Brazil’s finance minister postpones controversial cryptocurrency tax proposal.

The suggested tax would categorize specific cryptocurrency transactions as foreign exchange activities, with rates potentially reaching up to 3.5%.

(Rafaela Biazi/Unsplash)

What to know:

• Brazil’s finance minister has postponed a consultation regarding the taxation of certain cryptocurrency transactions, expressing concerns about provoking conflict with Congress during an election year.
• The suggested tax would designate specific crypto transactions as foreign exchange operations, with rates reaching up to 3.5%, which industry associations claim are both illegal and unjust.
• This delay follows opposition from industry representatives, who argue that stablecoins should not be classified as foreign exchange instruments, and it may also precede the withdrawal of another proposal to eliminate tax exemptions on investment securities.

Brazil’s recently appointed finance minister, Dario Durigan, is anticipated to postpone a public consultation on imposing a tax on financial operations, known locally as Imposto sobre Operações Financeiras (IOF), on certain cryptocurrency transactions, according to Reuters, citing informed sources.

Durigan assumed office on March 20 after Fernando Haddad resigned to campaign for governor of São Paulo. Reuters noted that the new minister aims to prioritize microeconomic initiatives and steer clear of proposals that might incite conflict with Congress in an election year.

The delayed consultation focused on a proposed decree that could categorize some cryptocurrency transactions as foreign exchange operations.

This classification is significant because foreign exchange transactions in Brazil may incur IOF rates ranging from 0.38% on some inbound transactions to as high as 3.5% on international purchases, remittances, and card expenditures abroad. Transfers intended for overseas investments may face a 1.1% rate.

The proposal has already encountered resistance from key industry groups. In a joint statement, organizations including ABcripto, ABFintechs, Abracam, ABToken, and Zetta, which collectively represent over 850 companies, asserted that applying IOF to stablecoin transactions would violate Brazil’s constitution and the 2022 Virtual Assets Law.

They contended that stablecoins do not qualify as fiat currency and cannot be classified as foreign exchange instruments through decree or administrative regulations.

The proposal gained attention in February when the central bank categorized part of the cryptocurrency market, particularly certain stablecoin activities, under foreign exchange regulations. This provided the Finance Ministry and tax authorities a basis to investigate whether these transactions should be subject to IOF.

The ministry may also consider shelving a separate proposal aimed at removing tax breaks on certain investment securities.