European Court of Justice: Bitcoin is a currency and exchanges are VAT-exempt

The European Court of Justice (ECJ) has ruled that bitcoin exchange transactions should be exempt from VAT. The ECJ ruling stated that bitcoin transactions "are exempt from VAT under the provision concerning transactions relating to currency, bank notes and coins used as legal tender."

The ECJ's top legal advisors had already recommended the exemption, but the judges do not always agree with them. Had the decision gone the other way, it would have caused a huge headache for European bitcoin exchanges.

The case involved a request regarding the tax status on exchange commissions and margins which came from a Swede called David Hedqvist who was looking to set up a one-man bitcoin exchange. He had approached Swedish tax authorities for an advanced decision on whether or not the exchange of bitcoin into Swedish Krona and vice versa should be considered as a VAT taxable or VAT exempt activity.

The tax authorities said Bitcoin trading should be subject to VAT, but Hedqvist thought the answer should be no, and he took it to court and eventually it reached the appeal court in Sweden. Since all VAT law flows from Europe, the appeal court passed the case on to the ECJ to decide.

There have been some limited decisions in the US involving criminal cases where bitcoin was viewed as money, for the purposes of money laundering offence. Meanwhile, the US Commodity Futures Trading Commission (CFTC) last month deemed bitcoin to be a commodity and closed down trading platform Coinflip in the process.

Commenting on the ruling, Sarah Buxton, a tax lawyer at the global law firm Bryan Cave LLP said: "The European Court of Justice, Europe's highest court, has ruled that exchanges of Bitcoin into fiat currency should be exempt from VAT under Article 135(1)(e) of the VAT Directive concerning transactions relating to currency, bank notes and coins used as legal tender.

"This ruling is great news for Bitcoin enthusiasts and means that Europeans can continue to buy Bitcoins without paying tax. The ruling treats Bitcoin as money and should help strengthen the popularity of this cryptocurrency. This decision may be a step in the right direction towards the recognition of Bitcoin as legal tender."

Not everyone agreed the ruling was great news, however. Jens Bader, chief commercial officer of Secure Trading said the ruling had far reaching implications for Bitcoin and other cryptocurrencies, as all EU states will now have to comply with the VAT ruling.

Member states had previously come to their own decisions on the VAT-status of Bitcoin, with Poland levying a 23% VAT and the UK making Bitcoin trading exempt from VAT in a ruling in March.

Bader said: "Many with a vested interest in cryptocurrencies will be overjoyed by the ruling. It is easy to see why an un-regulated currency not subject to sovereign states taxes is an enticing prospect. However, it is a shame to see the ECJ cave in on this issue, and for Bitcoin not to be held to universal VAT standards.

"The question of whether or not Bitcoin should be subject to VAT is a simple one – if it is considered a currency it shouldn't be subject to VAT and if it is considered a product it should be. In my mind, Bitcoin is not a currency. It is an exchangeable product – but a product none-the-less – and for that reason I am surprised by the ECJ's ruling.

"The distinction lies in the fact that Bitcoin exchanges, and cryptocurrency exchanges like it, are not regulated and licensed financial services. While we call it a 'currency', in fact Bitcoin is a tradable commodity, like gold and silver.

"Where currencies come under a highly regulated framework, tradable goods do not, which means that their value is always in flux. The bottom line is that Bitcoins are products attributed and traded for a value, and nothing more.

"Digital services have created new challenges for governance, and slowly we are coming to terms with these issues. In the same way that a process for regional taxation for digital content was established this year, cryptocurrencies must face the same process."

Jonathan Rogers, partner in the Financial Services Regulatory group at Taylor Wessing, said: "From a strategic perspective, this decision, which appears to ensure virtual currencies will be seen as cash, should be an opportunity for emerging forms of financial services & FinTech to get a shot in the arm – bringing growth and consolidation.

"Greater clarity can now emerge in the debate about how to regulate virtual currencies, leading to increased credibility and consumer confidence; in turn, virtual currencies will have a much greater critical mass in the financial services system. This sector is always looking for greater certainty about how it should be treated for official purposes, so at first glance, this decision will probably be welcome."

Daniel Lyons, indirect tax partner at Deloitte, said: "Should the transfer of Bitcoins and other cryptocurrencies, or charges for dealing in them, be subject to VAT? If so they would be at a distinct disadvantage to traditional currencies both in terms of administrative inconvenience and possible extra VAT costs.

"The ECJ's decision, and its refusal to be limited by a traditional view of what constitutes a currency, will give more certainty to participants in the market. It may boost confidence in cryptocurrencies and could lead to wider adoption."

Michael Kent, CEO & Founder of digital money transfer company Azimo commented: "The fact that the EU court is even ruling on whether bitcoin should be VAT exempt or not is another big step forward in recognition for digital currencies.

"Doubts still remain around anonymity and security, which have so far prevented more widespread adoption, but following bitcoins commoditisation in the US, I'm not surprised the EU Court's move to rule. If the EU follows this decision up with plans to regulate bitcoin that will be the real game-changer."

Prepaid and emerging payments expert Judith Rinearson, partner at the global law firm Bryan Cave LLP, added: "The decision of the European Court of Justice is good news for the bitcoin and virtual currency industry on a number of different levels.

"The decision that transactions involving the exchange of legal tender for bitcoin and other 'non-traditional currencies' (and vice versa) are in fact 'financial transactions' is well reasoned and will make it easy for commerce to grow in this area. I would also agree that it reflects the intention of the financial transaction exemptions.

"But the ruling did leave at least one question unanswered – regarding the exchange of one digital currency such as bitcoin for another digital or non-traditional currency, such as litecoin, or devcoin or the hundreds of other digital or virtual currencies. Such exchanges between digital currencies are occurring with more frequency, but it is unclear how they would be treated for VAT purposes at this point.

"The Court's decision squarely places bitcoin and similar digital currencies within the ambit of 'financial transactions'. Now the question must be asked, where does bitcoin fit in the EU's financial regulatory system and will it be covered under Payment Services Directive 2?"