Author: Oscar A. López Velarde Pérez (Tax Partner), Joaquín Aguinaco Gómez Mont (Tax Associate), Ritch, Mueller, Heather y Nicolau, S.C.
The statements in this document reflect guidance issued as of May 21, 2020.
Mexican legislators and tax authorities have remained silent on the tax treatment of cryptocurrencies. There is no tax rule in Mexico that makes reference to cryptocurrencies of any kind.
In 2018, with the approval of the Law to Regulate Financial Technology Institutions (“FinTech Law”), the Mexican government laid down a (much needed) regulatory framework for the fintech industry, including the use of cryptocurrency. However, the FinTech Law does not specifically regulate the particularities of the crypto market, including the mining process.
Complementary regulations have been issued following the FinTech Law but none of them have expanded the regulatory and tax framework applicable to virtual assets, as cryptocurrencies have been identified for Mexican legal purposes.
Considering the lack of specific tax provisions, Mexican taxpayers have to apply general tax principles to cryptocurrency transactions, which creates a lot of uncertainty, as well as economic inefficiencies and inconsistencies. While specific tax regulations are still necessary to regulate crypto transactions and the crypto market in Mexico, this memorandum addresses some of the main tax questions that impact cryptocurrency transactions based on existing legislation.
What is the tax nature of cryptocurrency?
The Fintech Law defines virtual assets, in general, as the representation of value recorded electronically and used among the public as a means of payment for all kinds of legal acts and whose transfer can only be carried out by electronic means. It also states that virtual assets should not be considered as Mexican or foreign currency.1
Based on the Fintech Law definition, cryptocurrencies could be defined for tax purposes as (i) intangible assets or movable property, (ii) and should not be considered as cash or currency.
While the FinTech Law definition provides clarity on the crypto tax nature, the outcome might not necessarily result in appropriate taxation and it does not necessarily cover all cryptocurrencies available in the global market, mainly when they have as underlying other assets that may have a different tax treatment, e.g., gold, currency, commodities, and stock.
What is the tax value of cryptocurrencies?
Aside from all complications that exist globally to set the value of cryptocurrency, which are even more complex in a jurisdiction like Mexico that has not issued any regulations on the topic, it is very important to consider that all transactions for Mexican tax purposes should be reported in Mexican pesos.2 Conversions to or valuations in Mexican pesos need to be made as of the day the transactions take place.
When should income be recognized for income tax purposes?
The Mexican Income Tax Law (“MITL”) does not recognize gains and losses for fluctuations in value on an accrual basis, except for foreign exchange and inflation fluctuations on certain monetary assets and liabilities. Because cryptocurrency is not considered a currency or a debt instrument, gain or loss on cryptocurrency should not be triggered until the cryptocurrency is transferred or used to settle a transaction.
It is important to highlight that payments in-kind are treated as a sale of the property that is used for payment, and that a property exchange is also deemed the sale of the properties exchanged, which are concepts that apply and are commonly applicable to cryptocurrency transactions.
What is the income tax rate applicable to cryptocurrency transactions?
Opposed to other jurisdictions, the MITL does not make an income tax rate distinction for ordinary income and capital gains. All income received by legal entities is taxed at the 30% rate and Mexican individuals are generally taxed under a progressive rate which goes up to 35%. Both rates apply to income in general, including income from cryptocurrency.
Given the legal nature of the cryptocurrency, in principle, it should be considered as movable property. It is worth noting that Mexican individuals have an annual tax exemption on capital gains from the sale of movable property up to ~$90,000 Mexican pesos (~USD $4,000),3 which is an amount that may cover many cryptocurrency transactions, mainly when used as a payment method.
What is the income and deductions that should be recognized?
Taxation of profits for the transfer of property under the MITL follows, either: (i) an indirect method, which involves recognizing as taxable income the full value received or deemed received in exchange for the property, and separately, recognizing its cost of acquisition, if applicable, as an authorized deduction; or (ii) a direct method, through which only the net gain or loss from the transfer of the property gets recognized.
It is important to bear in mind that rules to claim the deduction for the cryptocurrency cost are not entirely clear in the MITL, but in our view it should be deducted as a cost of goods sold (i.e., inventory), which is not deductible until the commodity is deemed sold. Rationale behind this conclusion is that the cost of cryptocurrency should not be treated as an expense nor can it be depreciated as a fixed or intangible asset due to the definitions included in the MITL, but certainly this is one of the topics that requires urgent clarification from the tax authorities, particularly if the cryptocurrency is backed by other assets.
In the case of Mexican individuals, the direct method applies and only the net gain obtained from the transfer of cryptocurrencies should be recognized by taxpayers. Cost of acquisition, restated by Mexican inflation, should be considered to determine the net result of the transaction. Nevertheless, the MITL does not allow individuals to deduct losses from cryptocurrency transactions.4
Non-Mexican residents should not be subject to income tax in Mexico in respect to cryptocurrency transactions, even if carried out with a Mexican counterparty, unless such transactions are allocated to a permanent establishment located in Mexican territory. The permanent establishment definition in Mexico follows the one established by the OECD. It is worth noting that the FinTech Law is silent in respect to mining activities or a staking pool.
Are there any requirements for claiming the cryptocurrency cost deduction?
Pursuant to the MITL, all tax deductions have to comply with specific requirements, including obtaining an invoice in accordance with all domestic regulatory provisions, regardless if the transaction is entered into with a Mexican or foreign-based party. This is a requirement that in practice is extremely complex to meet as valid invoices for cryptocurrency transactions should be issued by the seller directly, which the majority of the time is not even known by the crypto exchanges. In addition, there are complications when crypto is used for retail transactions, as the retailers need to receive an invoice from their customers that use crypto as a mean of payment; otherwise, they would not have basis on the crypto they receive as a payment-in-kind.
Are there any withholding obligations?
The MITL does not impose any withholding obligations to existing regulated cryptocurrency exchanges or to transactions in which the crypto seller is a Mexican legal entity; however, transactions that involve the transfer of crypto by a Mexican individual should be subject to a 20% withholding tax if the acquirer is a Mexican resident entity or individual. The withholding tax is based on the gross value of the transaction. This is considered an advanced payment which is creditable against the seller’s annual tax lability. This withholding obligation should apply to every transaction that exceeds ~$230,000 Mexican pesos (~USD $10,000).
Is the transfer of virtual currency a VATable event?
One of the main problems that has been identified for the cryptocurrency market in Mexico is that the transfer of crypto is not VAT exempt. There is a provision in the VAT law that exempts the transfer of currency and documents commonly used for payment, e.g., promissory notes, but the law is silent in respect to crypto; therefore, crypto transactions should be VATable at the 16% rate if deemed carried out in Mexican territory5 (0% rated if transferred to a none Mexican resident). Transactions involving intangible goods are deemed to be carried out in Mexico when the acquirer and the seller, both, are in Mexico.
1 Article 3o of the Law to Regulate Financial Technology Institutions.
2 Article 20 of the Federal Fiscal Code.
3 Based on exchange rates in effect on May 13, 2020.
4 Articles 120, 121 and 122 of the MITL.
5 Article 9 of the Value Added Tax Law.