On October 22, 2015 the ECJ ruled its first bitcoin case (David Hedqvist).
In this case it concerned a Swedish bitcoin exchange service operated via a website. Through the exchange it was possible to exchange "bitcoin" (a virtual currency) into Swedish Krona and vice versa. The exchange operates a bid price and offer price, the difference constituting the remuneration for the services of the website.
The exchange website and the Swedish Tax Authorities were in dispute whether the exchange of bitcoin should be considered a VAT taxable or VAT exempt activity. In this regard the Swedish court referred two preliminary questions to the ECJ on June 2, 2014:
- whether or not a service for remuneration rendered by a bitcoin (virtual currency) exchange can be treated as a VAT relevant service; and
- in case the bitcoin (virtual currency) exchange service is VAT relevant, whether a VAT exemption can be applied.
In relation to the first question, the ECJ answers that a service for remuneration rendered by a bitcoin exchange must be treated as a VAT relevant service, only if there is a direct link between the services supplied and the consideration received by the exchange. As this is the case with such services, exchanging traditional currency for units of bitcoin and vice versa against remuneration constitutes a supply of services relevant for VAT purposes.
In answering the second question, the ECJ states that bitcoin is a contractual means of payment, and a direct means of payment between the operators that accept it. The ECJ further considers that services relating to bitcoin are regarded as financial services, and should therefore be VAT exempt, just as services by 'regular' currency exchanges.
As the services performed by the website must be treated similarly to exchange services that are engaged with exchanging foreign currencies, no VAT should be charged by the service providers to customers for virtual currency exchange services. This means that service providers in this industry will possibly face input VAT recovery restrictions. In addition, and given the anonymous characteristics of bitcoin and the market players involved, discussions may arise regarding the determination of the VAT position of such service providers. Also, such service providers should take into account that there may be a broader impact, such as on existing real-estate lease agreements in place.
The ECJ also addresses bitcoin and virtual currencies itself. As long as they can only be used as means of payment, they should be qualified as such and be identically treated as other means of payments (such as legal tender). This implies that no VAT is due on the mere transaction with bitcoins.
Finally, while the case seems only to apply to virtual currencies, such as bitcoin, the case could also impact future technological developments such as smart contracts, Blockchain-based software systems in place between banks and insurers and communication between devices within the Internet-of-Things.