El Salvador has become the first country in the world to recognise the cryptocurrency bitcoin as legal currency, according to President Nayib Bukele in a tweet on Wednesday. Citizens will be able to pay taxes in bitcoin and, perhaps most importantly for bitcoin diehards, bitcoin won’t be subject to capital gains taxes in El Salvador.
“The #BitcoinLaw has been approved by a supermajority in the Salvadoran Congress,” the 39-year-old president Bukele tweeted on Wednesday. “62 out of 84 votes! History! #btc”
The price of bitcoin, shortened as BTC, rose early Tuesday following the news out of El Salvador, up 4.3% over the past 24 hours.
The so-called Bitcoin Law acknowledges that roughly 70% of Salvadorans don’t have access to traditional financial services and proposes bitcoin as a possible alternative. The law suggests bitcoin is great as a digital currency because it, “answers exclusively to free-market criteria, in order to increase national wealth for the benefit of the greatest number of inhabitants.”
Retailers in El Salvador can now list prices in bitcoin, though the law states U.S. dollars will need to be used as a reference currency for accounting purposes. That’s almost a given since the price of bitcoin swings wildly on any given day — or at any given hour for that matter.
For example, bitcoin dipped to a low of $US31,453 ($40,342) on Tuesday and is currently trading at $US34,335 ($44,038) according to CoinDesk. With that kind of volatility, many retailers that accept bitcoin list their prices in U.S. dollars. Tesla did precisely that for the brief period when it was accepting bitcoin for its cars. The electric car company dropped the scheme after Elon Musk expressed concerns about the environmental impact of bitcoin — something that’s not exactly new information.
To be clear, there’s no evidence that bitcoin helps the poor people this new law in El Salvador claims it’s trying to help, but it’s a great move for any wealthy people in the Latin American nation who want to hide profits made from crypto under the guise of economic “freedom.”
Will people around the world try to move their bitcoin profits to El Salvador in order to gain some kind of tax advantages? That’s entirely possible, but would still be a useless exercise for the average American. The U.S. tax code applies to all Americans no matter where they reside, so any American citizen would likely need to set up some kind of complex shell company in El Salvador in order to avoid paying capital gains taxes on bitcoin. Which is to say, you can’t take your bitcoin wallet physically to El Salvador and think you’re going to simply avoid paying capital gains tax on any crypto earnings — at least not without denouncing your U.S. citizenship first, and that comes with plenty of its own tax penalties.
President Bukele recently changed his Twitter avatar to include laser eyes, a modification that used to be associated with white supremacists but has recently been adopted by bitcoin enthusiasts. Bitcoin believers have been ecstatic ever since Bukele announced his intentions to adopt bitcoin as legal currency earlier this week.
Bitcoin has plunged in recent months, responding to the whims of the world’s second wealthiest person, Elon Musk. The SpaceX founder changed his Twitter bio to read “bitcoin” in March and said he was a big believer. Musk’s company Tesla even announced in an SEC filing that it had purchased an enormous amount of bitcoin before Musk pulled a 180 that can only be interpreted as a very blatant attempt to move the crypto market up and down whenever he chooses. By May, Musk explained that he no longer wanted to accept bitcoin and the price of bitcoin tanked.
Yes, bitcoin isn’t officially beholden to any one government around the world, but for a supposedly “decentralized” store of value, it depends immensely on how Elon Musk feels on any given day.
It’s anyone’s guess how El Salvador will fare with bitcoin recognised as an official currency, but we can safely bet on one thing: The rich will get richer and the poor will almost certainly suffer.