This article will analyze the basics, current situation, and future trends of cryptocurrency taxation in Chile from three aspects, exploring the development trends and challenges of cryptocurrency taxation in Chile.

Author: TaxDAO

1. Introduction

With the development of cryptocurrency, the Chilean government has gradually realized that the cryptocurrency market signifies innovation and opportunities for financial development. Its attitude towards cryptocurrency has shifted from strong opposition to inclusive acceptance. At the same time, in order to address the potential risks and challenges of the cryptocurrency market, the government has maintained a cautious attitude and continuously built and improved institutional mechanisms. In the field of taxation, the Chilean government has established a tax system for taxing cryptocurrencies based on the country's basic tax system. This article will analyze the basics, current situation, and future trends of cryptocurrency taxation in Chile from three aspects, exploring the development trends and challenges of cryptocurrency taxation in Chile.

2. Main Tax Types and Rates in Chile

2.1 Overview of Chile's General Tax System

Taxation in Chile is the responsibility of the central government and follows a personal tax system. Chile's tax system is unique compared to most countries. According to a series of different measurement standards, Chile's tax-to-GDP ratio is the lowest among OECD countries, and its tax structure differs significantly from other countries, mainly due to differences in the collection of value-added tax and personal income tax. For example, in terms of personal income tax, due to the narrow tax base and low personal income (including capital income), the tax burden on individuals in Chile is much lower. Chile's main tax types include value-added tax, first category tax (corporate income tax), second single tax (personal income tax), additional tax, complementary tax, and this year, a new capital gains tax has been added.

2.2 Value-Added Tax

Value-added tax (VAT) is an indirect tax levied on the value added to goods and services during the production and sales process. In Chile, the general VAT rate is 19%, and different products or services may enjoy special tax rates or tax-exempt treatment. For example, imported services from abroad that require withholding tax on their remuneration are exempt from VAT. VAT registration is mandatory for every Chilean company, and declarations are made on a monthly basis.

2.3 Income Tax

Chile's income tax is a direct tax levied on individual income, including investment income, interest and dividend income, and various types of wages. All individuals residing in Chile, regardless of the source of income being in Chile or abroad, are required to pay taxes. For individuals without residence in Chile, income obtained within Chile is subject to taxation. Therefore, foreign individuals residing in Chile are only required to pay income tax on their income obtained within Chile during the first three years of their entry into Chile. Chilean-source income includes assets or production activities located within Chile, as well as indirect transfers of Chilean companies and other assets located within Chile.

Chile's income tax is levied through different tax types based on different types of income, including first category tax (corporate income tax), second category tax (labor income tax), complementary tax, and global complementary tax.

Income from assets (corporate) is taxed under the first category tax, while employee income (wages) is taxed under the second category tax. Generally, income obtained by individuals residing in Chile is subject to global complementary tax, and income obtained by non-residents within Chile is subject to complementary tax.

Both global complementary tax and complementary tax are considered final taxes, while the first category tax is considered a prepayment of final taxes. In Chile, paying the first category tax can be used to offset these final taxes, thus avoiding double taxation in the calculation of the corresponding final income tax payable by the taxpayer. The percentage of the offset of income tax paid will depend on the chosen tax system.

2.3.1 First Category Tax (Corporate Income Tax)

This tax covers income from capital, business, industry, mining, and other sources, based on accrued or received income minus expenses, and is declared annually in April for all earnings of the previous calendar year. The first category tax rate depends on the type of tax system chosen by the taxpayer. Chile's tax reform in 2014 established a dual tax system, which began to be implemented on January 1, 2017, including two payment methods: the comprehensive income tax payment method (also known as the distributed income system) or the partial tax credit income tax payment method.

Under the comprehensive income tax payment method, a final tax (i.e., global complementary tax and complementary tax) must be paid when capital gains are generated, regardless of whether dividends are actually distributed or profits are withdrawn. In this case, the first category tax paid by the company can be used to offset the tax rate of the final tax by 100%, so there are no other taxable items when dividends are distributed or profits are withdrawn. The tax rate of the first category tax under the comprehensive income tax payment method is 25%, applicable to individual limited liability companies, individuals and community groups composed entirely of individuals residing in Chile or individuals without residence in Chile.

Under the partial tax credit income tax payment method, a final tax (i.e., global complementary tax and complementary tax) must be paid when dividends are distributed or profits are withdrawn. In this case, the first category tax paid on capital gains can be deducted from the complementary tax, but only 65% of the paid first category tax (corporate income tax) can be deducted. The tax rate of the first category tax under the partial tax credit income tax payment method has been 27% since 2018, applicable to joint-stock companies, partnership companies, and companies with at least one owner, joint owners, partners, or shareholders who are foreign investors (exempt from paying final taxes).

2.3.2 Second Category Tax (Labor Income Tax)

The second category tax is a progressive tax levied on work-related income, such as work, pensions provided by the Chilean government, and additional or supplementary income. It is levied at a series of progressive tax rates, with the first level exempt from tax when income is less than 1,300,000 Chilean pesos (CLP), at a tax rate of 0%; when income is between 1,300,001-2,200,000 CLP, the tax rate is 7%; when income is between 2,201,001-3,500,000 CLP, the tax rate is 14%; when income exceeds 3,500,000 CLP, the tax rate is 27%, up to a maximum tax rate of 35%. Social insurance and health insurance are deducted from labor wages or salaries, and are withheld and paid monthly by the relevant employer or payer.

2.3.3 Global Complementary Tax

Global complementary tax is a final tax levied on individuals residing in Chile. The taxable income is determined according to the rules of the first and second category taxes, and is levied annually based on the calculation basis. This tax is levied at a series of progressive tax rates, with income divided into brackets and taxed progressively, from the first level exempt from tax to a maximum tax rate of 35%. It is declared and paid in April of the following year after income is obtained (the tax rates and brackets are the same as the second category tax, but calculated annually). If a company pays corporate income tax, it can offset the corresponding global complementary tax.

2.3.4 Complementary Tax

Complementary tax is a tax levied on income obtained within Chile by individuals or legal entities without residence in Chile or not residing in Chile. It can be withheld annually or declared annually, depending on the type of income involved.

The general tax rate for complementary tax is 35%, and it applies to dividends distributed, profits withdrawn, and/or profit remittances from joint-stock companies, partnership companies, or permanent establishments of foreign companies within Chile. Some types of income are taxed at lower rates, such as trademark usage tax at a rate of 30% and patent tax at a rate of 15%.

Complementary tax, as a final tax, can also be offset according to the two payment methods after the company pays the first category tax.

2.4 Capital Gains Tax

Capital gains tax refers to a tax levied on realized capital gains of taxpayers who are not specifically engaged in the trading of real estate and securities, and is a temporary tax. Previously, capital gains on securities listed on the Chilean stock market were not subject to taxation, but starting from September 1, 2022, Chile imposes a new capital gains tax on securities at a rate of 10%.

3. Cryptocurrency Taxation in Chile

3.1 Definition and Attitude of the Chilean Government towards Cryptocurrencies

The Chilean Financial Market Commission ruled that cryptocurrencies are not financial securities and are therefore not subject to the rules governing the regulation of such assets. According to the central bank, cryptocurrencies are not eligible as legal tender or foreign currency. Both entities and the Financial Stability Committee of the Ministry of Finance have stated that due to their volatility, and if derivatives of cryptocurrencies become widespread, they may indirectly threaten financial institutions, so there are risks associated with purchasing and holding cryptocurrencies. The central bank has recommended legislation to place such assets under the regulation of the Financial Market Commission, similar to other financial securities.

3.2 Taxation of Cryptocurrencies

In Chile, cryptocurrency is taxed based on the cost method. Cryptocurrency can be acquired in the following ways: 1. Purchasing with cash or its equivalent; 2. Providing goods or services; 3. Exchanging with other cryptocurrencies. The first and third methods consider the cash paid or the value of the exchanged currency as the cost basis for taxation. The second method requires consideration of the income recognition requirements related to providing goods or services. The tax base is the price when realizing cryptocurrency minus the cost basis.

Scenarios that require payment of cryptocurrency tax typically include: exchanging cryptocurrency for Chilean national currency and making a profit, paying for goods and services with cryptocurrency at a value higher than the debtor's acquisition cost, and receiving wages in the form of cryptocurrency. However, if a holder transfers cryptocurrency between wallets, no tax is required.

Unlike other jurisdictions, Chile's tax law applies the same income tax system to income earned through cryptocurrency as it does to income earned through most other forms of income. Therefore, the taxation of cryptocurrency income in Chile depends on the taxpayer's identity (individual or legal entity), the applicable tax system, the nature of the transaction (creation, sale, payment, etc.), and whether there is a high value or profit. It is mainly collected through the first category tax (corporate income tax), additional tax, and global complementary tax.

4. Historical Evolution of Cryptocurrency Taxation

Before 2018, the Supreme Court of Chile supported banks in closing accounts of cryptocurrency exchanges, stating that cryptocurrency is not legal tender and does not possess the basic characteristics of legal tender. In 2018, the National Tax Service issued Circular No. 963, stating that cryptocurrency represents a new form of digital or virtual asset, excluding the possibility of levying value-added tax on cryptocurrency. Therefore, the profits from trading cryptocurrency need to be subject to the taxes covered by the law, including the first category tax (applicable to corporations), global complementary tax (applicable to individuals), and withholding tax (paid when remitting), and the cost of purchasing cryptocurrency can be deducted as the cost of selling cryptocurrency income. As an intangible commodity, cryptocurrency is not subject to value-added tax in Chile. However, taxpayers buying and selling cryptocurrency must issue invoices and receipts.

In 2019, the National Tax Service issued Circular No. 36 and No. 1371, clarifying the methods and calculation of income tax and capital gains tax on cryptocurrency. Starting from April 2019, Chilean residents are required to pay taxes related to cryptocurrency, and the Chilean government has included cryptocurrency in the tax list. According to documents from the Chilean National Tax Service, Chilean residents must report income related to cryptocurrency transactions as "other personal income/third-party income." Taxpayers are understood to include anyone who owns cryptocurrency, including cryptocurrency traders and miners.

In September 2021, the Chilean government submitted a bill to Congress aimed at regulating the fintech industry. The bill is envisioned as a framework to establish regulatory principles and develop new financial products and services with greater impact. The regulatory framework constructed by this bill will include alternative trading systems for securities and financial instruments (including invoices, derivatives, virtual financial assets, or cryptocurrencies). Virtual financial assets are understood as digital representations of units of value, goods, or services, whether in local or foreign currency, that can be transferred, stored, or exchanged digitally.

On January 4, 2023, the Chilean government enacted the Financial Technology Law (Law No. 21.521), which was submitted to Congress in 2021. The law is currently in the process of taking effect, and the necessary regulations for implementing the law are being drafted. Cryptocurrency is regulated under this law, and it explicitly defines a limited number of "fintech services." Five of these services are particularly relevant to cryptocurrency, regulating activities related to cryptocurrency as a financial instrument and means of payment. The enactment of this law gives the central bank more power and responsibility, providing good guidance for the future development of financial assets such as cryptocurrencies. Additionally, the Chilean government is participating in international cooperation with the OECD and the EU to improve the transparency of cryptocurrency taxation and information exchange, and to combat tax evasion and avoidance.

5. Future: Prospects for the Development of Cryptocurrency Taxation in Chile

In Chile, cryptocurrency does not have the status of legal tender, but it is still widely used. The government is actively working to establish regulatory and supervisory frameworks with the aim of providing consumer protection and promoting innovation in the financial sector to drive economic development.

Due to the widespread use of cryptocurrency, the Central Bank of Chile has recognized cryptocurrency as a mechanism for the exchange of goods and services. In early November 2021, Congressman Karim Bianchi proposed a bill to recognize and regulate the use of Bitcoin and other cryptocurrencies as legal means of payment in the country. If passed, the law could provide a legal basis for further regulatory development, such as providing banking services for cryptocurrency custody. A week later, Congress approved Bianchi's initiative for discussion by the Economic and Development Committee. The legislation is very concise and essentially aims to regulate Bitcoin as a means of payment, "valid in any transaction and any capacity of private individuals or legal entities." In addition to recognizing Bitcoin as a valid means of payment, the proposed law stipulates that the exchange rate of Bitcoin will be determined by the free market mechanism, and prices can be expressed in Bitcoin in the country, although they must also be expressed in Chilean pesos. This clearly demonstrates that Chile's legislators are currently working to legalize the use of Bitcoin as a means of payment. Meanwhile, the Chilean government is preparing to develop its own central bank digital currency (CBDC), essentially a digital version of the Chilean peso. In late September, the Central Bank of Chile established a team to study its digital currency from 2022 as a way of innovation and economic revitalization. Unlike traditional cryptocurrencies, CBDC is a digital equivalent of traditional legal tender. In CBDC, digital currency is issued and controlled by the central bank, and users typically sacrifice privacy for convenience, making it a more efficient payment method.

In addition, the Financial Technology Law recognizes that stablecoins can be considered part of the means of payment and are subject to prudent supervision by the central bank, as they are part of the national payment chain, demonstrating the important position of cryptocurrencies in the Chilean financial market. However, Chile's current cryptocurrency tax policies and regulatory bills are not perfect, posing challenges when using them as a means of widespread and low-value payments.

Overall, the Chilean government's attitude towards cryptocurrency is cautious, neither fully prohibiting nor fully accepting it, but attempting to regulate and control the development and risks of cryptocurrency through legal and tax means. Therefore, it can be predicted that the Chilean government will continue in this direction in the future, gradually improving the legal and tax system for cryptocurrencies, while also paying attention to international trends and cooperation to adapt to the rapid changes and innovations in cryptocurrencies, creating a stable and favorable trading environment for the use of cryptocurrencies and promoting the stable development of the national economy.

References:

1. Foresight News. (2023). Cryptocurrency Taxation Regulations. December 21, 2023.
2. NSS. Taxation of Cryptocurrencies in Chile. Abogados. December 2023.
3. OECD Tax Policy Reviews: Chile (2022). OECDilibrary.
4. Tom Azzopardi, Journalis. How Chile Taxes Cryptocurrencies. ```

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