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The European Court of Justice (CJEU) has confirmed that bitcoin and other digital currency trading is VAT exempt “..under the provision concerning transactions relating to currency, bank notes and coins used as legal tender."
The ruling creates a uniform fiscal policy, binding to all EU member states, and can only be overturned if overruling law is made by the European Commission in Brussels.
“Article 2(1)(c) of Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax must be interpreted as meaning that transactions such as those at issue in the main proceedings, which consist of the exchange of traditional currency for units of the ‘bitcoin’ virtual currency and vice versa, in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients, constitute the supply of services for consideration within the meaning of that article.
“Article 135(1)(e) of Directive 2006/112 must be interpreted as meaning that the supply of services such as those at issue in the main proceedings, which consist of the exchange of traditional currencies for units of the ‘bitcoin’ virtual currency and vice versa, performed in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients, are transactions exempt from VAT, within the meaning of that provision.
“Article 135(1)(d) and (f) of Directive 2006/112 must be interpreted as meaning that such a supply of services does not fall within the scope of application of those provisions.” Read the full judgment here.
The decision that bitcoin and other digital currency exchanges should not be subject to VAT has come about after a dispute in a Swedish court. Swedish national David Hedqvist intended to carry out an online business of currency exchange solely between bitcoin and Swedish krona, and the issue was the treatment of transactions involving the exchange of bitcoin currency for conventional currency.
The Supreme Administrative Court in Sweden asked for a ruling from the CJEU on how to interpret the common EU VAT directive. The court had to answer two questions:
- Is Article 2(1) of the VAT Directive to be interpreted as meaning that transactions in the form of what has been designated as the exchange of virtual currency for traditional currency and vice versa, which is effected for consideration added by the supplier when the exchange rates are determined, constitute the supply of a service effected for consideration?
- If the answer to the first question is in the affirmative, is Article135(1) to be interpreted as meaning that the above mentioned exchange transactions are tax exempt?
In his document published on 16 July 2015 the Advocate General of the European Court of Justice proposed to the CJEU that:
- The exchange of a pure means of payment for legal tender and vice versa, which is effected for consideration included by the supplier when the exchange rates are determined, constitutes the supply of a service effected for consideration within the meaning of Article 2(1)(c) of the VAT Directive.
- Such transactions are exempt from VAT under Article 135(1)(e) of the VAT Directive.
Today’s ruling can be seen as a significant boost for bitcoin in Europe as companies in the EU now won't have to charge VAT on trading in digital currencies. It simplifies the interpretation, reduces compliance costs and secures the future of bitcoin exchange. In the UK HMRC’s interpretation is in line with the judgment, but some member states (like Sweden, Germany) need to reconsider their approach and change the application of the law.
Got questions? Get in touch with our expert VAT team.