On 22 October 2015, the European Court of Justice (“ECJ”) issued a judgment in response to a request from the Swedish Supreme Administrative Court (Högsta förvaltningsdomstolen) for clarification on the question whether transactions to exchange a traditional currency for the ‘Bitcoin’ virtual currency or vice versa were subject to value added tax (‘VAT’).

This decision follows a dispute between the Swedish tax authority (Skatteverket) and Mr. Hedqvist, a Swedish national who requested permission from the Swedish Revenue Law Commission (Skatterättsnämnden) to operate his online bitcoin exchange. In a preliminary decision, the Swedish Revenue Law Commission informed Mr. Hedqvist that bitcoin was exempt from VAT under Swedish law. However, the Swedish Tax Authority did not agree and appealed against the decision, arguing that the service in question was not covered by the VAT exemption under Swedish law.

The Swedish court saw itself forced to refer the following two questions to the ECJ:

  1. Is Article 2(1) of the VAT Directive to be interpreted as meaning that transactions in the form of what has been described 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? 
  2. If so, must Article 135(1) [of that directive] be interpreted as meaning that the abovementioned exchange transactions are tax exempt?’

According to the ECJ, the exchange transaction at issue falls under article 2 (1)(c) of the Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax (the VAT Directive). The ECJ first clarified that the exchange of different means of payments constitutes a supply of services within the meaning of article 24 of the VAT Directive, since bitcoins cannot be characterized as “tangible property” referred to in article 14 of the VAT Directive. The Court goes on to recall that the supply of services is effected “for consideration” only if there is a direct link between the services supplied and the consideration received. According to the ECJ, it is clear that the exchange of traditional currency for units of bitcoin, in return for payment of a sum equal to the difference between the price paid by the operator to purchase the currency and the price at which he sells the currency to his clients, constituted a supply of services for consideration within the meaning of Article 2(1)(c) of the VAT Directive.

Subsequently, the ECJ focussed on the question whether this supply of services could fall under one of the VAT-exemptions laid out in article 135 (1) VAT Directive, more specifically the transactions included in paragraphs (d) to (f).

The ECJ explains that bitcoins, as a direct (contractual) means of payment, cannot be regarded as a “current account or deposit account, a payment or a transfer”, nor as “debt, cheques and other negotiable instruments” referred to in article 135 (1)(d) VAT Directive. The transactions targeted by this paragraph concern services or instruments that operate as a way of transferring money without actually involving money itself. The exchange transaction at issue, where bitcoins are exchanged for actual money, can therefore not fall under the scope of article 135 (1)(d) VAT Directive.

However, according to the ECJ, the exchange transaction at issue does fall under the exemption for transactions involving “currency, bank notes and coins used as legal tender” as laid out in article 135(1)(e) VAT Directive. According to the ECJ (in line with the AG’s conclusions in points 31 to 34) this article applies to financial transactions involving both traditional and nontraditional currencies. The ECJ stresses that to interpret this provision as including only transactions involving traditional currencies would go against the context and aims of article 135(1)(e) VAT Directive as transactions involving non-traditional currencies that have been accepted by the parties to a transaction are also financial transactions. Applied to this case, the bitcoins exchange has no other purpose than to be a means of payment.

Finally, the ECJ concluded that the bitcoin exchange transactions do not fall within the scope of the exemptions laid down in article 135 (1)(f) VAT Directive, namely for transactions in “shares, interests in companies or associations, debentures and other securities”, as it is commonly accepted that the bitcoin virtual currency is neither a security conferring a property right nor a security of a comparable nature.

With this decision, the ECJ laid out a positive future for bitcoinpurchases at bitcoin-exchanges in Europe. Following this decision, Europeans can continue to buy bitcoin with traditional currency without paying tax. We can only now hope that this approach gets adopted by countries outside of the European Union, thereby further harmonizing Bitcoin’s taxation-approach.

The case (C-264/14) can be found on http://www.curia.europa.eu