This article will analyze the regulation and taxation system of cryptocurrency assets in Mexico from four aspects: basic tax system, cryptocurrency regulation policies, cryptocurrency taxation system, and cryptocurrency asset taxation system, and predict its future development direction.
Author: TaxDAO
1. Introduction
The United Mexican States (Spanish: Estados Unidos Mexicanos), commonly known as "Mexico," is a major economic power in Latin America and a significant producer of minerals worldwide. Unlike countries like Argentina and Venezuela, Mexico has not fallen into a severe inflation crisis. However, its financial industry has long been monopolized by foreign capital, and traditional banks have been unable to reach target users, leading to unmet demand for private credit. With the development of financial technology, the financial functions of cryptocurrencies have been discovered in Mexico, making it one of the Latin American countries with the highest adoption rates of blockchain and cryptocurrencies. Finance is a key factor driving the development of cryptocurrencies in Mexico, and Mexico's cryptocurrency tax system is closely related to financial regulation. This article will analyze the regulation and taxation of cryptocurrency assets in Mexico from four aspects: basic tax system, cryptocurrency regulation policies, cryptocurrency taxation system, and cryptocurrency asset taxation system, and predict its future development direction.
2. Overview of Mexico's Basic Tax System
2.1 Tax System in Mexico
According to the Mexican Constitution, both the federal government and state (city) governments have the power to levy taxes, creating a dual taxation system at the federal and local levels. The federal government has the power to levy major domestic taxes, especially corporate income tax, and any level of local government has no authority to levy such taxes.
The Mexican federal government implements a composite tax system structure with income tax and value-added tax as the dual main components. The current tax system includes major tax types such as income tax (including corporate income tax, personal income tax, and capital gains tax), value-added tax, property tax (the minimum tax based on assets), import and export tariffs, wage taxes (mainly including taxes on wages, social insurance, and workers' housing funds). In addition, federal taxes also include taxes levied on mineral resources, special goods, and services, such as consumption taxes on alcoholic beverages, tobacco, gasoline, telecommunications services, and automobiles.
Local governments, including state and city governments, have the authority to levy taxes such as property tax, wage tax (levied on employers), real estate transaction tax, operating asset tax, and various property registration and business license fees.
2.2.1 Income Tax
The Mexican federal tax law defines Mexican tax resident enterprises as legal entities with their main place of management or effective management located in Mexico. In tax treaties, Mexico usually follows the concept of resident enterprises as defined in the OECD model. Therefore, in tax treaties, resident enterprises refer to individuals subject to taxation in that country due to their location, residence, management, establishment (in accordance with the tax treaty with Mexico), or similar conditions, and do not include individuals subject to taxation only on income derived from that country. In principle, if a legal entity does not meet the definition of a Mexican tax resident enterprise according to Mexican tax law, it is considered a non-resident enterprise in Mexico. The collection object of corporate income tax is enterprises, companies, and other legal persons engaged in business activities within Mexico. Non-resident enterprises with a permanent establishment in Mexico are required to pay corporate income tax in Mexico on income attributable to that permanent establishment and income derived from Mexico. Non-residents without a permanent establishment in Mexico are only required to pay Mexican corporate income tax on income derived from Mexico. Different types of gross income (without deduction items) of non-resident enterprises are subject to different tax rates, but net taxable income from the sale of real estate and shares and income from short-term construction, installation, and similar projects are taxed at a higher rate. In specific cases, if such companies are deemed to have established or fixed operations in Mexico for income tax purposes, they will be subject to the tax rules of resident companies from the date of determination, based on the situation of the registered branch of the foreign company in Mexico. Capital gains from the sale of fixed assets, stocks, and real estate are considered ordinary income and are subject to corporate income tax. Mexican law allows capital gains from the sale of real estate, stocks, and other fixed assets to be linked to the inflation index.
According to the federal tax law of Mexico, individuals with a permanent residence in Mexico are considered Mexican residents for tax purposes. If such individuals also have a permanent residence abroad, the main factor determining their tax resident status is the location of their center of vital interests. There are two situations in which an individual's center of vital interests is in Mexico: within a calendar year, income derived from Mexico exceeds 50% of total income; the main location of professional activities is in Mexico. If an individual's center of vital interests is in Mexico, they should be considered a Mexican resident. Individuals who do not meet the aforementioned conditions are non-residents. Mexican residents are required to pay personal income tax on their worldwide income, while non-residents in the following two situations are required to pay personal income tax: operating through a permanent establishment in Mexico and earning income, or earning income derived from Mexico. Foreigners residing in Mexico are only taxed on their income within Mexico. Residents are allowed to deduct medical expenses, charitable donations, education expenses, and other expenses from their taxable income, while non-residents are not allowed to do so. Since 2018, the personal income tax (ISR) has implemented a progressive tax rate with a maximum of 35%.
2.2.2 Value-Added Tax
Value-added tax in Mexico is levied on income from the sale of goods and provision of services, rental income, and the import of goods and services. In determining the applicable tax rate, operating income that is not subject to value-added tax is considered together with income subject to value-added tax as the basis for determining the tax rate. When taxpayers fulfill their tax obligations and enjoy their exemption rights, the tax transferred due to investment expenditures must be adjusted in subsequent tax years. According to the new tax law, the basic tax rate for value-added tax in Mexico's interior and border areas is 16%. In addition, a 16% value-added tax will be levied on items that were previously subject to a zero tax rate. Currently, items exempt from value-added tax include agricultural products, basic food and medicine, service exports, and labor exports.
2.2.3 Property Tax
Operating asset tax is an important local tax. It is a minimum tax based on assets, levied at 2% of the value of company assets, and is a supplement to federal income tax. Operating asset tax is levied by states and the federal district, with different tax rates. This tax applies to individual and corporate assets. The tax base for property tax is based on the assessed value of property by the National Land Registry Commission and the local finance department, which are jointly responsible for assessing property value. Real estate transaction tax is also an important tax for local governments, and its tax rate is determined by state governments. It initially appeared as a replacement for real estate transaction stamp duty, including transactions such as inheritance donations, donations to non-profit organizations, and various real estate transfers.
3. Cryptocurrency Regulation Policies in Mexico
The classification of cryptocurrencies determines the direction of Mexico's cryptocurrency regulation policies. According to the explanation of the Bank of Mexico, although cryptocurrencies can be exchanged for goods or services like currency, virtual assets such as cryptocurrencies do not meet the classic functions of currency. For example, the high volatility of Bitcoin makes it difficult to serve as a store of value and unit of account, and currently, there are few businesses that accept cryptocurrencies, making them unsuitable as a universal medium of exchange. Additionally, cryptocurrencies themselves are not financial assets, and the investment gains and losses resulting from their volatility can only function similarly to financial assets.
Mexico is the first country in Latin America to enact specific laws to regulate internet finance companies in the financial technology sector. Currently, the country has three departments responsible for regulating the financial industry: the Bank of Mexico, the Ministry of Finance and Public Credit (SHCP), and the National Banking and Securities Commission (CNBV). Mexico's cryptocurrency regulation policies mainly revolve around the Fintech Law (Ley Fintech) and the secondary regulations on the regulation of financial technology institutions.
In the wave of rapid development of financial technology, Mexico passed the Fintech Law in 2018. This law mainly involves two authorizations: first, it authorizes crowdfunding institutions (Instituciones de Financiamiento Colectivo-IFC) to conduct "crowdfunding" transactions, such as capital transactions related to bonds, equities, or ownership; second, it authorizes electronic payment institutions (Instituciones de Fondos de Pago Electrónico-IFPE) to issue, manage, redeem, and transfer electronic funds through digital means, including virtual assets such as cryptocurrencies. Both types of institutions must comply with minimum capital requirements. Electronic payment institutions that only operate in Mexican currency must meet a standard of 500,000 UDI (Units of Investment Fund Index used as a stable substitute for the Mexican peso), while those engaged in virtual asset trading, foreign currency trading, or derivatives using basic virtual assets must meet a standard of 700,000 UDI.
In March 2019, the Bank of Mexico issued secondary regulations for the Fintech Law, bringing cryptocurrency companies under its jurisdiction. Companies conducting business using cryptocurrencies must obtain relevant authorization, and violators may face fines ranging from $9,500 to $47,000, indicating stricter qualification review and control of cryptocurrency businesses. It should be noted that small and medium-sized enterprises using cryptocurrencies as a payment method are not subject to this law; only companies in the financial technology sector using electronic trading mechanisms or raising funds (crowdfunding) require authorization. Interestingly, the Bank of Mexico, as one of the authorizing institutions, did not approve any companies in the months following the enactment of these regulations, but instead advised investors to be cautious of cryptocurrency companies.
In addition to the above regulations, the Financial Intelligence Unit (FIU) of Mexico also issued reporting guidelines for cryptocurrencies, requiring the reporting of cryptocurrency asset transactions and information on intermediaries and service providers.
4. Cryptocurrency Taxation System in Mexico
Mexico's cryptocurrency taxation system is not complex, and there are few specific tax regulations for cryptocurrencies and other virtual assets. Instead, it mainly follows the general tax laws of Mexico. As early as 2014, the Mexican Federal Tax Administration issued Announcement No. 230, which specified the tax treatment of Bitcoin and other similar virtual currencies. This announcement clearly stated that Bitcoin and other similar virtual currencies are not considered legal tender or foreign currency, and therefore are not subject to Mexico's foreign exchange control laws. From a tax perspective, the Mexican tax authorities do not differentiate between virtual assets and other assets, meaning that the acquisition and transfer of any cryptocurrency should comply with the same general income tax and value-added tax regulations as other movable assets.
However, there are three special aspects of Mexico's cryptocurrency taxation system: first, the Mexican government established the Financial Intelligence Secretariat (CARF) to establish a unified tax framework, indicating that Mexico's cryptocurrency taxation system may become more sophisticated. Second, companies conducting day-trading of cryptocurrencies similar to stocks or foreign exchange are required to pay a 35% corporate income tax. This policy aims to guide day-trading behavior in cryptocurrencies, prevent excessive market fluctuations, and stabilize the financial market. Third, according to the provisions of the Fintech Law, since September 10, 2019, cryptocurrency companies must separately declare taxes when their transaction volume exceeds 50,000 Mexican pesos or $2,700, in addition to normal income tax and value-added tax declarations. This demonstrates the close attention of Mexico's financial regulatory and tax authorities to cryptocurrency companies.
5. Summary and Outlook of Mexico's Cryptocurrency Taxation System
Mexico's cryptocurrency taxation system is still in its early stages of development, mainly relying on the general tax system, and the applicable tax regulations depend on the legal classification of cryptocurrency assets by the Mexican government. The few specific cryptocurrency tax regulations are mainly aimed at strengthening compliance reviews to protect investor interests and prevent potential financial risks associated with cryptocurrencies and other virtual assets, rather than reflecting a policy stance of encouraging and supporting the development of the cryptocurrency asset field in Mexico. Overall, while the Mexican government continues to respond to the evolving nature of cryptocurrency assets through regulation, taxation, and other means, it has not denied the legitimacy of cryptocurrencies and their transactions. However, it still prefers to use cryptocurrency assets as a tool to promote economic development and has been very cautious about the financial risks behind cryptocurrency transactions and the impact of cryptocurrency circulation on national monetary sovereignty.
In January 2022, the Bank of Mexico announced efforts to create a central bank digital currency (CBDC) and expects to launch it into circulation by 2024. In the same year, in July, Mexican Senator Indira Kempis proposed a bill hoping to give Bitcoin a status similar to legal tender in Mexico. As of the completion of this article, the bill has not been passed, and Mexico's central bank digital currency has not been introduced. However, it is foreseeable that regardless of whether Mexico chooses the path of centralized cryptocurrencies or grants decentralized cryptocurrencies legal tender status, it is an unstoppable trend to establish independent and comprehensive tax systems for cryptocurrencies such as Bitcoin, in order to adapt to the development trend of cryptocurrencies and better balance the relationship between economic development, financial security, and monetary sovereignty.
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