury in various ways, profit shifting is one of the most common.

As we have seen, confronting a new reality and the need for legislation to deal with technologies and crypto-assets is a global challenge; in other words, Brazil is not the only country facing this arduous task.

For example, while Brazilian authorities view cryptocurrencies as assets – hence the term "big capital" – in the United States they are seen as assets.

This is just one of many examples worldwide. Given this, we note the dysfunctions and, consequently, this will have ramifications and respective impacts on tax and regulatory legislation.

Is Brazil lagging behind in updating its tax system?

In Brazil, there are bills currently being processed in the National Congress that address issues proposing changes to the tax system.

Such as the famous PEC 110/2019, which establishes tax reform to eliminate taxes and create the Tax on Operations with Goods and Services (IBS).

There is also PEC 45/2019, which also proposes changes to the tax system. However, according to Hadassa, none of the proposals have a vision focused on the digital economy. 

“Technically, I think it’s still a bit lacking, but it’s not the authors’ fault. It’s because we need to understand the future by looking to the future, because the past doesn’t fit there. So, it’s no use looking at the liturgical concepts of the 1976 Tax Code,” adds the specialist.

During the episode on Taxation and Cryptoassets, Professor Hadassa argues that the key issue is that each country's taxation is based precisely on its territorial context. 

So, they create territorial jurisdiction to tax goods or wealth produced within their own territory. This then leads to a dispute over jurisdiction. However, when we talk about a digital economy, borders no longer exist.

"Brazil faces a major challenge because we are a continental country, and we have an eroding tax base, both in municipalities, but mainly and almost entirely in the states; the state tax bases are increasingly eroding," says the professor.

Check out the full episode!

This was a summary of what you will find in the Tax Law: Taxation and Cryptoassets episode of the IDPCast. Listen now on your favorite audio platform or on YouTube. 

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