Bitcoin: The World Sets Its Eyes On El Salvador

• Published date: 13 December 2021
• Subject Matter: Tax, Technology, Sales Taxes: VAT, GST, Fin Tech
• Law Firm: TMF Group BV
• Author: TMF Group

As cryptocurrencies and other digital assets gain more prominence in the financial landscape, El Salvador is making headlines around the world for its adoption of bitcoin (BTC) as legal currency in the country.

As of 7 September 2021, El Salvador became the first country in the world to recognise bitcoin as legal currency, through the entry into force of the Bitcoin Law and Decree No. 27 containing the Regulation of the Bitcoin Law, making it mandatory for all Salvadorans and companies established in the jurisdiction. The Oversight Board of the Public Accounting and Auditing Profession, the entity that regulates accounting in the jurisdiction, issued an accounting application guide for bitcoin that considers how to account for transactions. It has taken into consideration compliance with the asset elements established within the conceptual framework of the IFRS standards and depending on the use for which the company will hold the cryptoassets: either as a means of payment (a current asset), or for trading (a non-current asset).

El Salvador has bet on the future and intends to boost financial inclusivity in the country, given that 70% of the population does not have a bank account. One of the government's main objectives is to promote investment from anywhere in the world, by decentralising financial systems and generating a more competitive rate for the receipt of remittances, which represent 16% of the country's GDP.

Tax incentives and opportunities

Although it is remarkable that companies still do not have access to the technologies that allow the execution of transactions in BTC, transactions with the cryptocurrency, which recently reached its historical maximum, turn out to have a competitive advantage over the handling of other assets; exchanges will not be subject to any tax, be it capital gains, value added tax (VAT), income tax, or so on. Additionally, the government offers the facility to make tax payments through this currency.

The main objective of the use of BTC is to encourage foreign investment, offering lower costs, simpler purchasing processes and the security offered by the use of blockchain within the internal processes of companies.

Among the measures to stimulate the economy and incentivise the use of BTC, the Salvadoran government has created the bitcoin digital wallet, "Chivo", and has delivered a US$30 voucher to each citizen that can be used for the purchase of goods and services. In addition, a...