On 7 September 2021, El Salvador made history as the first nation to recognise Bitcoin as legal tender.
I posted about this and its global legal implications on Hive.
[Source: Created by me using Grok with this instruction "Draw image of El Salvador dropping BTC as legal tender under IMF pressure"]
El Salvador is to make payments by BTC voluntary and taxes must be paid in USD not Bitcoin. These changes (once passed into law in El Salvador) mean BTC will no longer be legal tender in El Salvador.
Global Tax Implications
What this also means is the BTC will no longer be "foreign currency" under the laws of other nations.
Most nations define "foreign currency" in their tax and other laws as: the legal tender of another nation state.
This has significant tax implications, as most countries do not tax profits or losses on foreign currency transactions unless you are a trader. To do so would cause every foreign currency purchase either while travelling or online, to become a tax event.
Attempting to exclude BTC from the general definition of "foreign currency" in national laws is tricky and problematic because it infringes the Doctrine of Comity: The principle of respecting the sovereignty of foreign countries in relation to their own laws in relation to their citizens and institutions.
Only one other nation state has made BTC legal tender (in April 2022): the Central African Republic (CAF) and they repealed their BTC Legal Tender law in September 2023, likely under IMF pressure.
Other countries such as Panama got close, but were ultimately pressured not to do so.
What this means is that from the date these changes are implemented in El Salvadoran law, Bitcoin will no longer be foreign currency under other nation's tax and other laws.
Why did El Salvador give in the IMF pressure?
It is important to note that El Salvador is not giving up on BTC. It still holds substantial BTC reserves, is mining BTC with volcano power and supports BTC adoption.
However the compulsory aspect of BTC adoption has not been successful. It has not been adopted in practice and the law has not been enforced. Moreover, Bitcoin Libertarians have opposed compulsion from the beginning and the compulsory aspect has not been popular in El Salvador itself.
The Chivo Wallet has been problematic and is highly centralised. Part of the IMF deal is to reduce government involvement in it.
So President Bukele is really just dropping the unsuccessful parts of his Bitcoin strategy while keeping the successful parts. He is a pragmatist.
It was never part of El Salvador's interests to impact the tax treatment of BTC in other countries, and the IMF has obviously been putting a lot of pressure on countries on this issue.
But these changes also mean El Salvador is no longer special regarding BTC, as many nations, including Argentina and soon the US are adopting BTC friendly laws, without making it legal tender.
From this perspective El Salvador will not be as popular a relocation or business investment destination with cryptocurrency enthusiasts and entrepreneurs. This is especially so as El Salvador's laws are super unfriendly to cryptocurrencies other than BTC.
It was BTC Maximalist country.
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