The Chilean yearly income tax return has seen some changes in fiscal year 2021. The first and most notable one is that the term for income tax filing has been extended. The Ministry of Finance (MoF) announced that the term for filing yearly income tax returns will be extended until May 31 2021 to help taxpayers with tax compliance obligations in light of the challenges that COVID-19 has caused.
However, the extension of the filing term is not the only surprise for taxpayers. In a year where the prices of bitcoin, ether and even dogecoin have skyrocketed, taxpayers, particularly those that invest in cryptocurrencies would have seen a pop-up on the Chilean Internal Revenue Service’s (IRS) website, when filing the annual tax return. This pop-up gave taxpayers notice that any transactions in cryptocurrencies were being included in the 2021 income tax filing for the purposes of calculating income tax due for this fiscal year.
This should come as no surprise, since the IRS has included a reference to the taxation of cryptocurrencies since 2019, when issuing the guidance for annual income tax filing. It should be noted that the instructions set forth in the annual guide, only refer to the capital gains and losses derived from transactions in cryptocurrencies alongside repeating the general criteria on the matter that the IRS has adopted.
For those who are not familiar with the Chilean tax system, the inclusion of this pop-up is in line with the IRS’ flow of financial information received from several private and public entities, in this particular case, the entities that act as intermediaries of digital assets. The intermediaries of digital assets alongside all financial intermediaries, are obligated to report the sales and purchases transactions of digital assets. This obligation has been in force since FY2019.
Overall, the Chilean tax approach to cryptocurrencies and cryptoassets is, to say the least, not very comprehensive. For those keeping count, the IRS has only made refer to the tax consequences of transactions involved in cryptocurrencies in four administrative rulings. Besides that, and to this date, the IRS has not issued any formal and comprehensive guidance. The first of these rulings was issued in 2018, coming four years after the first guidance issued by the IRS and HMRC in 2014. The last of these rulings was issued in 2020.
Considering the astoundingly fast development of the underlying technology since its inception, i.e. blockchain and distributed ledger, these administrative pronouncements seem only to touch the tip of the iceberg in what seems to be an ever-growing amount of tax challenges that cryptoassets pose.
In broad terms, the administrative pronouncements of the IRS address the following initial areas of concern that all tax administrations face when dealing with cryptocurrencies:
Their legal nature;
The taxation of capital gains derived from the sale;
The timing for income recognition;
Inventory recognition method;
VAT treatment; and
Taxation of the intermediaries or exchanges for their services.
The IRS’ interpretations of the above have been reasonable and in line with general Chilean tax principles. However there are many other tax questions that are still left unanswered, starting with the taxation applicable to miners and forgers, the questions of barter transaction when tokens are exchanged for services or other goods, what happens in case of hard forks, what happens with non-fungible tokens, and the list continues.
Unlike the referred pop-up that taxpayers got, the interest that tax authorities have shown on the income, capital gains, and generally speaking other taxable events that are derived from cryptotransactions is well expected and in line with what other tax administrations are doing.
Chilean tax developments in these matters should be closely monitored by all kind of investors that have their eye – like the rest of the world has – on cryptoassets.
Sandra Benedetto
Partner, PwC Chile
Jonatan Israel
Manager, PwC Chile
