On-chain Andes: Analysis of Brazil's Cryptocurrency Tax System and Regulation in the World's Fifth Largest Cryptocurrency Market

Author: TaxDAO Brazil is the largest country in South America, with a population of over 214 million, making it the fifth largest country by area and the sixth largest by population in the world. In addition to its forestry sector, which supports GDP through rubber and timber, Brazil is also the world's largest exporter of beef and soybeans. From Brazil's independence until 1985, the country was under a succession of populist and military governments, and only established its constitution in 1988, defining the nation as a democratic federal republic. Subsequently, Brazil benefited from the transfer of industrial activities to low-cost countries in the 1990s, accompanied by foreign investment, better education, and increased domestic consumption, becoming an important player in the global economy and regarded as one of the strongest emerging markets in the world. The evolution of Brazil's cryptocurrency market is a significant topic in the global digital finance market. Today, Brazil is one of the top five countries in the world with the most cryptocurrency investors, boasting over 10 million cryptocurrency investors, approximately 5% of its population, second only to India, the United States, Russia, and Nigeria. Furthermore, the growth rate of Brazil's cryptocurrency market has outpaced that of traditional stock markets, with around 4 million investors in Brazil's main stock exchange, B3. Hashdex, the country's leading cryptocurrency asset management company, reported that the number of cryptocurrency investors astonishingly grew by 938% in 2021 alone. This exponential growth indicates a significant shift in Brazil's financial landscape, reflecting an increasing awareness and confidence in cryptocurrencies as viable investment tools.

1. Overview of Brazil's Basic Tax Policies

Brazil's tax system is extremely large, covering multiple areas including personal income tax, corporate income tax, and value-added tax (VAT). This complex tax structure is among the highest tax rates globally, with the main organization being the Brazilian Federal Revenue Service (RFB), responsible for tax collection and management. In the areas of personal income tax and corporate income tax, Brazil employs progressive tax rates, while VAT is collected by both federal and state governments. The Social Contribution on Net Profit (CSLL) is an additional tax that supports the national social security system. Overall, Brazil's tax policies are known for their complexity and high rates, which may impact the competitiveness of businesses and international investment.

1.1 Federal Taxes

1.1.1 Corporate Income Tax (IRPJ) Brazil's corporate income tax is divided into two types, one of which is called Imposto de Renda de Pessoa Jurídica, literally meaning corporate (Pessoa Jurídica) income (Renda) tax (Imposto), which is the corporate income tax. The details of Brazil's income tax (Regulamento do Imposto de Renda) were established by Decree No. 3000 issued on March 30, 1999, which includes personal income tax, corporate income tax, and withholding income tax in three parts, with corporate income tax being in the second part of the regulation. According to the aforementioned legal provisions, the corporate income tax rate is 15% of taxable income, and an additional 10% tax is required on the portion of annual taxable income exceeding 240,000 reais. In simple terms, the tax rate on corporate profits below 240,000 reais is 15%, while the portion exceeding 240,000 reais is taxed at 25%. Brazil's corporate income tax includes a basic tax and an additional tax, collected four times a year, with deadlines on the last day of March, June, September, and December; it applies to corporate profits, with rates ranging from 15% to 25%. In 2014, the Central Bank of Brazil announced that cryptocurrencies are not considered legal tender and are therefore not subject to legal constraints. Nevertheless, Bitcoin and other currencies are still subject to tax regulations. Therefore, the Receita Federal (Federal Revenue Service) requires local cryptocurrency users to report their earnings. If profits from buying and selling exceed BRL 35,000, the profits must be taxed as income tax, with 15% collected by the state through annual tax returns. In other cases, exemptions may apply. 1.1.2 Personal Income Tax (IRPF) Brazilian citizens or individuals with permanent residency in Brazil are required to pay personal income tax. Their personal income, interest, and rental income are considered taxable income, using a progressive tax rate with a maximum rate of 27.5%. Taxpayers are classified as resident taxpayers and non-resident taxpayers. Residents are taxed on worldwide income. Non-residents are only taxed on income sourced within Brazil. Taxable households with married couples may file separately if their assets are divided; if the assets are jointly owned, the non-head of household can only file separately for specific income items. Taxable income is calculated by deducting statutory deductions from various types of income, such as business income, investment income, and employment income, to arrive at cumulative net income, which is then reduced by exempt items. The Brazilian Federal Revenue Service issued Normative Instruction No. 1888, applicable to various cryptocurrency-related activities, stating that if monthly trading amounts exceed 30,000 Brazilian reais (7,800 USD), Brazilian citizens are obligated to report their cryptocurrency trading activities to the national tax authority. Failure to report accurately may result in fines ranging from 1.5% to 3% of the unreported trading amount. Subsequently, Brazil's Federal Revenue Service (RFB) announced that investors in Brazil's cryptocurrency market must pay personal income tax on transactions involving cryptocurrencies of the same type, such as Bitcoin and Ethereum. On November 29, 2023, the Brazilian Senate approved a new personal income tax bill requiring Brazilians to pay 15% tax on income generated from cryptocurrencies held on foreign exchanges. According to the bill, any Brazilian earning more than 6,000 Brazilian reais (approximately 1,200 USD) on foreign exchanges will be taxed, effective January 1, 2024. Brazil incorporates capital gains tax into personal and corporate income tax without a separate capital gains tax. The capital gains tax is also subject to the progressive tax rates of personal income tax. 1.1.3 Other Taxes Other taxes include the Social Contribution on Net Profit (CSLL), income taxes (PIS and COFINS), the Tax on Industrialized Products (IPI), import duties (II), and the Financial Transactions Tax (IOF).

1.2 State Taxes

At the state level in Brazil, the main tax is the Goods and Services Circulation Tax (ICMS), which is paid during the circulation of goods, with rates typically ranging from 17% to 19%. Interstate transactions or transportation may also incur additional interstate ICMS, with rates varying based on the state of the transaction.

1.3 Municipal Taxes

At the municipal level, the main municipal tax is the Service Tax (ISS or ISSQN), with rates ranging from 2% to 5%. According to Brazilian tax law, the tax base for ISS is the contract price of the project, and actual taxation usually occurs at the location where the service is performed.

1.4 Other Fees

Among other fees, the Social Security Contribution (INSS) is a social security cost paid by employees and employers for employees. The INSS payment method includes employers paying 20% of employee salaries and withholding 11% at the time of payment. Additionally, the Severance Indemnity Fund (FGTS) is a welfare cost paid by employers for employees, with a monthly payment amounting to 8% of the payable employee salary.

2. Analysis of Brazil's Cryptocurrency Tax Policies and Regulatory Framework

Brazil's government tax policies on crypto assets remain relatively ambiguous. The legal status of crypto assets has not been clearly defined, and their classification and taxation policies have not been explicitly established. This creates uncertainty and variability for the entire digital asset industry. The lack of a clear legal framework may lead to legal risks and investment uncertainties in the cryptocurrency market.

2.1 Overview of Cryptocurrency in Brazil

The Federative Republic of Brazil is widely regarded as one of the most cryptocurrency-friendly countries in the world, with regulations and policies aimed at promoting the adoption of cryptocurrencies and other digital assets by its citizens. In December 2022, Brazilian President Jair Bolsonaro signed a bill providing a comprehensive regulatory framework for the use and trading of cryptocurrencies domestically, legalizing cryptocurrencies as a means of payment within the country. According to the text of the bill, Brazilian residents will not be able to use cryptocurrencies like Bitcoin as legal tender, similar to the situation in El Salvador. However, the newly passed law includes many digital currencies under the definition of legal payment methods in Brazil. It also established a licensing system for virtual asset service providers and imposed penalties for fraudulent activities involving digital assets. In 2022, Brazil passed Bill No. 4401/21, classifying Bitcoin and other digital assets as financial assets, marking a fundamental change in domestic recognition of cryptocurrencies. The subsequent Bill No. 14.478/22 further developed this by defining virtual assets as digital representations that can be electronically traded, transferred, used for payment, or as investments, while introducing licensing requirements for virtual asset service providers (VASP), reflecting Brazil's forward-looking approach to cryptocurrency regulation. These legal changes highlight Brazil's evolving role in the global digital economy, presenting opportunities and challenges for venture capital in the market and emphasizing the need for a comprehensive understanding and strategic adaptation to regulatory shifts.

2.2 Brazil's Cryptocurrency Tax Policies

In 2019, Brazil's Federal Revenue Service issued Normative Instruction No. 1888, which had a significant impact on the taxation of profits from cryptocurrency operations in Brazil. The content states that only cryptocurrency transactions exceeding 35,000 Brazilian reais in a month are subject to capital gains tax. The tax is 15% of the capital gains, which is the difference between the selling price and the purchase price of the cryptocurrency, applicable to the portion exceeding the exemption threshold. The deadline is the last working day after the month of the taxable transaction. Normative Instruction No. 1888 categorizes transactions into three types: Bitcoin, other digital currencies (such as Ethereum, Ripple, BCH, USDT, Chainlink, etc.), and other crypto assets. For monthly sales below 35,000 Brazilian reais, capital gains are exempt from tax. For sales exceeding 35,000 reais, capital gains are taxed at a rate of 15%. The capital gains tax also includes a progressive tax rate for larger transactions, with rates ranging from 15% to 22.5% for amounts exceeding 500,000 reais. Investors must calculate and pay taxes through DARF (Document of Federal Revenue Collection). All transactions involving cryptocurrencies must be reported in the annual income tax return. Brazil's new cryptocurrency tax law will take effect on January 1, 2024, with the Brazilian Senate passing new income tax rules on November 29, 2023, stipulating that Brazilian citizens will need to pay up to 15% tax on income generated from cryptocurrencies held on foreign exchanges. According to the bill, any Brazilian earning more than 1,200 USD (6,000 Brazilian reais) on foreign exchanges will be subject to this tax starting January 1, 2024. This groundbreaking legislation is not limited to cryptocurrencies but also covers a broader range of overseas investments, including profits and dividends from cryptocurrencies, foreign investment funds, platforms, real estate, and trusts. The Brazilian government expects this new tax to generate approximately 20 billion reais (4 billion USD) in revenue in 2024. To encourage early compliance, taxpayers who pay these taxes in 2023 can use an 8% reduced tax rate on all income earned before 2023 and begin installment payments in December. Starting in 2024, the tax rate will increase to 15%. Notably, overseas income not exceeding 6,000 Brazilian reais (1,200 USD) is exempt from this tax.

2.3 Brazil's Cryptocurrency Asset Regulatory Framework

In September 2023, the President of the Central Bank of Brazil announced that, in light of the 44.2% surge in the popularity and adoption of cryptocurrencies in Brazil, the Central Bank plans to tighten regulations on the cryptocurrency market due to the increasing activities related to tax evasion and crime associated with cryptocurrencies. 2.3.1 Licensing and Registration Brazil's Bill No. 4401/21 laid the foundation for the regulation of virtual asset service providers (VASP), defining virtual assets as digital representations that can be electronically traded, transferred, used for payment, or for investment purposes. According to the bill, services provided by VASP include the exchange of virtual currencies for fiat currencies, the exchange between virtual assets, the transfer of virtual assets, custody or management, and participation in financial services related to virtual assets. In Brazil, operating as a cryptocurrency broker requires mandatory registration with CNPJ (National Registry of Legal Entities) and approval from Conar (National Advertising Self-Regulatory Council). This bill marks an important step in Brazil's cryptocurrency regulation, providing more security for investors and entrepreneurs. The clarity and credibility of the regulations pave the way for new investment channels, attracting institutional and traditional market investors into Brazil's growing cryptocurrency sector. The 14.478/22 bill, effective in 2023, is a milestone that further defines the guidelines for regulating virtual asset services, providing greater security for cryptocurrency investors. 2.3.2 Investor Protection and Penalties The new Brazilian law introduces penalties for fraudulent activities involving virtual assets, imposing prison sentences of 4 to 8 years and fines on offenders. This move makes it easier for victims without legally registered companies in Brazil to assert their rights. The government plans to establish specific rules to punish such criminal activities, which will not only include pyramid schemes but also reduce all fraudulent activities involving cryptocurrencies, aiming to enhance the security and reliability of virtual assets. Additionally, users will be able to identify which companies have been licensed, making it easier to distinguish illegal companies.

3. Future Policy Directions for Brazil's Cryptocurrency Asset Regulation

Brazil's cryptocurrency market regulation is rapidly evolving to meet the growing demand. Despite regulatory and bureaucratic challenges in most areas, the Central Bank of Brazil and CVM have taken proactive measures to rectify this situation to promote blockchain innovation. The introduction of CBDCs has significantly advanced the development and resolution of related issues for startups and fintech companies in Brazil. Current trends show fintech companies leveraging blockchain technology and CBDC infrastructure to seek solutions in the financial and payment markets. Some startups have secured funding from large investment funds, such as Lumx receiving investments from BTG Pactual Bank and BRLA's seed pre-financing. Throughout Latin America, strict regulations, high inflation, and difficulty accessing international assets have provided a geographical advantage for the development of blockchain startups. The progress of CBDCs and tokenized government bonds has led to the establishment and development of other startups, most of which focus on executing upstream and downstream transformations and using tokenized government bonds to innovate collateralized credit solutions. Blockchain technology is not limited to financial markets but also releases value in agriculture, events, and physical assets. Asset tokenization improves efficiency across various fields through secondary markets and liquidity. In emerging countries, the agricultural market is particularly important, with applications providing financing for agricultural operations by tokenizing different assets, such as Agrotoken. Overall, the Brazilian government appears to adopt a relatively open stance towards crypto assets, attempting to achieve a balance in regulation for emerging industries. However, the lack of clear regulations and regulatory frameworks leaves the legal status of digital assets and their tax treatment uncertain. The government is likely to closely monitor the development of the digital asset industry to formulate clearer and more flexible tax policies while protecting investors and market stability. Future policy directions may be influenced by domestic and international economic conditions, market demand, and international regulatory trends. The Brazilian government is expected to promote innovation and sustainable development in the industry by establishing 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, aiding its economic diversification and sustainable growth.