El Salvador to exempt bitcoin profits from income tax

RIO DE JANEIRO, BRAZIL – On Tuesday, September 7, El Salvador became the first country to establish bitcoin as a legal tender on par with the dollar, the currency that has governed the country’s economy for 20 years.

“If a person has bitcoin as an asset and has a high profit, there will be no tax. This is obviously intended to encourage foreign investment,” said the presidency’s legal advisor Javier Argueta.

“Neither capital gain, nor income, no tax will be paid. This is an advantage that has drawn much attention,” he explained.

President Nayib Bukele’s plan experienced some setbacks, such as a crash in the state-owned electronic wallet system Chivo due to high demand. But the technical issues have been gradually resolved.

The “Chivo Wallet” can only be accessed by Salvadoran citizens, who receive a voucher equivalent to US$30 in bitcoins to start operating.

The government installed 200 Chivo ATMs to recharge electronic wallets or to make withdrawals in dollars of bitcoins received from transfers, deposits from abroad or business sales.

FIGHTING MONEY LAUNDERING

El Salvador’s openness to bitcoin set off alarms about its potential use for money laundering in this cryptoasset that often operates under shrouds of confidentiality.

“The ‘chivo wallet’ includes mechanisms for due diligence. The important thing about it is obviously the traceability of the money, the origin and outflow of funds. This is now regulated for the private sector and there are a number of conditions that must be met just as they are with the dollar,” Argueta said.

“We are complying with a number of recommendations from international institutions against laundering, mainly due diligence” through the Central Reserve Bank, he added.

PROTECTION AGAINST VOLATILITY

When it emerged in 2009, bitcoin cost only cents on the dollar, but last year it reached a value of US$62,000. On the day Bukele’s plan was launched, the cryptocurrency was worth over US$52,000, but dropped to around US$47,000.

Argueta said that should the price of bitcoin drop significantly, there is a BCR regulation to temporarily halt operations and minimize the impact of the high volatility.

In the case of natural or legal persons, “as it is optional to have it, individuals bear the risk and decide whether they want bitcoin as an asset.”

Regarding state reserves, the BCR has also established a technical regulation to have a back-up in dollars in case of “any eventual loss.”

MASSIVE ALBEIT NOT MANDATORY

With 70% of its population unbanked, El Salvador seeks that all its inhabitants “have the required means to be able to use bitcoin.”

Argueta clarifies that holding this cryptocurrency is not mandatory, although businesses must have the mechanism to accept the transaction.

“I accept the transaction, I have no option but to accept the transaction, but when the cell phones are joined, when the transaction is added, it will always appear in the ‘Chivo wallet’ or in other regulated wallets, it will always ask if I want bitcoin or dollars,” he said.

He also reiterated that salaries and pensions are paid in dollars, which remains as legal tender of El Salvador alongside Bitcoin.

ATTRACTING MORE REMITTANCES

Remittances from the Salvadoran diaspora – 2.5 million citizens live in the United States – represent 22% of the country’s GDP. Argueta assured that, with no commissions charged in the ‘Chivo Wallet’, remittances from abroad will increase because Salvadorans abroad will also have access to the app.

“Our people abroad who send remittances to their families pay around US$400 or US$450 million in commissions to the different institutions that make these transfers” or to the so-called “messengers,” who bring the money physically on flights, he said.

“Those US$450 million that are currently collected in commissions will be sent by our brothers and sisters abroad to their families, thereby boosting the country’s economy,” he said.