Bitcoin is a virtual money that is not controlled nor issued by a government or a company. For that reason, it is decentralized, or peer-to-peer. Bitcoin is not minted as the traditional money we know, but rather created through a process called mining. Miners are computer programmers who validate the transactions of Bitcoins captured in the web via mathematical formulations.
Confirmed transactions are inputted into the Blockchain, a ledger where all operations of trade of Bitcoins are registered. The system works on its own, in an intricate cryptographed environment. After Bitcoin, literally hundreds of other cryptocurrencies came to life.
If you are a mortal like me, this whole explanation seemed way too complicated. Do not worry, though. There are easier ways to come across a Bitcoin. You can simply buy one with hard cold cash, and store in your e-wallet. If you had done it a couple of months ago, you could have doubled your investment today.
Uses for Cryptocurrencies
Bitcoin was originally used in transactions within the boundaries of the electronic environment: exchanges between gamers and geeks in general. It was born in 2009 and traded for zero dollar until 2013, and then took-off, when it started being accepted by “real life” businesses. In December 2013 one Bitcoin was worth US$ 1,060.00. The Bitcoin traded recently for more than US$ 4,400.00, an all-time high.
Cryptocurrencies can be used for exchanges online, but also to buy goods outside of the internet. They are also convertible into government issued currencies such as Brazilian Reais. One collateral usage of Bitcoin is speculation, given that they are available in a market with equivalent real money value.
Bitcoin and the Law
Is it legal? Bitcoin is legal in most parts of the world but it is forbidden in some countries, such as Bolivia and Saudi Arabia.
How is it taxed? The Brazilian tax authority (RFB – Receita Federal do Brasil) has published in the Q&A for income tax filings for individuals (Declaração de Imposto de Renda Pessoa Física) its opinion about virtual currencies: the RFB treats virtual currencies not as money but as property/goods. As such, they shall be declared by their acquisition price. The sale of cryptocurrencies (see question 607 of the Q&A) will be taxed as capital gain, when above 35,000 Reais/month – at a 15% rate.
The tax collection finds a limitation here, because Bitcoins are anonymous, or pseudonymous. Thus, they only manner for the RFB to have access to the volumes negotiated by users is through spontaneous declarations.
Notwithstanding scarce manifestations from the government, namely an unsophisticated bill (Projeto de Lei 2303/15), by congressman Aureo Lidio Moreira Ribeiro (SD/RJ), cryptocurrencies are far from being regulated in Brazil.
As means of exchange, virtual currencies are starting to be the object of legal dispute. There are currently 11 rulings registered at the Tribunal of Justice of São Paulo (TJ/SP), dealing mainly with the payment or delivery of bitcoins, i.e., the property aspects of the bitcoin. To our knowledge, Brazilian judges have not yet been confronted with the essential definition of the bitcoin: is it money, property, a type of security, other?
Cryptocurrencies are a new phenomenon. Although they were born in 2009, with Bitcoin, it wasn’t before 2011 that they acquired some monetary value and thus became the object of disagreement. As real and virtual worlds continue to intersect, legal interpretations will have to be fabricated for situations of bankruptcy, inheritance, and many others. The enthusiasts of Bitcoin will hate to see it regulated by the government, but a guess is that the tendency, as for anything, is that the State will regulate virtual currencies in the following years.
Luckily, as we saw happen time and time again, every time a market is disrupted, it hardly goes back to what it was originally. Cryptocurrencies have revolutionized the way to think money, hence we shall see more cryptocurrencies being launched, via ICOs – Initial Coin Offerings – and we shall see Blockchain used to organize markets in a way we had never imagined.
* Originally published in Recht & Steuern issue 3/2017
Adriano B. Consentino was partner at Pacheco Neto Sanden Teisseire Law Firm.