Author: TaxDAO
Brazil is the largest country in South America, with a population of more than 214 million. It is the fifth largest country in the world and the sixth largest country in population. In addition to supporting GDP through forestry industries such as rubber and timber, Brazil is also the world's largest exporter of beef and soybeans. From Brazil's independence until 1985, the country was ruled by more than a century of populist and military governments before a constitution was created in 1988 that defined the country as a democratic federal republic. Since then, Brazil has benefited from the shift of industrial activities to low-cost countries in the 1990s, accompanied by increased foreign investment, better education and domestic consumption, and has become an important player in the global economy and is regarded as the strongest growing country in the world. One of the emerging markets.
The evolution of the Brazilian cryptocurrency market is a significant topic in the global digital financial market. Today, Brazil is one of the top five countries in the world with the largest number of cryptocurrency investors, with more than 10 million cryptocurrency investors, accounting for approximately 5% of its population, behind only India, the United States, Russia and Nigeria. Additionally, the Brazilian cryptocurrency market is growing faster than the traditional stock market, with approximately 4 million investors in Brazil’s main stock exchange B3. Hashdex, the country’s leading cryptocurrency asset management company, reports that the number of cryptocurrency investors has grown by a staggering 938% in 2021 alone. This exponential growth represents a significant shift in Brazil’s financial landscape and reflects growing awareness and confidence in cryptocurrencies as viable investment vehicles.
1. Overview of Brazil’s basic tax policies
Brazil’s tax system is extremely large and covers many areas, including personal income tax, corporate income tax, value-added tax ( VAT) etc. This complex tax structure has one of the highest tax rates in the world. Its main organization is the Brazilian National Tax Agency (RFB), which is responsible for the collection and management of taxes. In the area of personal income tax and corporate income tax, Brazil uses progressive tax rates, while value-added tax is levied by the federal and state levels of government. The Social Security Levy (CSLL) is an additional surcharge used to support the country's social security system. Overall, Brazil’s tax policy is known for its complexity and high tax rates, which can have an impact on companies’ competitiveness and international investments.
1.1 Federal Tax
1.1.1 Corporate Income Tax (IRPJ)
Brazilian Corporate Income Tax There are two types, one of which is called Imposto de renda de Pessoa Jurídica, which literally means legal person (Pessoa Jurídica) income (Renda) tax (Imposto), which is corporate income tax. Brazil’s income tax regulations (Regu lamentodo Imposto de Renda) are Decree No. 3000 promulgated on March 30, 1999. This decree includes three parts: personal income tax, corporate income tax and withholding income tax. Corporate income tax is in the second part of the regulations. . According to the above-mentioned legal provisions, the corporate income tax rate is 15% of the taxable income, and an additional 10% surtax is required for the portion of the annual taxable income exceeding R$240,000. To put it simply, the tax rate is 15% for the portion of corporate profits below R$ 240,000, and the tax rate for the portion exceeding R$ 240,000 is 25%. Brazilian corporate income tax includes basic tax and surcharge, which are levied four times a year, with the deadlines being March, June, September and the last day of December respectively; applicable to corporate profits, the tax rate is 15% to 25%.
In 2014, the Central Bank of Brazil announced that cryptocurrencies are not legal tender and therefore are not subject to the law. Still, Bitcoin and other currencies are subject to tax controls. Therefore, the Receita Federation (Federal Revenue Service) requires local crypto users to submit their earnings. If more than BRL35,000 is obtained through buying and selling, then the profits obtained must be taxed as income tax, and 15% of the profits are collected by the state through the annual tax return. In other cases, exemptions apply.
1.1.2 Personal Income Tax (IRPF)
For Brazilian citizens or individuals with a permanent residence permit in Brazil, personal income tax is payable. Personal income, interest and rent are taxable income, with progressive tax rates, with the highest tax rate being 27.5%.
Taxpayers are divided into resident taxpayers and non-resident taxpayers. Residents are taxed on worldwide income. Individuals other than residents are considered non-residents and are taxed only on their source income in Brazil. Married couples in a taxable household can file separate tax returns if their property has been divided. If the property is jointly owned, the non-head of the household can only file separate tax returns on specific income items. Taxable income is calculated based on business income, investment income, work income such as employment income, independent work income and other types of income after deducting statutory deduction items to arrive at the cumulative net income, and then subtracting exemption items.
The Brazilian Internal Revenue Service issued Regulation No. 1888, which applies to various cryptocurrency-related activities. If the monthly transaction amount exceeds 30,000 Brazilian reals (7,800 U.S. dollars), Brazilian citizens are obliged to pay the country’s national tax. bureau reports on its cryptocurrency transactions. Failure to report truthfully will result in penalties ranging from 1.5% to 3% of the amount of the unreported transaction. Later, Brazil's Federal Revenue (RFB) announced that investors in Brazil's crypto-asset market must pay personal income tax on transactions involving equivalent types of cryptocurrencies, such as Bitcoin and Ethereum. The Brazilian Senate approved a new personal income tax bill on November 29, 2023. Brazilians will be required to pay a 15% tax on income generated from cryptocurrency held in foreign exchanges. Under the bill, any Brazilian who earns more than 6,000 Brazilian reals (approximately $1,200) from transactions outside Brazil will be taxed, effective January 1, 2024. Brazil incorporates the taxation of realized capital gains into personal income and corporate income and calculates taxes together, without establishing a separate capital gains tax. The capital gains tax also applies to the progressive personal income tax rate.
1.1.3 Other taxes
Other taxes can be divided into net profit social contribution fee (CSLL), income tax (PIS and COFINS), industrial products tax (IPI), tariff (II) and financial transaction tax (IOF), etc.
1.2 State Tax
At the state level in Brazil, there is mainly a turnover tax (ICMS). This tax is paid when goods are circulated, and the tax rate is usually 17 % to 19%. Interstate transactions or shipments may also result in additional interstate ICMS, with tax rates varying depending on the state of the transaction.
1.3 Municipal Tax
Municipal tax at the municipal level is mainly service tax (ISS or ISSQN), with the tax rate varying between 2% and 5%. According to Brazilian tax laws, the tax base of ISS is the contract price of the project, and the actual tax is usually paid where the labor services are performed.
1.4 Other expenses
Among other expenses, social security contributions (INSS) are social security expenses paid by employees and enterprises for employees. The INSS payment method includes the enterprise paying 20% of the employee's salary by itself, and withholding 11% when the owner pays. In addition, the Seniority Security Fund (FGTS) is a welfare fee paid by the enterprise for employees, and the monthly payment amount is 8% of the employee's salary payable.
2. Analysis of Brazil’s crypto tax policy and regulatory framework
The Brazilian government’s tax policy on crypto assets is still at a relatively vague stage. The legal status of crypto-assets has not yet been clearly defined, and policies for their classification and taxation have not been clearly defined. This makes the entire digital asset industry face uncertainty and variables. The lack of a clear legal framework can lead to legal risks and investment uncertainty in the crypto-asset market.
2.1 Overview of Brazilian Cryptocurrency
The Federal Republic of Brazil is widely regarded as one of the most cryptocurrency-friendly countries in the world, and its regulations and policies aim to in promoting the adoption of cryptocurrencies and other digital assets among its citizens. In December 2022, Brazilian President Jair Bolsonaro signed a bill providing a comprehensive regulatory framework for the use and trading of domestic cryptocurrencies, legalizing the use of cryptocurrencies as a payment method within the country. According to the text of the bill, Brazilian residents will not be able to use cryptocurrencies such as Bitcoin as the country’s legal tender, as is the case in El Salvador. However, the newly passed law includes many digital currencies under the definition of legal payment methods in Brazil. It also establishes a licensing system for virtual asset service providers and imposes penalties for fraudulent use of digital assets.
In 2022, Brazil passed Bill 4401/21, which includes Bitcoin and other digital assets as financial assets, marking a change in the domestic understanding of cryptocurrency. Fundamental changes. Subsequent Bill 14.478/22 went further, defining virtual assets as digital representations that can be traded electronically, transferred, used for payments or as investments, while introducing licensing requirements for virtual asset service providers (VASPs), reflecting Brazil’s Forward-looking in cryptocurrency regulation. These legal changes highlight Brazil’s evolving role in the global digital economy, creating opportunities and challenges for venture capital in the market, underscoring the need for a comprehensive understanding of regulatory shifts and strategic adaptation.
2.2 Brazilian Crypto Tax Policy
In 2019, the Brazilian Federal Tax Service issued normative directive No. 1888. It has had a significant impact on the taxation of gains from cryptocurrency operations in Brazil. It includes that only cryptocurrency transactions exceeding BRL 35,000 in a month will be subject to capital gains tax. The tax is 15% of the capital gain, which is the difference between the sale price and the purchase price of the cryptocurrency, applicable to the amount in excess of the exemption. The deadline is the last business day following the month in which the taxable transaction occurs.
Normative Directive No. 1888 divides transactions into three categories: Bitcoin, other digital currencies (such as Ethereum, Ripple, BCH, USDT, Chainlink, etc.) and other encrypted assets. Capital gains are tax-free for monthly sales of less than BRL 35,000. For sales exceeding R$35,000, capital gains are taxed at a rate of 15%. Capital gains tax also includes progressive rates for larger transactions, such as those exceeding R$500,000, with rates ranging from 15% to 22.5%. Investors need to calculate and pay taxes through DARF (Documento de Arrecadação de Receitas Federais). All transactions involving cryptocurrencies must be reported in annual income tax returns.
Brazil’s new cryptocurrency tax bill comes into effect on January 1, 2024, and the Brazilian Senate passed new income tax rules on November 29, 2023, stipulating thatBrazilian citizens need to pay taxes abroad Exchanges pay up to 15% taxon income from cryptocurrencies held. Under the bill, any Brazilian citizen who earns more than $1,200 (BRL 6,000) on foreign exchanges will be subject to this tax starting January 1, 2024. The groundbreaking legislation is not limited to cryptocurrencies, but covers a wider range of overseas investments, including profits and dividends from cryptocurrencies. Foreign investment funds, platforms, real estate and trusts.
The Brazilian government expects the new tax to generate approximately 20 billion reais ($4 billion) in revenue in 2024. To encourage early compliance, taxpayers paying these taxes in 2023 can use the reduced rate of 8% on all income earned before 2023, with installments starting in December. From 2024, the tax rate will increase to 15%. It is worth noting that overseas income up to BRL 6,000 (USD 1,200) is exempt from this tax.
2.3 Brazilian Crypto-Asset Regulatory Framework
In September 2023, the Governor of the Central Bank of Brazil announced that in view of the popularity and adoption of cryptocurrencies in Brazil, The rate surged 44.2%. Brazil’s central bank has plans to tighten regulations on the cryptocurrency market as tax evasion and crime-related activities intensify.
2.3.1 Licensing and Registration
Brazil’s Act No. 4401/21 lays the foundation for the regulation of virtual asset service providers (VASPs). Defines virtual assets as digital representations that can be traded electronically, transferred, and used for payment or investment purposes. According to the bill, the services provided by VASP include the exchange of virtual currency and legal currency, the exchange between virtual assets, the transfer, custody or management of virtual assets, and participation in financial services related to virtual assets. In Brazil, operating as a cryptocurrency broker requires mandatory approval from the CNPJ (National Register of Legal Persons) and Conar (National Advertising Self-Regulatory Commission). This bill marks an important step in Brazil’s cryptocurrency regulation, providing investors and entrepreneurs with more security. Regulatory clarity and credibility paves the way for new investment avenues, attracting institutional and traditional market investors to Brazil’s growing cryptocurrency sector. Bill 14.478/22, which comes into force in 2023, is a milestone that further defines the guidelines for the regulation of virtual asset services and provides greater security to cryptocurrency investors.
2.3.2 Investor Protection and Penalties
Brazil’s new bill introduces the crime of fraud against virtual assets, imposing 4 to 8 years on offenders punishment and a fine. This move makes it easier for victims who previously did not have legally registered companies in Brazil to assert their rights. The government plans to formulate special rules to punish such crimes, not only including pyramid schemes, but also to reduce all fraudulent activities involving cryptocurrencies, aiming to improve the security and reliability of virtual assets. Additionally, users will be able to see which companies are licensed, making it easier to identify illegal companies.
3. Future Policy Directions for Brazil’s Crypto-Asset Regulation
Brazil’s cryptocurrency market regulation is developing rapidly to adapt to growing needs. Although regulations and bureaucracy exist in most areas, the Central Bank of Brazil and the CVM have taken some proactive steps to rectify this phenomenon to promote blockchain innovation. The launch of CBDC has enabled startups and financial technology companies to develop and solve related problems in Brazil. Current trends show that fintech companies are leveraging blockchain technology and CBDC infrastructure to seek solutions for the financial and payment markets. Some startups have received funding from large investment funds, such as Lumx, which received investment from BTG Pactual Bank and pre-seed funding from BRLA. Strict regulations, high inflation, and limited access to international assets throughout Latin America provide a geographical advantage for blockchain startups. The progress of CBDC and tokenized treasury bonds has given rise to the establishment and development of other startups, most of which focus on executing upstream and downstream conversions and innovating secured credit solutions using tokenized treasury bonds. Blockchain technology is not limited to financial markets, but is also unlocking value in areas such as agriculture, events, and real assets. Asset tokenization increases efficiency in various areas through secondary markets and liquidity. In emerging countries, where the agricultural market is particularly important, there are already applications that provide financing for agricultural operations by tokenizing different assets, such as Agrotoken.
Generally speaking, the Brazilian government may have shown a relatively open attitude towards crypto-assets, trying to achieve a balance with emerging industries in regulation. However, the lack of clear regulations and regulatory frameworks leaves uncertainty about the legal status of digital assets and their tax treatment. The government may pay close attention to the development of the digital asset industry in order to formulate clearer and flexible tax policies while protecting investors and market stability. The direction of future policies may be jointly affected by domestic and foreign economic conditions, market demand, and international regulatory trends. The Brazilian government is expected to promote innovation and sustainable development in the industry by formulating clear regulations and tax policies while adapting to the development of digital assets. By comparing with international tax trends, Brazil can better determine its position in the global digital asset market and help its economic diversification and sustainable growth.
References
[1] Wei Qingfeng & Cui Rui. (2022). Introduction to the Brazilian tax system and tax planning for EPC general contracting projects. China General Accountant (07), 140- 142.
[2]Brazilian House of Representatives (2022). Bill No. 4401/2021
[3]Brazilian House of Representatives (2023). Bill No. 4173/23
[4]AvalonCapitalAvalon Capital (2023). Development of Brazilian Cryptocurrency Market Regulation: Impact and Trends
JinseFinance
Kikyo
Cointelegraph