How to declare Bitcoin in income tax

How to declare Bitcoin in income tax (and other cryptocurrencies)?

At the beginning of May 2019, the Federal Revenue Service (RFB) published the RFB Normative Instruction no. 1.888/2019This article deals with the declaration of transactions involving crypto-assets, a term that covers bitcoins, as well as other "virtual currencies" or "cryptocurrencies".

In this text, we'll show you how the RFB treats cryptocurrencies today and how to declare Bitcoin in your personal income tax return (DIRPF), the most well-known of them. We'll also describe why the RFB created this new tax obligation and what you need to state in your declaration. This is a topic that individuals who already trade bitcoins or other cryptoassets should pay attention to. Especially those living abroad.

What are bitcoins?

Doubts about how to declare Bitcoin for income tax? First of all, we need to understand more about what type of asset this is.

In short, bitcoin is a virtual currency, or cryptocurrency, used as an instrument to carry out electronic transactions. The main difference between bitcoin and other electronic payment instruments is the use of cryptocurrency technology. blockchainThis allows the currency to be issued and transacted without the need for intermediaries. An encrypted electronic record is automatically distributed on the computer network, with information on all the transactions carried out. Then, each new transaction is only accepted after a validation process, with the consensus of the majority of network participants, which minimizes the possibility of tampering with the records. For a more in-depth analysis, we recommend CVM's text on bitcoin and the technology of blockchain available at Investor Portal.

Released to the public in 2009, bitcoin, as well as the technology of blockchain have become immensely popular, leading to the emergence of other competing virtual currencies and other virtual assets, or crypto-assets. This popularity has attracted interest in acquiring virtual currencies and other crypto-assets also as a means of speculating on the appreciation of these assets, or to raise capital for new ventures.

Bitcoins in the view of the Central Bank and the RFB

Because of the decentralization of records, virtual currencies exist without the need for a monetary authority. This has required a position from the monetary authorities of each country, as virtual currencies are increasingly used. In this sense, the position released by the Central Bank on their website is quite enlightening, and explains to some extent why the RFB issued the RFB Normative Instruction no. 1.888/2019.

For the Brazilian Central Bank, the value of virtual currencies (or "cryptocurrencies") stems from trust in their operating rules, as well as in the chain of participants. The use of virtual currencies, such as bitcoin, to make payments or as an investment is the result of an agreement between the parties to each transaction, who bear the risk of loss of capital, price fluctuations and fraud.

For this reason, the Central Bank does not recognize virtual currencies as official currencies, like the real, or as electronic currency (funds in reals held in electronic form to make payments). The consequence of this is that transactions with virtual currencies, such as bitcoins, are not treated as international transfers, subject to the control of the foreign exchange market and supervised by the Central Bank. In other words, the Central Bank does not consider itself responsible for supervising transactions carried out with bitcoins and other virtual currencies, and recognizes that there is currently no specific legislation or regulation on the subject in Brazil. This position raises many questions about how to declare Bitcoin in income tax.

From the RFB's point of view

From the RFB's point of view, contained in the Explanatory Memorandum to the RFB Public Consultation No. 06/2018This is due to the growing volume of transactions with virtual currencies. In Brazil, in 2017, the number of customers of exchanges (companies specializing in trading or enabling the purchase and sale of bitcoins and other virtual currencies) exceeded the number of users of the São Paulo Stock Exchange, and it is estimated that the volume of bitcoins traded jumped from R$ 44.8 million in 2014 to R$ 8.3 billion in 2017, with the expectation of an ever-increasing volume of transactions. As a result, the RFB believed it was necessary to create control mechanisms to monitor the collection of income tax on these transactions.

The RFB also argued that, due to the anonymity of the transactions, cryptoassets are used in tax evasion, corruption and money laundering operations, which need to be combated. The Explanatory Memorandum also mentioned that other jurisdictions have already established regulations to oversee the operations of cryptoassets. exchangesThis is the case with Australia, South Korea and the European Commission, as well as the states of New York and Texas in the United States.

For these reasons, the RFB justified the creation of a new declaration of transactions in bitcoins and other crypto-assets with the aim of verifying tax compliance and combating money laundering and corruption, as well as increasing "the perception of risk in relation to taxpayers intent on tax evasion", which was done by means of the RFB Normative Instruction no. 1.888/2019.

What are "virtual currencies" and how to declare Bitcoin for income tax purposes

The RFB seems to have only spoken out once about bitcoins before the Normative Instruction was published. In guidelines for filling in the DIRPF 2019Based on the content of the answers, we can summarize the RFB's conception as follows:

• virtual currencies (including bitcoins) are goods or rights that can be equated to financial assets;
• being assets or rights, virtual currencies must be reported on the assets and rights sheet of the DIRPF as "other assets" (i.e. with code 99);
• virtual currencies must be reported at their acquisition cost;
• the sale of virtual currencies must be taxed as a capital gain, at progressive rates of 15% to 22.5%, depending on the amount of the gain;
• personal income tax (IRPF) must be paid by the last working day of the month following the sale of the virtual currency;
• The IRPF exemption applies if the disposal value of the virtual currencies is equal to or less than R$ 35,000.00 (thirty-five thousand reais) per month;
• in the absence of an official quotation to ascertain the value of virtual currencies, both the cost of acquisition and the capital gain must be proven with proper and suitable documentation.

Although fundamentally correct, the above guidance sheds very little light on how to declare Bitcoin in income tax, as we'll see below in a separate topic.

Calculation of tax due

In order to calculate the tax due, the taxpayer must download the Capital Gains Calculation Program (GCAP 2019) in website to enter the information that will later be exported to the DIRPF during the submission period (March and April 2020). This free program also allows you to issue DARF forms to pay the tax, although it is more advisable to use the Sicalc Program or SicalcWeb for this, as both allow you to issue invoices with barcodes for online payment and automatically calculate the fine and interest for late payment.

How to declare Bitcoin in income tax - What Normative Instruction no. 1.888/2019 says

According to the Normative Instruction, a new declaration has been created for the RFB, just to report transactions made with cryptoassets. The declaration must be filed through the RFB's Virtual Service Center (e-CAC), and the use of a digital certificate is required whenever the general rules of the e-CAC require it. Clarifying how to declare Bitcoin in your income tax return.

The following are obliged to comply exchange who carries out the operation with cryptoassets or the individual or legal entity resident in Brazil, according to the table below:

Person obliged to declare:

- a exchange of cryptoassets domiciled for tax purposes in Brazil

- an individual or legal entity resident or domiciled in Brazil

Operations to declare:

- in the case of exchange of cryptoassets domiciled for tax purposes in Brazil, the transactions carried out by the exchange

- in the case of individuals or legal entities resident or domiciled in Brazil, transactions carried out in exchanges domiciled abroad; and those not carried out in exchange.

In the latter case, the individual or legal entity resident or domiciled in Brazil should only make the declaration if the monthly value of the transactions, alone or jointly, exceeds R$ 30,000.00 (thirty thousand reais)

Failure to submit the declaration, submitting it late or with inaccurate, incomplete or incorrect information subjects the person responsible to a fine, the amount of which depends on the conduct and legal status of the person obliged to submit it. The fines are set out in art. 10 of the Normative Instruction. For example, the smallest fine for an individual is R$ 100 per month or fraction of a month, in the case of late filing, while the same fine for a legal entity opting for real profit would be R$ 1,500 per month or fraction of a month.

Without prejudice to the fine, the RFB may formalize a communication to the Federal Public Prosecutor's Office if it finds evidence of money laundering crimes (Law no. 9.613/1998, art. 1), in the event that the information is not provided or is provided with inaccuracies or omissions.

How to declare Bitcoin in income tax - What the RFB wants you to know

Under the proposed new declaration, the person required to submit it will have to provide the following information on each of the transactions carried out with bitcoins and other crypto-assets:

• date of operation;
• type of operation (purchase and sale, exchange, donation, transfer to exchange, withdrawal from exchange, temporary assignment "rent", payment in kind and other operations);
• owners of the operation;
• cryptoassets used in the operation;
• quantity of cryptoassets traded, in units;
• value of the operation, in Reais, excluding the service fees charged for carrying out the operation;
• value of the service fees charged for the execution of the operation, in Reais, if any; and
• the identification of exchangeif the operation is carried out using exchange domiciled abroad.

In addition to the above information, submitted to the RFB on a monthly basis, the exchange a cryptoasset company domiciled for tax purposes in Brazil must submit the following additional information on an annual basis, based on December 31 of the previous year, for each user of its services:

• the balance of fiat currencies, in Reais;
• the balance of each type of crypto-asset, in units of the respective crypto-asset; and
• the cost, in Reais, of obtaining each type of cryptoasset, declared by the user of its services, if any.

This additional information must be submitted by exchange as part of the monthly declaration for December.

What the RFB needs to clarify about bitcoins and other crypto-assets

Let's take, as an example, a very simple sequence of transactions made by an individual. And they correspond to what we have already seen in our professional practice.

A certain individual makes the following transactions (fictitious values):

• initially, the individual has R$ 100,000.00 in a bank account in Brazil and US$ 2,500.00 in a bank account abroad;
• on day 1, uses R$ 100,000.00 to buy 10 bitcoins from a exchange located in Brazil (for simplicity, there are no fees for this operation). Instead of keeping your 10 bitcoins deposited with the exchangeThe person prefers to keep them in their own virtual wallet;
• on day 2, he uses another 2 bitcoins to buy 60 ethereums and US$ 2,500.00 to buy another 30 ethereums, this time with a exchange abroad. In this way, the person holds 8 bitcoins and 90 ethereums;
• on day 3, the person decides to invest in an investment fund abroad that specializes in "mining" bitcoins (i.e. acquiring bitcoins while maintaining an advanced computational structure to operate the blockchain). The person uses 5 bitcoins to acquire 5% of participation in this fund. This gives them 3 bitcoins, 90 ethereums and a 5% stake in an overseas fund;
• on day 4, the person decides to use their 90 ethereums to pay for services abroad. They now hold 3 bitcoins and 5% in the fund;
• on day 5, the person decides to invest their 3 bitcoins in the same investment fund, receiving a further 3% stake. The person therefore holds 8% in the fund;
• on day 6, the fund distributes income to the person, giving them 1 bitcoin. At the end of the day, the person holds 8% in the fund plus 1 bitcoin.

Even with the IRS's Q&A guidelines mentioned above, there are a number of unanswered questions. So we've chosen to divide them into two categories below:

a) Measurement difficulties

• how can the value of virtual currencies be accurately represented in reais, as the RFB claims? In the absence of a criterion in the document itself (for example, an indication in the contract of the value in reais of the virtual currency operation), there is no "official quotation" published by the Central Bank, so there is only evidence of the values being transacted in the virtual currencies. exchanges every day;
• in the absence of an express indication of value in Reais, what documentation can be considered "competent and suitable" to demonstrate the value of a virtual currency? The average of the prices published by all the exchanges in Brazil on the day, or only some of them? And when the operation is carried out abroad and without the intermediation of a exchangeWhat can be considered reliable information?
• When a virtual currency is used to pay an obligation (day 4 of the example above), does the taxpayer realize a capital gain? How can this be measured? Should the taxpayer withhold income tax for the service taken abroad?

b) Legal qualification difficulties

• if the acquisition of a virtual currency is not a foreign exchange transaction, as the Central Bank understands, which capital gain rule should an individual use? Capital gains from the sale of assets located in Brazil (SRF Normative Instruction no. 84/2001) or capital gains in foreign currency (SRF Normative Instruction no. 118/2000)? Does the fact that the virtual currency was purchased with Brazilian reais (day 1) or US dollars (day 2) influence this analysis? What if the virtual currency was purchased with another virtual currency (day 2)?
• If it is a "normal" capital gain, would there be any situation in which it would be possible to use the losses, given the volatility of the price of virtual currencies in relation to official currencies? Or can losses not be offset?
• If the capital gain is in foreign currency, should the capital gain be calculated in reais or in US dollars, in accordance with the legislation? What criteria should be used to determine the correct rule?
• In the case of receiving income in virtual currency (day 6), how should the income be taxed? As a zero-cost capital gain, as the RFB recommends for interest on financial investments abroad (Questions and Answers IRPF 2019Question 603), or as income subject to the "carnê leão"? In this case, again, how should the value of the income be determined, considering that, for transactions in foreign currency, the legislation provides for different rules for converting to reais?

The doubts above represent practical problems. Whether in complying with the new declaration proposed by the RFB (precisely identifying the equivalent value in reais of a transaction). Or in complying with the obligations to fill in the DIRPF and pay the income tax due.

An example of this is the issue of the DARF form for paying the tax.

If we use the "normal" capital gain rule, as if the bitcoins were goods placed in Brazil, the tax collection code is 4600. If the foreign currency capital gain rule is used, the code is 8523 (general rule) or 8960 (if foreign currency is held in cash, which is unlikely). The way the GCAP 2019 program and the DIRPF are filled out also changes.

It seems inappropriate to demand the submission of information and require the taxpayer to comply with tax legislation. This without first fully clarifying how they must comply with tax legislation.

Lack of a position from the RFB on what to do with the losses

We mentioned above that the RFB has not clarified whether losses on transactions with bitcoins or any other crypto-assets can be offset against subsequent gains. The RFB's guidelines only deal with the taxation of capital gains, suggesting, without stating, that losses cannot be offset. This is a significant problem for taxpayers, especially given the volatility of virtual currency prices.

The same problem applies today to financial assets abroad compared to financial assets in Brazil. In the case of stock exchange or over-the-counter transactions carried out in Brazil, the tax legislation allows the individual to tax only the net gain from the transactions and to use the losses. However, it is silent on the same operations carried out abroad. In this regard, we recommend reading our text on taxation of earnings and income abroadin which the difficulties of this legislation are dealt with in more detail.

How to declare Bitcoin in income tax - Additional difficulties for those living abroad

For individuals who live abroad but are tax residents in Brazil and therefore affected by the new declaration, the possible requirement for a digital certificate represents a significant problem. The number of individuals with a digital certificate in Brazil is still relatively small. Furthermore, we have no information on whether it is possible to obtain one from a Brazilian consulate abroad. It would be advisable for the RFB not to require a digital certificate for transmission in any case.

Conclusion on how to declare Bitcoin in income tax

The reasons that led the RFB to create the declaration are fair and legitimate. They also follow the international trend when adopting a new technology that imposes the need for some discipline. However RFB Normative Instruction no. 1.888/2019 deserves some criticism.

The RFB has created an obligation to declare transactions involving bitcoins or other crypto-assets. And it has also imposed fines without first having clarified the taxpayer about the object of taxation. The main flaw here is that the RFB treats virtual currencies as if they were official currencies, and the exchanges as if they were exchange institutions, even though the Central Bank expressly recognizes that they are not.

This becomes clearer when you think of operations involving bitcoins and other virtual currencies as if they were operations involving the exchange of physical objects (chairs or real estate). As with all operations in which the parties do not directly trade a currency with each other, but exchange objects, taxation is possible. But it runs into difficulties.

The fact that virtual currencies are digital, i.e. not located in any country, adds complexity to the problem.

This certainly makes it difficult to declare Bitcoin in income tax. Therefore, it would be better if, before imposing obligations, the RFB communicated with the Central Bank and the Securities and Exchange Commission (CVM), each within the scope of their competence, and listened to the participants in this new market. In addition, the RFB should provide more detail on how to correctly calculate the tax due, if it wants to obtain tax compliance from taxpayers and avoid tax evasion.

In the absence of these precautions, we will probably see numerous difficulties in forming this new market over the next few years. In addition, it is likely that there will also be the start of litigation over virtual currency operations, as is already the case with so many other matters of tax legislation. Any questions? Leave a comment or send me an e-mail at contato@tersi.adv.br or via WhatsApp. Click here to send a message now.

Check out more posts on taxation and estate planning at information for residents abroad.

This text about How to declare Bitcoin in income tax was prepared by Vinícius Tersi Advocacia, a law firm specializing in International Tax Consulting.