Venezuela: Bitcoin payments will be subject to taxation if this law is passed

The Venezuelan Parliament, controlled by the ruling Chavism, approved a few days ago in first discussion the reform of the law on tax on large transactions, which imposes a surcharge of up to 20% on transactions carried out -natural and legal- with currencies and cryptocurrencies, such as bitcoin (BTC).

The reform, available for appreciation on the official page of the National Assembly, states that they seek to promote, through taxes, a treatment "at least equal, or more favorable" to payments executed with cryptocurrencies and foreign currencies.

Taxes equal to or higher than payments in bolivars

In detail and as explained in the legislation still under discussion, it is intended that operations in foreign currency and digital assets pay a tax on debits and transactions "at least equal to or higher than that currently paid by debits in bolivars."

The project intends to apply the tax for these transactions at a rate ranging from 2% to 20%, starting at 2.5% for all foreign currency transactions until the Executive establishes a different pace.

The exciting thing is that, although there are exemptions, the reform adds as taxpayers of the tax all those businesses, companies, premises, or individuals that make payments in cryptocurrencies other than those issued by the Bolivarian Republic of Venezuela, such as the petro token.

This, "within the national banking system, without the intermediation of a foreign banking correspondent, by the policies, exceptional authorizations, and parameters established by the Venezuelan Central Bank."

The Venezuelan Parliament recognizes the transactional dollarization that has arisen in the Caribbean country due to the enormous crisis they are going through. According to the Legislative, it is true that there are activities "highly concentrated in payments in dollars in cash." This occurs "in large businesses that today represent an important part of the tax collection."

The document clarifies that the tax on large transactions represents 13% of the Venezuelan tax collection. Therefore, they estimate that, in a medium-term scenario, the reform will increase tax collection by 5.4% more.

Paid in bolivars, calculated in dollars

Juan Castillo, the former president of the Venezuelan Tax Law Association, explained that since there is still no technical norm to regulate the application of the tax, the payment will be made in bolivars. Still, the calculation will be in foreign currency.

This tax, added the jurist, will coexist -if approved- with other taxes already in force in Venezuela, such as the Value Added Tax, for example.

The law, it should be clarified, would enter into force provided that it ends up being approved in the second discussion and subsequently sanctioned by the Parliament. However, changes and modifications may be made in that session. In addition, and in theory, the legislation must be consulted with Venezuelan unions and citizens by the provisions of the Constitution.

This tax, it should be noted, has already been in effect for some time. In principle, it was a 2% tax on large financial transactions applied to "special taxpayers." These are legal entities previously identified by the Venezuelan tax agency (Senate) that have a certain income level.

According to the legislation, it is known that the tax is automatically deducted from the bank account when one of these companies executes a transaction. Likewise, if the transaction is made by means other than Venezuelan banks, they must calculate 2% and deliver it to the treasury.

This is not the first time that the Venezuelan State has tried to regulate the cryptocurrency market through taxes. Two years ago, the now-defunct National Constituent Assembly (ANC), also controlled by chavismo, approved a decree of partial reform of the Organic Tax Code, where a surtax of between 5% to 25% was created for purchases in foreign currencies and cryptocurrencies.

However, soon after came the quarantine by COVID-19, and that initiative did not end up being implemented. Therefore, this law reform on taxation of large transactions seems to be a new attempt to grow the public treasury from cryptocurrencies.

The Venezuelan government recognizes the enormity of operations in foreign currencies and cryptocurrencies.

Olmos points out that the idea of a 2.5% tax is that when a business processes a transaction, it will issue a legal invoice detailing the VAT, for example, and this new tax.

However, he does not believe that this will make the price of products in Venezuela more expensive. Under the principle of sound money and bad money, consumers and traders will protect transactions in other currencies since they see more profitability and inflation hedging.

Instead, he predicts an increase in the formalization of the registration of payments made with currencies other than the bolivar "because it would be a matter of protecting these means of payment." "There will be one or two operations that will be registered to show that they are being carried out, but there is no way to have the details," he explained.

Very difficult to trace payments

Aarón Olmos points out that it will be complicated for the Venezuelan State to trace payments in cash currencies. The same with cryptocurrencies, where they will have practically no information that would allow them to know what has been traded.

"In the case of foreign exchange, if a person pays with his international credit or debit card, that is recorded. But if it is in cash, it isn't easy to know. It is up to the merchant's discretion to declare or not how much he made in transactions. In the case of cryptocurrencies, it is more difficult. Operations go from purse to purse. The Executive has no control, and it does not know how many operations are taking place, where, or what volume. There are no details".

Aarón Olmos, Venezuelan economist specialized in cryptocurrencies.

Dollars and cryptocurrencies take the place of the bolivar

The reform to the law on taxes on large transactions is also ideologically charged. In principle, the pro-government National Assembly admits that they want to encourage, in terms of taxes, the use of the depreciated bolivar, "making its use cheaper about foreign currency, thus supporting the gradual strengthening of our national currency."

It happens that, due to inflation, the bolivar is only used for small transactions, such as daily purchases or retail, losing ground to alternative currencies, such as the dollar, the euro, and, of course, cryptocurrencies, for other significant transactions.

It is well known that, at the corporate level, it is already preferred to negotiate the purchase of raw materials, for example, with foreign currencies. Not to mention imports and exports, which are also based on other, more stable currencies.

And at the consumer level, the story is the same. More and more people are using alternative means to acquire products and materials. This is where cryptocurrencies have come into play since, due to the informal nature of dollarization, a shortage of low denomination banknotes was unleashed, something covered and solved by digital assets and payment platforms, such as PayPal and Zelle.

Moreover, it is known that this country is one of the largest in terms of peer-to-peer (P2P) trading volume. And not only that, the Caribbean nation is the seventh in the global adoption of cryptocurrencies, according to Chainalysis.

Thus, if the reform is approved, we would be talking about a significant tax burden for those who have found in foreign currencies a refuge from Venezuela's relentless inflation, which, although it has slowed down, is still enough to keep the country in a significant economic crisis.se país en una importante crisis económica.