Why El Salvador No Capital Gains Tax Declaration and Plans of Making Bitcoin Legal Tender is Massive

June 16, 2021 - Crypto News, Expert Commentary

El Salvador Bitcoin

Milestones. 

They are few and far between, and some are more consequential than others. 

Bitcoin has quite a story to tell. 

It has everything from the inauspicious beginnings to the first Bitcoin purchase by Laszlo Hanyecz, the emergence of Bitcoin exchanges, price rallies past historical marks, and much more. 

One milestone that always seemed impossible was Bitcoin getting recognition as legal tender in a country. 

Yes, this would be a watershed moment. There are many stuttering national currencies worldwide. Bitcoin believers kept the faith, hoping that the first domino would fall soon. 

As it turns out, they were right. 

El Salvador Makes Bitcoin as Legal Tender 

In early June 2021, Bitcoin enthusiasts heard the news they had waited for since the inception of crypto. 

El Salvador President Nayib Bukele announced that he would table legislation to make it the world’s first sovereign nation to adopt Bitcoin as legal tender.

President Bukele announced at a Bitcoin conference in Miami dubbed “the biggest Bitcoin event ever.” He outlined plans to send legislation to El Salvador’s Congress. 

Bukele is very popular in the country, and many expect the legislation to sail through. 

Notably, President Bukele is only 39 years old. He is tech-savvy, with Twitter being his primary mode of communication. 

Bukele is the aptly named New Ideas Party leader, which also has a supermajority in Congress. His openness to new ideas is understandable given the state of El Salvador’s economy. 

President Bukele hoped that the move would generate jobs and help provide financial inclusion to thousands outside the formal economy. Cryptocurrencies have a positive role in boosting financial inclusion and improving access to financial assets. 

The country has had trouble with its currency for a while. 

For close to two decades, the USD has been an official currency in El Salvador. 

Bitcoin is a borderless decentralized currency and asset which can do more for the local economy. 

The proposal by the President also included a legislation to grant permanent residence to crypto entrepreneurs.

Developing Currencies Rely Heavily On Remittances

El Salvador has a significant immigrant population in the United States. 

Estimates place this number at approximately one-quarter of the population. Immigrants mostly go to developed countries to look for opportunities, and when they do, they send money back home. 

The El Salvadoran diaspora sent more than $6 billion in remittances in 2020. These remittances accounted for almost 20 percent of the country’s GDP. 

Remittance services charge exorbitant fees for these transfers. Cryptocurrency provides a way to bypass these fees and restrictions. 

President Bukele knows the value of Bitcoin to the remittance economy. He noted on Twitter that Bitcoin could be “the fastest growing way to transfer six billion dollars a year in remittances.”

This move could reduce the amount of money lost to intermediaries. Reducing the cost of remittances will be especially beneficial for more than a million low-income families. 

Most of El Salvador’s population does not have a bank account and operates out of the financial mainstream. 

He is obviously keen on making El Salvador one of the most important monetary centers in the world. 

Bukele is keen on attracting Bitcoin entrepreneurs to the country. He promotes his country not only as a tropical paradise but also for its benefits to Bitcoin owners. 

Of note, with El Salvador making Bitcoin legal tender, there will be no capital gains tax. The U.S. classifies Bitcoin as property and imposes Capital gains. 

Bitcoin getting the designation as legal tender is huge. Most countries permit Bitcoin ownership.

However, designating it as legal tender is a first because of its sovereignty implications. 

The Bitcoin Community Is Over the Moon

This decision is the Holy Grail for some Bitcoin holders. Having Bitcoin as legal tender has come sooner than most expected. 

On Twitter, the excitement was palpable. Many were particularly enthralled at the idea of Bitcoin earnings without the requirement to pay Capital gains taxes. 

Yes, tax-free Bitcoin. 

El Salvador has enough reasons for this policy move. Its economy felt the full effects of Coronavirus. Frankly, it has not had a solid economy or monetary environment for ages. 

Therefore, as soon as this legislation passes, Bitcoin entrepreneurs will seriously consider relocating their operations. El Salvador could become what the Cayman Islands are to tax havens.

Those who attended the conference were ecstatic. His positive comments through a recorded video message elicited a standing ovation. This decision may be a turning point for a coin that has already overachieved at every turn. 

For the record, Bukele is not exactly a saint. His regime has a dicey relationship with the Biden administration over domestic governance issues. 

However, he is also keen on turning his country’s economy around, which would be in the best interests of the US. Even if this measure is to boost his popularity online, the collateral effect for cryptocurrencies is more significant. 

Many will be awaiting the full rollout to study the legislation in-depth. That said, the public details are enough to turn heads. El Salvador is one of many Latin American countries that have struggled immensely with monetary stability. 

Venezuela is an extreme example, but many other countries are not on a solid footing. Who knows? El Salvador may have just opened the way for the rest to chime in and explore Bitcoin as legal tender. 

The Implications for Bitcoin 

Legal tender means that Bitcoin will have the backing of a state for the first time. 

This asset and currency have been gaining institutional legitimacy for some time, but there are no larger institutions than states. 

Legal tender currencies enjoy many advantages in the financial system. The addition of an accessible and decentralized channel to transfer value from anywhere globally is massive. 

For Bitcoin, this is a valuable layer of legitimacy. Going from countries thinking of banning Bitcoin to one making it legal tender is no mean feat. 

At press time, this news had not provided a boon for prices. This nonchalance may be due to El Salvador’s small economy. 

Nonetheless, looking at the upsides, now millions of Salvadorians can suddenly use low-cost Bitcoin for remittance.

This move undoubtedly has a ripple effect in developing countries. Bitcoin is a multi-billion-dollar economy, and countries like El Salvador can benefit immensely by joining it fully. 

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