Ruling clarifies bitcoin taxation across Europe, while individual countries still struggle

On Thursday, the Court of Justice of the European Union (CJEU) ruled that Value Added Tax need not be applied to the exchange of digital currency, as it will be treated as money.

“The Court also holds that those transactions are exempt from VAT under the provision concerning transactions relating to ‘currency, bank notes and coins used as legal tender’.”
— – Court of Justice of the European Union

The Luxembourg-based court often follows the advice of the Advocate General, Juliane Kokott, who expressed her opinion that the business of exchanging bitcoin for other currencies counted as a transaction which was exempt from duty under EU VAT regulations.

The judgment may well turn out to be a landmark for the new technology. The court deals with requests for preliminary rulings from national courts, certain actions for annulment, and appeals. “The Court of Justice interprets EU law to make sure it is applied in the same way in all EU countries.” states the Court’s mandate.

In June this year, the CJEU was approached by the Swedish Tax Authority, who asked for a ruling on the  power of tax authorities over bitcoin, and other digital currencies. The need for clarification stemmed from David Hedqvist, a Swedish national, who wanted to provide and exchange service.

Prior to conducting transactions, Hedqvist requested a preliminary decision from the Swedish Revenue Law Commission to establish whether bitcoin purchases would require VAT payments on such purchases. The commission found that bitcoin, “is a means of payment used in a similar way to legal means of payment and the transactions that Mr Hedqvist intends to effect must, consequently, be exempt from VAT.”

The Swedish Tax Authority, The Skatteverket, appealed against the Revenue Law Commission’s decision, through the Swedish Supreme Administrative Court, the Högsta förvaltningsdomstolen. In this circumstance, the Högsta förvaltningsdomstolen asked the Court of Justice whether such transactions are subject to VAT.

According to Rogier Vanhorick, a tax adviser at Delloitte in Rotterdam, in EU tax rules “nothing specific is arranged for bitcoins or virtual currency.” The recent ruling by CJEU has set a precedent, unifying EU members in their approach to the taxation of bitcoin and other digital currencies.

Other EU members have previously taken matters into their own hands. In February last year, the UK tax department, Her Majesty’s Revenue and Customs (HMRC), published an official brief, which outlined its position.

“As an EU tax, the VAT treatment for cryptocurrencies adopted by the UK must be consistent with any treatment that may eventually be implemented across the EU.”
— – Her Majesty’s Revenue and Customs

The friendly tax environment provided by the HMRC allows refuge for companies facing additional taxes in other countries. For example, Bitcoin had been exempt from taxation in Australia, until July 2014. In August, the Australian Tax Office (ATO) issued a ruling that stated any transactions involving digital currency such as bitcoin would be liable for goods and services tax (GST), the australian version of VAT.

The tax office concluded that, "a transfer of Bitcoin from one entity to another is a ‘supply’ for GST purposes." In exchange for goods and services, however, the ATO said a supply of Bitcoin will be treated as “a barter transaction."

The ATO defined that "Bitcoin is not a legally recognised universal means of exchange and form of payment by the laws of Australia or the laws of any other country. Therefore, it is not ‘currency (whether of Australia or of any other country)’ under […] the definition of ‘money’.”

“The ATO’s view is that Bitcoin is neither money nor a foreign currency, and the supply of Bitcoin is not a financial supply for goods and services tax (GST) purposes. Bitcoin is, however, an asset for capital gains tax (CGT) purposes.”
— – Australian Tax Office

The Bitcoin industry was shocked, and believed the ruling would be damaging to the digital currency industry of Australia. “We will not have a Bitcoin industry to tax if we have GST added onto the price of Bitcoin, as Australians will just buy them from overseas based exchanges,” stated a petition to the Treasury of Australia.

It wasn’t long after the new tax regulation that emerging companies left the country, in search of friendlier tax environments. Coinjar, which was one of Australia’s largest digital currency exchanges, claimed that the ATO’s GST ruling had rendered it “uncompetitive against non-Australian rivals.” The bitcoin start-up took a shine to HMRC ruling and moved its headquarters to the United Kingdom.

“Aside from catalysing CoinJar’s growth, the UK relocation will mean CoinJar customers will no longer be subject to 10 per cent GST (Goods and Services Tax) when they buy bitcoin using our services. HMRC (Her Majesty’s Revenue and Customs) in the UK exempts digital currency trading from value added tax (VAT), so new and existing CoinJar customers will not be levied any additional taxes.”
— – Coinjar

Australia is continuing to grapple with the regulation and treatment of bitcoin. The Australian Senate Economics References Committee released a report, Digital currency-game changer or bit player, in August 2015, calling to amend the definition of money, by changing the GST Act. The report states that the GST treatment of digital currencies is a pressing concern for digital currency businesses in Australia.

“Where GST or VAT is imposed on the acquisition of bitcoins as part of a trading transaction, it makes it much more difficult and much less economically viable for me to take my Australian dollars and convert them into bitcoin if one-eleventh of that transaction is going to be lost in GST at the point that I do that. For everyday consumers, that one-eleventh cost is a real cost. That is a consequence of treating bitcoin like a commodity rather than a currency,” concludes Andrew Sommer, Clayton Utz, in the Australian Senate Economics References Committee report.