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Bitcoin wins EU VAT case

  • Oct 21, 2015 | Richard Asquith

Bitcoin wins EU VAT case

The European Court of Justice (ECJ), the highest court of appeal for EU matters, has today ruled that trading in digital currencies, such as bitcoin, is VAT exempt.  This is on the basis that they are a method of payment – a private currency similar to national (fiat) currencies - which are VAT exempt under the provision concerning transactions relating to 'currency, bank notes and coins used as legal tender'.

It represents a significant boost for virtual currencies’ role as a viable alternative to national currencies.  It will also help ensure the UK realises its ambition to become the European and global bitcoin trading centre.

UK victory over German and Polish doubts

The result, which backs the UK’s HMRC view that bitcoin is similar to a currency, means all EU member states must make the trading of virtual currencies VAT exempt.  Countries such as Germany, Poland and Sweden considered bitcoin more like a commodity or good used for barter, and so subject to VAT.  Since the average EU VAT rate is over 21%, this would have rendered the exchange and use of bitcoin as subject to a substantial tax bill.

Aside from the exchange of digital currencies, the ruling also covers the creation or ‘mining’ of bitcoin in the EU.  A VAT liability on this activity would have potentially destroyed the EU industry.

Richard Asquith, VP Global Tax at tax compliance firm Avalara, commented:

"Today’s ruling will help boost the UK’s prospects of securing its position as the European and global hub for the bitcoin sector.  As long as the VAT treatment of bitcoin remained uncertain, intense competition from global exchanges such as Switzerland, Singapore and Hong Kong, threatened to take market share.

This is also the first step in securing bitcoin’s future as a genuine alternative to national currencies.  The next stage will be receiving regulatory compliance approval from national banks. Today’s ECJ ruling will help lay the path to this.  It will also give the wider general public the confidence to adopt digital currencies for their day-to-day use.  Retailers and payment platforms will now likely step-up their investment in bitcoin management in anticipation of this."

ECJ ruling

The ECJ was asked by the Swedish tax authorities in July 2014 to clarify:

  1. if bitcoin exchange services fall within the scope of services under the EU VAT Directive Article 2(1); and
  2. if so, is the trading and mining of bitcoin VAT exempt under the Directive’s Article 135(1), and VAT due on the spread made in a trade

The ECJ held that bitcoin services fall within the scope of EU VAT.  However, the digital currencies are effectively private money with no intrinsic value, like goods or commodities.  This means their exchange is a financial service, similar to the exchange of national currencies, which are VAT exempt.

The ECJ ruling follows ECJ Advocate General Juliane Kokott’s non-binding bitcoin opinion issued in July 2015 that bitcoin should not be subject to VAT.  This was on the basis that it is comparable to money, which does not add value so cannot be subject to VAT.

VP Global Indirect Tax
Richard Asquith
VP Global Indirect Tax Richard Asquith
Richard Asquith is the former VP Global Indirect Tax at Avalara