Normative Instruction No. 1,888/2019 (IN 1,888), which establishes and disciplines the provision of information related to cryptoasset transactions, shows the concern of the Brazilian Federal Revenue Service (RFB) with providing transparency in transactions with virtual currencies. Although it represents an increase in compliance costs for companies operating in this market, the measure may give more credibility to the industry and help attract new players.
RFB's effort to publish a specific regulation on this matter confirms what the market and industry experts already knew: the volume of cryptoasset transactions has taken off in recent years and still has strong growth potential. In fact, the explanatory memorandum accompanying RFB’s Public Consultation No. 6/2018 on the subject already showed an estimated movement of R$ 18 to 45 billion in bitcoin transactions only in 2018.
Although bitcoin is the best known of the "virtual currencies," it is already possible to identify in an avalanche of new “altcoins” and other types of cryptoassets in the market. Aware of this new trend, the RFB was concerned with giving cryptoassets a comprehensive definition, rather than just using the term "virtual currencies," and deeming them as equivalent to financial assets, as it had been doing in the most recent editions of the Individuals Income Tax Questions and Answers.
According to IN 1,888, a cryptoasset is " the digital representation of value denominated in its own unit of account, the price of which may be expressed in local or foreign sovereign currency, transacted electronically using encryption and distributed recording technologies, which may be used as a form of investment, an instrument for the transfer of funds or access to services, and which does not constitute legal tender."
The broad definition adopted by the RFB suggests that tax authorities will seek to impose the obligations brought in by IN 1,888 on all kinds of transactions or investments involving encryption, including the so-called security and utility tokens, and not just crypto-coins. For this reason, we also believe that one cannot rule out the possibility that, in the future, the RFB will require transactions with fictitious virtual game currencies, or even credits used in certain applications, be reported on the basis of the new rule.
“The broad definition adopted by the RFB suggests that tax authorities will seek to impose the obligations brought in by IN 1,888 on all kinds of transactions or investments involving encryption, including so-called security and utility tokens, and not just crypto-coins.”
Following the effort to broaden the scope of persons required to provide information, the RFB also defined the concept of a cryptoasset exchange. According to IN 1,888, a cryptoasset exchange is “a legal entity, even if non-financial, that offers services relating to transactions performed with cryptoassets, including brokering, trading, or custody, and which may accept any means of payment, including other cryptoassets."
The RFB further clarifies that the concept of brokerage of cryptoasset transactions includes "the provision of environments for the execution of cryptoasset purchase and sale transactions carried out among the users of its services."
As explained below, the classification of a legal entity as a cryptoasset exchange is important because IN 1,888 imposes rigid obligations to these entities, including the control of their clients and the transactions they execute. On the other hand, the above definition refers only to legal entities that provide services related to transactions performed with cryptoassets, and does not cover entities that only accept or use cryptoassets as a payment method. Thus, companies that merely exchange their products or services for bitcoins, for example, should not be subject to the obligations imposed on exchanges.
In the same sense, IN 1,888 also does not refer expressly to companies that provide platforms for users to exchange products or services for cryptoassets, without the cryptoassets themselves being bought and sold for cash. Thus, in principle, marketplaces hosting vendors that accept cryptoassets as a form of payment would not qualify as exchanges.
After establishing the definitions above, the RFB required individuals or legal entities that carry out transactions involving cryptoassets to provide, on their own account or through a proxy, the information required by IN 1,888 in relation to transactions exceeding the monthly volume of R$ 30 thousand. These transactions include the purchase and sale, barter, donation, and even the "withdrawal" or "deposit" of cryptoassets in an exchange. These individuals and legal entities must report, among other information, the date, type, value, and persons involved in the transaction, the cryptoassets used, and the address of the sender's and the recipient's wallet.
These users, however, are only required to provide the above information in the event of transactions without the involvement of an exchange or of transactions involving a foreign cryptoasset exchange. In the case of cryptoasset transactions in a Brazilian exchange, the obligation to provide the information on the transactions is transferred to the exchange, and not the individual users or legal entities mentioned above.
In turn, exchanges domiciled in Brazil are obliged to provide the same information on the transactions carried out by their users. In both cases (delivery by users or by the exchanges), the frequency is monthly.
In addition, by the end of January of each year, exchanges must report the balances of fiduciary currency and cryptoassets held by their users as of December 31 of the preceding year, as well as the acquisition cost of each of these cryptoassets, if disclosed by the user. These rules seem to aim at controlling the capital gains earned by users in transactions with cryptoassets, which, according to the position adopted by the RFB, are subject to the imposition of income tax.
The entities covered by the RFB's definition of a cryptoasset exchange will need to maintain computerized management systems in order to be able to generate all the information required by IN 1,888 in a timely manner to meet the deadlines established. Likewise, these exchanges must be prepared to guide their users in relation to the new procedures required by the RFB.
Delay, omission, inaccuracy, or incorrectness in the delivery of the information requested by the RFB subjects the declarant to fines ranging from R$ 100.00 to 3% of the value of the transactions to which they refer, depending on the qualification of the declarant and the type of infraction.
From a reading of IN 1,888, it is possible to predict that the RFB will require the reporting of any and all relevant transactions involving digital assets. In fact, IN 1,888 is part of an effort by the RFB already felt in other sectors, such as the management of investment funds, which aim at increasing the transparency and reliability of transactions that, in the view of tax authorities, have a high potential to facilitate or cover illicit conduct. This effort is aligned with an international tendency to demand greater transparency of financial institutions and similar organizations regarding the transactions carried out by their clients.
Thus, despite increasing compliance costs, IN 1,888 may ensure the credibility of cryptoasset operators who meet its requirements. From this point of view, the RFB's new measure has the potential to attract sectors that have hitherto been resistant to the use of cryptoassets, as may be the case with institutional investors and financial institutions.