The Federal Reserve of Brazil (BFR) has decreed a new law according to which Brazilian crypto investors are required to pay income tax on transactions that involve the exchange of cryptocurrencies.
This means that Brazilian investors will now have to pay taxes to convert say Bitcoin to Ethereum or Ethereum into Luna, even if the exchanges are carried out without conversion to reais.
The declaration was published in the Diário Oficial da União. The decision was taken due to the suggestion of a citizen to the regulator.
At the end of 2021, the group issued an opinion stating that trading to crypto pairs should be taxable even without intermediary conversion to the Brazilian currency.
The declaration reads, “The capital gain calculated on the sale of cryptocurrencies, when one is directly used in the acquisition of another, even if the acquisition cryptocurrency is not previously converted into reais or other fiat currency, is taxed by the Individual Income Tax, subject to progressive rates, in accordance with the provisions of art. 21 of Law No. 8,981, of January 20, 1995.”
Although the declaration does not clarify what is “capital gain” since there is no real profit in reais when one crypto asset is exchanged for another.
The declaration also states that not all capital gains need to be reported. Only crypto investors who trade more than BRL 35,000 (roughly $7263.67) in crypto need to pay the income tax.
“Capital gain earned on the sale of cryptocurrencies is exempt from income tax, the total value of the sales in a month, of all types of crypto assets or virtual currencies, regardless of their name, is equal to or less than BRL 35,000.00 (thirty-five thousand reais).”
The RFB’s plan is illegal, according to Kim Kataguiri, a Federal Deputy, because the regulation on the calculation and payment of Individual Income Tax specifies that capital gain in exchanges occurs only when currency is involved, which is not the case when dealing like-kind crypto assets.
He said, “In the exchange between crypto assets, there is no exchange involving currency; one crypto asset is exchanged for another, therefore, there is no equity increase.”
Kataguiri also further argued that according to article 110 of the Tax Code, the tax law cannot change the definition of private law institutes.
Thus, Federal Revenue does not have the power to change an understanding of the Tax Code.
He said, “If the Union wants to tax the exchange of crypto-assets, legal innovation will be necessary and, even in this case, doubts may be raised about the constitutionality of the new law.”
“What we have is a completely illegal interpretation made by the tax authorities, which clearly exceeds the power to regulate.”
He asked the National Congress for immediate suspension of the RFB’s determination.
The Brazilian government has maintained a proactive approach towards crypto and regulated it for years. Brazilian crypto investors have been required to declare their crypto assets to the regulators since 2016.
Recently, the Brazilian Senate passed a crypto regulation bill that outlines the punishment for crypto crimes and proposes a tax exemption for eco-friendly crypto machinery.