A landmark court ruling has sorted out some of the issues for trading the virtual currency Bitcoin.
The Court of Justice of the European Union (CJEU) has ruled the supply of Bitcoin is exempt from VAT, but any service involved in the transaction, like the cost of trading is not.
The case was referred to the CJEU by a court in Sweden that was asked by the country’s tax authority to clarify whether Bitcoin was a currency or a commodity.
Under tax rules, gains made from currency transactions are exempt from capital gains tax and VAT, while those from other investments are not.
The query was raised by a Bitcoin trader in Sweden who intended to exchange Bitcoin for other currencies.
Various courts in Sweden considered the point but could not come to a conclusion.
The European Court and Bitcoin
The CJEU came up with two conclusions: –
- A Bitcoin trader has a margin between currency buying and selling prices which the court decided was a supply of services
- Bitcoin was not a currency or legal tender but merely an agreed means of payment that made the exchange transactions possible
That, the judges decided, means trading Bitcoin is a VAT taxable supply but no VAT is due on the exchange as Bitcoin is not a currency or legal tender.
Effectively, this is good and bad news for Bitcoin.
VAT is only due on the margin in a trade, but capital gains tax is still due on any investment growth as the virtual currency is not legal tender in any European state.
Bitcoin still not considered a currency
The ruling does not apply to Bitcoin transactions outside the European Union, where each tax jurisdiction will have to make a local ruling.
Bitcoin trades in the UK are also exempt from VAT as Britain has opted to impose local laws rather than follow the EU VAT directive.
Other states within the EU must now consider whether to make their own VAT decisions about Bitcoin trades or follow the directive.
Bitcoin is an independent virtual currency that is not under the control of any central bank or government financial regulator.
This makes Bitcoin investment subject to capital gains tax in most countries, whereas foreign exchange gains are exempt from CGT as they are profits derived from currency transactions.