El Salvador Brings New Global Puzzle - What Is Bitcoin & How To Tax It?
There is a great number of issues debated today following the major news that El Salvador recognized the world's number one cryptocurrency, bitcoin (BTC), as legal tender. This may bring some important changes when it comes to how bitcoin is treated on the legal stage globally. However, in what manner and to what extent is not exactly clear yet.
As reported, the Legislative Assembly of El Salvador passed the Bitcoin law today. Also, the 90-day countdown to promulgation has already begun, meaning that, in September, BTC will be recognized as a satisfactory payment for any monetary debt.
The new law also allows prices to be expressed in BTC and taxes to be paid in it, while exchanges in BTC will not be subject to capital gains tax.
“It will be interesting to see how tax authorities around the world react to this,” Richard Howlett, a solicitor at Selachii Legal Limited, a London-based law firm, told Cryptonews.com.
According to him, if El Salvador would declare that their legal tender is BTC only, then it would set an argument that BTC elsewhere is not subject to capital gains tax also.
"However, I fear that governments worldwide would not want to lose the capital gains tax income and would likely state that they do not recognize it as a currency and it remains classed as an asset," Howlett said, adding that it would take some form of legal precedent to change this.
"If a court agrees it is not subject to capital gains tax as it is a currency, then there will be lots of very happy crypto owners!"
Niklas Schmidt, Partner with the Austrian law firm Wolf Theiss, and author of two books on crypto, also noted that the fact that El Salvador's legal tender is now BTC means that legal provisions in statute books making reference to other jurisdictions' legal tender will now possibly also cover bitcoin.
"There are many rules which apply to currencies and where previously you could say that bitcoin is not encompassed. Now that bitcoin has been adopted by one particular country as its currency, it will have to be re-evaluated whether such rules now do apply," he told Cryptonews.com, stressing that it is not possible to make a general statement applicable to all countries.
"There will be cases where this does have an impact and cases where this is not the case, depending on the interpretation of the wording of a concrete provision," Schmidt added.
Meanwhile, a US-based lawyer told Cryptonews.com that while the Internal Revenue Service treats BTC as the sale of the property at capital rates taxed on the gain-less basis, in terms of international transactions, it’s not wise to use BTC in international trade deals with Salvadorian partners "considering its instability and difficulties in legitimate banking."
"Most major international corporations aren’t going to be keen to take bitcoin as tender in a deal," the lawyer, who wished to remain anonymous, added.
In either case, El Salvador will now be in the spotlight for some time.
An experimental stunt
"Governments and central banks around the world will be watching the El Salvador experiment to see if Bitcoin becomes part of daily life for payments, remittance and a reserve asset for banks and corporations in the country," Ross Middleton, Chief Financial Officer of DeversiFi, a Layer 2 decentralized exchange (DEX) and decentralized finance (DeFi) trading platform, said.
However, per Howlett, El Salvador’s model can’t simply be copy-pasted, as every country would legislate in their own way, according to their formal procedures, but “as the El Salvador model proves to be a success, other countries will follow.”
He estimates that, most likely, it will be countries that "have the demographic of a third world country" and BTC adoption "could generate wealth that is unimaginable for them and bring some relief."
And when it comes to specifically the EU and North American countries doing the same as El Salvador, it might be better not to hold our breaths.
The EU is in Howlett’s opinion “too caught up in its own self-importance to adopt,” which is why “they miss many opportunities.” Will they adopt BTC instead of the Euro? “In the short term no,” he said, and in the long term, “if (and it is a big if) the EU remain as one unified block, there is potential it could happen but if the EU falls down and the countries within it move back to being on their own, it would make perfect sense for those countries to adopt BTC instead of going back to their former currency.”
"In the Eurozone, under the current rules, countries are prohibited from introducing a new form of legal tender; thus, adoption of bitcoin as legal tender in the European Union would only be possible by those few countries not part of the Eurozone. I do, however, think that this is highly unlikely," Schmidt added.
North America too would probably never do this, per Howlett, as “they like to print money (in the same way the UK does) as and when it suits them.” Furthermore, both North America and the UK are sticking “to old-fashioned values and the manner in which they feel they have to control their citizens.”
Meanwhile, Schmidt described the initiative of El Salvador's president as "definitely a publicity stunt" which has put "this tiny Latin American country into the spotlight."
While bold, the move is not "a panacea for all of El Salvador's woes," said Schmidt. He argued that Latin American countries are in "a mess" contributed to by decades of economic and cultural Marxism – a mess that was recently highlighted by hundreds of people taking selfies in front of a dumpster full of worthless Venezuelan bills at last week's Bitcoin event in Miami.
However, Howlett opined that BTC might help a country in case of hyperinflation.
“By adopting BTC as legal tender, a ‘currency’ that is decentralized, they avoid hyperinflation and it gives them an amazing opportunity to prosper as a country and a government,” he said.
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(Updated on June 10, 08:44 UTC with a quote from a US-based lawyer.)