The European Court of Justice (ECJ) has ruled that exchanges of virtual currency like bitcoin are exempt from value added tax (VAT).
The ruling was made in response to a request by Swedish tax authorities, who argued that such transactions should not be covered by an EU directive exempting currency transactions from VAT.
“Those transactions are exempt from VAT under the provision concerning transactions relating to ‘currency, bank notes and coins used as legal tender’,” said the ECJ in a concluding statement.
Governments looking to classify Bitcoin for the purposes of tax treatment and anti-money laundering legislation occasionally find themselves having to walk a tightrope. It would seem irrational to treat bitcoin as a currency, as it is not backed by governments and is only used as payment for goods by a miniscule portion of the population.
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But it would seem absurd to charge VAT when treating it like a good, as the buyer isn’t receiving anything of utilitarian value over and above Bitcoin’s use for payment. Hence, the classification as a payment instrument suffices for VAT purposes.
Governments have also been split on the treatment of bitcoin for the purposes of income tax, such as when capital gains are realized.
The ECJ’s ruling reinforces those previously made by several individual EU member states, including Spain, Germany, Finland, Belgium, Switzerland and the UK.
The industry has welcomed the ECJ’s decision. James Smith, CEO of Elliptic, a UK-based wallet and analytics startup, told Finance Magnates that the ruling is “good news for Bitcoin’s use as a currency.” He argued that the decision prevents double taxation- “once when consumers buy bitcoins, and then again when they buy goods and services with those bitcoins.”
He further argued that the decision raises a more fundamental question about what money is and who controls it. “The ECJ judgement refers to a carve-out for ‘currency, bank notes and coins used as legal tender’ as justification for their decision,” he said. “Bitcoin differs from these in that there is no central authority issuing or administering it. Perhaps other legal privileges usually reserved for legal tender will now be extended to decentralised currency schemes?”