Over time, the phenomenon of "cryptocurrencies" has become increasingly relevant, and it is becoming more common for these assets to be accepted as a means of payment. This trend has increased the interest in understanding their functioning, as well as the provisions that regulate their general aspects from a tax perspective.
From the definitions that several international organizations have given to cryptocurrencies, we can conclude that it is a digital medium of exchange of value, whose main distinction from other forms of money is its decentralization.That is to say, while currencies are regulated by the central authority of each country and issued according to economic needs, cryptocurrencies do not dependon any centralized body but are regulated by the community.
II. MAIN TAX CHALLENGES
Firstly, it is important to mention that there is no explicit taxregulation in Uruguay for these types of assets. However, it seems evident that their tax treatment must be regulated, especially regarding their classification for Net worth Tax and Income Tax purposes, to establish valuation criteria and other aspects that can provide certainty concerning the applicable tax treatment.
It is not advisable to restrict or force the application of the source criteria on to these types of assets whose location cannot be determined. Although the Tax Code grants certain autonomy in the interpretation of rules and allows reaching extensive results with respect to the terms contained therein, we consider that in this case, it would be necessary to deviate from the concept of source in order to include cryptocurrencies in our current taxprovisions.
In this sense, although analogy is a valid procedure to fill legal gaps in tax matters, an additional precaution is required due to the principleof legality, so that by analogical integration, no taxes, infractions, or exemptions may be created. Therefore, it would not be admissible to find asolution to this treatment by this means.
In addition, we believe these types of assets need to be classified. As analyzed below, considering them as currencies or personal property is not indifferent, since this has consequences for the treatment in terms of taxableincome.
On the other hand, the great dynamism, and the constant appearance ofnew variants of these types of assets pose difficulties when it comes todefining an adequate treatment. This represents another great challenge sinceit will be necessary to establish neutral solutions for assets with similarcharacteristics, which at the same time accompany their evolution and progress.
At the international level, the Organization for Economic Cooperationand Development ("OECD") warned that there is no consistent treatmentof these assets in the different countries. As they do not have a clearlocation, it would be advisable that local regulations be accompanied byagreements at an international level, to prevent this global phenomenon frombeing treated asymmetrically among the different countries.
III. OPINIONS OF THE TAX AUTHORITIES
Tax Authorities stated their position through Consultation 6,419,which is the only precedent we have to date regarding the tax treatment ofcryptocurrencies.
By means of this consultation, the operation of transferring realestate property in exchange for cryptocurrencies was raised. The positionadopted by the Tax Authorities in this regard is that this would be consideredan exchange of real property for personal property.
This is based on section 1661 of the Civil Code, which states that inpurchase and sale transactions, one of the parties is obliged to give somethingand the other to pay for it in money. Although there are multiple definitionsof money, the concept adopted is the one established by the Central Bank ofUruguay ("BCU"): "(...) any asset that is widely accepted asa means of payment. In addition to this function, money also serves as a unitof account and a store of value".
Based on the above, Tax Authorities respond that cryptocurrencies donot meet such conditions.
Although the solution provided has reasonable grounds, we understandthat it was adequate at the time, without considering that nowadays the trendhas changed, and cryptocurrencies are gaining more and more acceptance.Consequently, when they become widely accepted as a means of payment, it willbe necessary for the Tax Authorities to change their criteria or issue a newconsultation in order to provide legal certainty to taxpayers.
For VAT purposes, the movement of goods shall mean any transaction forvaluable consideration that consists of the delivery of goods by transferringthe right of ownership, including, among others, barter transactions.
It is worth mentioning that, both for Income Tax and VAT purposes, thebarter transaction will be covered provided that the cryptocurrencies arelocated in Uruguay. As mentioned above, this aspect is not defined according tothe source criterion provided in our tax system, nor was it addressed in thisConsultation.
IV. DRAFT BILL
In October 2021, a draft bill was published containing tax provisionsaimed at providing solutions to the problems posed by crypto assets. It shouldbe noted that this bill has not yet been considered by the Parliament.Likewise, in September 2022 the Central Bank of Uruguay submitted another billregulating crypto assets, which currently has the approval of one of theChambers of Parliament. However, there are no tax provisions in the laterdraft.
Below we will comment on the tax provisions contained in the firstmentioned draft bill.
As regards the material aspect, it is stated that it shall be treatedin the same way as foreign currency. Consequently, the purchase and sale of thesame shall not be subject to income tax or VAT.
However, this classification has implications concerning the taxtreatment resulting from holding assets. Since cryptocurrencies are highlyvolatile, exchange differences accrued during the year may generate significantgains or losses. Although they are excluded from Personal Income Tax (IRPF, forits acronym in Spanish) and Non-resident Income Tax (IRNR, for its acronym inSpanish), they will be computable for Income Tax on Economic Activities (IRAE,for its acronym in Spanish) purposes.
As for the spatial aspect, they are presumed to be considered as beingoutside Uruguay, except for those used exclusively or mainly for the domesticmarket. The later aspect was not defined in the draft.
Furthermore, it states that the payment of goods orservices with cryptocurrencies shall be considered as monetary payments with aforeign currency, therefore, we would no longer be in a barter hypothesis.
In view of the above, we believe that it is essential to provide asolution to transactions involving cryptocurrencies, in order to provide legalcertainty to taxpayers. For its part, Tax Authorities must establish reasonableprocedures and controls to ensure compliance by individuals.