Navigating Mexico's Crypto Landscape: Regulations, Taxes, and Future Prospects

Forward the Original Title：Andes OnChain (4) | Dynamic analysis of Mexico’s crypto taxation and regulatory frontiers

1 Introduction

The United Mexican States (Spanish: Estados Unidos Mexicanos, English: United Mexican States), commonly known as “Mexico”, is an economic powerhouse in Latin America and an important mining country in the world. Unlike Argentina and Venezuela, Mexico has not fallen into a vicious inflation crisis, but its financial industry has long been monopolized by foreign capital, and traditional banks cannot reach their target users, making it difficult to meet the large demand for private loans. With the development of fintech, the financial function of cryptocurrency is being tapped in Mexico, which has also made Mexico one of the Latin American countries with the highest usage rate of blockchain and cryptocurrency. Finance is a key factor in promoting the development of cryptocurrency in Mexico, and Mexico’s crypto tax system is also inseparable from financial supervision. This article will analyze Mexico’s crypto asset regulation and tax system from four aspects: basic tax system, cryptocurrency regulatory policy, cryptocurrency tax system, and a summary and outlook of the crypto asset tax system, and predict its future development direction.

2. Overview of The Basic Tax System In Mexico

2.1 Mexican Tax System

According to the Mexican Constitution, both the federal government and the state (city) government have the right to levy taxes, creating a two-tier tax system at federal and local levels. The local level includes the state and city levels, and the federal government has the right to levy the main types of domestic taxes, especially the corporate income tax, which no local government at any level has the right to levy. The Mexican federal government implements a compound tax system structure with income tax and value-added tax as the dual main bodies. The current tax system includes major taxes such as income tax (including corporate income tax, personal income tax, capital gains tax), value-added tax, property tax (the minimum tax levied based on assets), import and export tariffs, and wage tax (mainly including taxes levied on wages, social insurance, and workers’ housing fund). In addition, federal taxes also include some taxes levied on mineral resources and special goods and services, such as consumption taxes levied on alcoholic beverages, tobacco, gasoline, telecommunication services, and automobiles. Local governments, including state and city governments, have the right to levy taxes such as property tax, wage tax (mainly levied on employers), real estate transaction tax, business asset tax, etc., as well as various other fees for property registration, business license issuance, etc.

2.2.1 Income Tax

As stipulated by the Mexican Federal Tax Law, Mexican tax-resident enterprises refer to legal entities whose primary place of operation or effective management is in Mexico. In tax treaties, Mexico usually follows the concept of a resident enterprise as defined by the OECD model. Therefore, a resident enterprise in a tax treaty refers to a person who is taxed in that country due to their location, residence, management, establishment (in a tax treaty with Mexico), or other similar conditions. However, this does not include individuals who are only taxed based on their income from that country. In principle, if a legal entity does not meet the definition of a Mexican tax-resident enterprise, it is considered a non-resident enterprise in Mexico. The subjects of corporate income tax are enterprises, companies, and other legal entities that conduct business activities within Mexico. Non-resident enterprises in Mexico with permanent establishments should pay corporate income tax in Mexico for income attributable to the permanent establishment and income derived from Mexico. Non-residents without permanent establishments in Mexico only need to pay Mexican corporate income tax on income originating from Mexico. Non-resident enterprises apply different tax rates according to the different types of their gross income (without deductions), but the net taxable income from the sale of real estate and shares, and short-term construction and similar projects are taxed at a higher rate. In specific situations, if such companies are deemed to have permanently established or fixed operations in Mexico for income tax purposes, from the time of recognition, they will follow the tax regulations of resident companies in their home country, based on the situation of the branch registered by the foreign company in Mexico. Capital gains generated from the sale of fixed assets, stocks, and real estate are considered ordinary income and are subject to corporate income tax. Mexican law allows the income from the sale of real estate, stocks, and other fixed assets to be indexed to the inflation index.

According to the Mexican Federal Tax Law, individuals with a permanent residence in Mexico are considered Mexican residents. If this person also has 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 where Mexico is the center of vital interests: in a calendar year, the individual’s income 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 need to pay personal income tax on all their income worldwide; non-resident individuals in the following two situations should pay personal income tax according to law: operating through a permanent establishment in Mexico and generating income, and obtaining income originating from Mexico. Foreigners living in Mexico are only taxed on their income within Mexico. Residents are allowed to deduct medical expenses, charitable donations, education expenses, etc. from their taxable income, while non-residents are not allowed to do so. From 2018 onwards, a progressive tax rate with a maximum of 35% has been implemented for personal income tax (ISR).

2.2.2 Value-added tax

The value-added tax in Mexico is imposed on revenues from the sales of goods and provision of services, rental income, and imports of goods and services. When determining the applicable tax rate, the operating income as non-VAT taxable income and the VAT taxable income are taken together as the basis for determining the tax rate. When taxpayers fulfill their tax obligations and enjoy their exemption rights, the taxes transferred due to investment expenditure must be adjusted in the subsequent tax year. According to the new tax law, the basic VAT rate in Mexico and border areas is currently 16%. In addition, a 16% VAT will be levied on some items that were previously zero-rated. Currently, VAT-exempt items include: agricultural products, basic food and medicines, service exports, labor exports, etc.

2.2.3 Property Tax

Business Property Tax is an important local tax. It is an asset-based minimum tax, levied at 2% of the value of a company’s assets, and is in addition to the federal income tax. Business property tax is levied by the cantons and the federal district at different rates. This tax applies to both personal and business assets. The tax base for real estate tax is based on the assessed value of the National Land Registration Board and the local finance department, which are jointly responsible for the assessment of property value. Real estate transaction tax is also one of the important taxes of local governments, and its tax rate is set by the state government. It originally emerged as an alternative to stamp taxes on real estate transactions, including estate donations, donations to nonprofit organizations, various real estate transfers, and more.

3. Mexico’s Cryptocurrency Regulatory Policy

The characterization of cryptocurrencies determines the direction of Mexico’s cryptocurrency regulatory policy. According to the explanation of the Bank of Mexico (Spanish: Banco de Mexico), although cryptocurrencies can also be exchanged for goods or services like currency, virtual assets such as cryptocurrencies do not meet the classic functions of currency. For example, Bitcoin’s high volatility makes it difficult to function as a store of value and unit of account. At the same time, fewer merchants currently accept cryptocurrencies, and cryptocurrencies cannot become a universal medium of exchange. [1] Moreover, cryptocurrency itself is not a financial asset, and the investment gains and losses caused by its value volatility can only function like financial assets.

Mexico is the first country in Latin America to enact specific laws to regulate Internet financial companies in the fintech 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 regulatory policies mainly revolve around laws such as the Fintech Law (Spanish: Ley Fintech) and the Regulations of the Fintech Institutions Supervision Law (secondary law).

In the wave of rapid development of fintech, in 2018, Mexico passed the Fintech Law. The law mainly involves two aspects of authorization: one is to authorize crowdfunding institutions (Spanish: Instituciones de Financiamiento Colectivo-IFC) to carry out “crowdfunding” transactions, such as capital transactions regarding bonds, equity or ownership, and the other is to authorize electronic payment institutions (Spanish: Instituciones de Fondos de Pago Electrónico-IFPE) to issue, manage, redeem and transfer electronic funds in a digital way, and virtual assets such as cryptocurrencies are also included. Both types of institutions must comply with the minimum capital requirements. If an electronic payment institution operates only with Mexican currency, it needs to meet the standard of 500,000 UDI (index fund units used as a stable substitute for the Mexican peso), and if it conducts virtual asset transactions or foreign currency transactions or uses basic virtual assets to operate derivatives, it needs to reach the standard of 700,000 UDI.

In March 2019, Banco de Mexico issued the secondary law of the Fintech Law, bringing cryptocurrency companies under its jurisdiction. Since then, companies using cryptocurrencies to conduct business must also obtain relevant authorization, and violators may be fined between $9,500 and $47,000, which means that the cryptocurrency business is subject to stricter qualification review and control. It should be pointed out that small and medium-sized enterprises that use cryptocurrencies as a payment method are not subject to this law, and only companies in the fintech field that use electronic transaction mechanisms or raise funds (crowdfunding) need authorization. Interestingly, Banco de Mexico, one of the authorization institutions, did not approve any company within several months after the secondary law was passed, and instead suggested that relevant investors remain vigilant about cryptocurrency companies.

In addition to the aforementioned regulations, the Financial Intelligence Unit (FIU) of Mexico has also issued a guide on cryptocurrency reports, requiring the reporting of cryptocurrency transactions and related intermediary and service provider information.

4. Mexico’s Cryptocurrency Tax System

Mexico’s cryptocurrency taxation system is not complicated, and cryptocurrencies and other crypto assets rarely have special tax provisions, but mainly comply with Mexico’s general tax laws. As early as 2014, the Mexican Federal Tax Bureau issued Notice No. 230, which regulated the tax treatment of Bitcoin and other similar virtual currencies. This announcement clearly states that Bitcoin and other similar virtual currencies are not considered legal currency or foreign currency, so they 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, that is, the acquisition and circulation of any crypto assets should comply with the same general income tax and value-added tax regulations as other movable properties.

However, there are three special points about Mexico’s cryptocurrency taxation system: First, the Mexican government has established the Financial Intelligence Secretariat (CARF), which aims to establish a unified tax framework, which indicates that Mexico’s cryptocurrency taxation system may become more perfect. Second, similar to stock or foreign exchange intraday cryptocurrency transactions conducted by related companies need to pay 35% corporate income tax, this policy aims to guide the intraday trading behavior of cryptocurrencies, prevent excessive fluctuations in the financial market, and stabilize the operation of the financial market. Third, according to the provisions of the Financial Technology Law, since September 10, 2019, in addition to the normal declaration of income tax, value-added tax and other taxes, related cryptocurrency companies must make separate tax declarations when the transaction amount exceeds 50,000 Mexican pesos or 2,700 US dollars, which shows the close attention of Mexican financial regulators and tax authorities to cryptocurrency companies.

5. Summary and Outlook of Mexico’s Crypto-Asset Tax System

Mexico’s cryptocurrency taxation system is still in its early stages of development, with its tax system mainly attached to the general tax system, and the applicable tax provisions mainly depend on the Mexican government’s legal definition of cryptocurrencies. The few special tax provisions for cryptocurrencies are mainly intended to strengthen compliance reviews, protect investor interests, and guard against potential financial risks of cryptocurrencies and other digital assets, but do not reflect the Mexican government’s policy attitude of encouraging and supporting the development of the cryptocurrency field. Overall, although the Mexican government is continuously responding to the new development patterns of cryptocurrencies through regulation, taxation and other means, and does not deny the legality of cryptocurrency and its transactions, it still prefers to use cryptocurrency as a tool to promote economic development, and has always been very vigilant 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 that it was working hard to create a central bank digital currency (CBDC), and expected to put it into circulation in 2024. In July of the same year, Indira Kempis, a senator in the Mexican Congress, proposed a bill hoping to give Bitcoin a status similar to fiat currency. As of the completion of this article, the bill has not been passed, and Mexico’s central bank digital currency has not been launched, but it can be foreseen that whether Mexico chooses the path of centralized cryptocurrency or whether it gives decentralized cryptocurrency a status of fiat currency, establishing an independent and comprehensive tax system for decentralized cryptocurrencies such as Bitcoin is an unstoppable trend. Only in this way can we conform to the development wave of cryptocurrencies, better balance the relationship between economic development, financial security and monetary sovereignty.

Notes：

[1] Blockchain & Cryptocurrency Laws and Regulations 2024 (Legal Considerations in the Minting, Marketing and Selling of NFTs) | Insights | Skadden, Arps, Slate, Meagher & Flom LLP. (2024). Lukka, & Lukka. (2022, July 11). Overview of Mexico’s crypto taxation. Lukka. [2] Kereibayev, O. (2024, January 16). How to Comply with Mexico’s FinTech Law. Sumsub. [3] Ley para Regular las Instituciones de Tecnología Financiera [Law to Regulate Financial Technology Companies] arts. 30–34, Diario Oficial de la Federación [D.O.F], Mar. 9, 2018, available as originally enacted on the website of Mexico’s House of Representatives.

[4] Ma Hongxia. (2023). The development status, operational risks and trends of global central bank digital currencies Forecast. Huxiang Forum, 36(5), 1-10.

[5] The Bank of Mexico’s new Fintech Law strictly prohibits cryptocurrency. (n.d.).

[6] Institute of International Trade and Economic Cooperation, Ministry of Commerce. (2022) Foreign Investment Cooperation Country (Region) Guide - Mexico

[7] Research Report: Mexico Blockchain Regulations, Applications and Opportunities Golden Finance.

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