The continuing popularity of bitcoin and other cryptocurrencies has inevitably led to questions about their taxation, in particular, VAT.
Hedqvist judgment of the Court
The judgment of the Court of Justice of the European Union (Court, CJEU) of 22 October 2015 of Skatteverket v David Hedqvist (C-264/14), concerning the trade in the virtual currency called ‘bitcoin’, is crucial for assessing the VAT implications of the trade in crypto assets.
In the above-mentioned preliminary ruling, the CJEU held that, when assessing the VAT implications of bitcoin transactions, account must be taken of their basic payment function. Bitcoins generally serve no purpose other than payment, even if they are not legal tender. The principle of VAT neutrality requires that bitcoins be treated in the same way as other means of payment. According to the Court, the purpose of this exemption is to counter the difficulties associated with determining the taxable amount and the amount of deductible VAT in the case of taxation of financial transactions.
The aforementioned ruling has significantly influenced the position of the Polish tax authorities and administrative courts regarding the VAT taxation of transactions involving the exchange of Bitcoins for traditional currency and vice versa, as well as the payment of goods or services with Bitcoins.
Crypto assets other than Bitcoin
Although the CJEU’s Hedqvist ruling explicitly concerned trading in the virtual currency ‘bitcoin’, it should also be considered in relation to other virtual currencies. This presupposes that their primary function is a payment function, as this was the premise on which the Court based its position regarding the VAT exemption of bitcoin trading. In other words, the qualification of a given asset as a virtual currency, and more generally as a crypto asset, is not in itself sufficient for the application of the VAT exemption. In the case of virtual currencies with other functions, exempting their trade from VAT may be more problematic and require in-depth analysis. All the more, crypto assets other than virtual currencies should be subject to in-depth analysis from a VAT perspective. The need for such an analysis and the possible different outcomes are highlighted, inter alia, in the VAT Committee’s working paper of 21 March 2008 (Working Paper no. 1060 of the EU VAT Committee on an EC question on non-fungible tokens (NFTs)) on the VAT treatment of NFT tokens, which presents a number of different solutions (which will be the subject of a future post).
Summary
The taxation of trade in crypto-assets under VAT requires an analysis of these crypto-assets. There is no justification for the automatic application of the VAT exemption, but an analysis is required, in particular, of the functions performed by the asset in question.
