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VAT treatment of cryptocurrencies


Article by Nikolas Kontozis, Associate, Tax & Legal Services, PwC Cyprus 



This article provides a summary of the applicable VAT treatment of the supply of services or goods in relation to cryptocurrencies. It is mainly based on the judgement of the case C-264/14 of the European Court of Justice (ECJ) and the analysis of Working Papers No 811, No 854 and No 892 published by the VAT Committee of the European Commission. It is highlighted that the article is informative in nature and does not constitute any kind of advice. Therefore, it is very important for the readers to do their own research and get independent professional advice based on their specific circumstances prior to any decision. 

The way from barter transactions to cryptocurrency transactions

The history of money has its origins in the earliest years of the world's first civilisations. At the beginning, bartering was used for the exchange of goods and services. The first official currency was created by King Alyattes in 600 B.C. in Lydia. Many years later, humans printed the first paper money and, in 1946, the first credit card was introduced in New York. The evolution of money continued with the introduction of mobile banking by the first European banks in 1999. With the advancement of technology, businesses constantly introduce new ways of trading, as well as innovative forms of money. Traditional wallets are being replaced by digital wallets. Purchases in online and real stores can be made faster by contactless payments using a device like your mobile phone, watch or keys. One of the latest innovations is the invention of a new form of money which uses cryptography to control its transactions and does not require the support of a central authority. Ten years ago, the world's first decentralised currency, named Bitcoin, was introduced by its unknown creator (or creators) with the pseudonym Satoshi Nakamoto, aiming to change the global monetary system. Since then, Bitcoin's popularity has been growing significantly and, as expected, other cryptocurrencies have also appeared to follow its success. 

Despite their increasing popularity, cryptocurrencies are currently unregulated in most jurisdictions and their value is characterised by high volatility. However, the fact that major international companies like Microsoft, Overstock and Expedia started to accept bitcoins and recognised universities like New York University, IT University of Copenhagen, Princeton University and University of Nicosia offer courses on digital currencies or related topics, indicates that cryptocurrencies are here to stay. Moreover, government bodies globally make announcements and publications about their positions and most of them view cryptocurrencies as entirely legal. Only a small number of countries, like China, have applied legal restrictions against cryptocurrencies. In any case, it is not the article's purpose to assess the advantages and disadvantages of cryptocurrencies but their use by the business world will be approached as a long-term matter. 

For the time being, most EU Member States have not issued specific regulations for cryptocurrencies and adopted a cautious but friendly approach towards them. Malta is very committed to the growth of cryptocurrencies and blockchain technology (i.e. the technology which is used by cryptocurrencies) in Europe and has recently formed a group called the "Mediterranean Seven". The group includes Malta, France, Spain, Portugal, Cyprus, Italy and Greece and its main aim is to support the use of blockchain technology for the benefit of various sectors like education, banking, healthcare, shipping, transport, real estate, company registry, land registry, customs and others. This could spark growth to the cryptocurrency industry in Europe over the next few years. 

With the increase of Bitcoin related headlines in the media and the lack of relevant regulations or guidance in most countries, the public has many questions in relation to the use and future of using cryptocurrencies for business transactions. Some of the most important questions concerning cryptocurrencies are related to the tax treatment from an indirect tax perspective. Are Bitcoin transactions subject to VAT? As Bitcoin is the most well-known cryptocurrency, the article will mainly refer to Bitcoin but the same applies for all cryptocurrencies with similar characteristics. 

Are Bitcoin transactions subject to VAT?

The guidance in relation to the VAT treatment of cryptocurrencies is currently very limited. However, due to their continuous increasing popularity and wider use by businesses, there is a need for EU Member States to reach a common position and follow a similar approach. The VAT treatment of Bitcoin has been discussed by the VAT Committee of the European Commission (hereafter referred to as 'the Committee') in three formal meetings that took place in 2014, 2015 and 2016. Following each meeting, the Committee issued Working Papers No 811, No 854 and No 892 respectively which include the views, concerns and conclusions of the Member States. In order to establish a logical VAT treatment, the Committee examined the possibility of Bitcoin to be regarded, for VAT purposes, as (a) electronic money (b) currency (c) negotiable instrument (d) security (e) voucher or (f) digital product. Before the judgement of the case C-264/14 Hedqvist, the majority of the Member States were of the opinion that the most suitable option was to treat Bitcoin either as an exempt negotiable instrument or a taxed digital product (i.e. electronically supplied service) and concluded that treating Bitcoin as an exempt negotiable instrument creates less problems and challenges than treating it as a taxed digital product. However, the Committee has only an advisory role for the application of the VAT Directive and no legislative powers. Based on the judgement of the Hedqvist case, Bitcoin shall be treated as a currency because its main purpose is to be used as a direct means of payment.

Exchange services between traditional currencies and bitcoins

The judgement of the case C-264/14 Hedqvist provided the basis for the VAT treatment of transactions concerning the exchange of traditional currencies for bitcoins and vice-versa, in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients. More specifically, the questions referred to the Court for a preliminary ruling were the following:

  1. Is Article 2(1) of the VAT Directive (see References at the end of the article) 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 a 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 the VAT Directive (see References at the end of the article) be interpreted as meaning that the abovementioned exchange transactions are tax exempt?

The Court decided that exchange transactions, such as those at issue in the main proceedings, constitute the supply of services for consideration within the meaning of Article 2(1) but they are exempt from VAT within the meaning of Article 135(1)(e).  

Other types of Bitcoin related services

Although the Hedqvist case is very important for the VAT treatment of cryptocurrencies, it shed light upon transactions concerning the exchange of bitcoins for traditional currencies only. Bitcoin transactions involved other types of services as well. Therefore, after the judgment, the Committee considered the VAT treatment of other Bitcoin related services and provided the following suggestions based on the legal status given to Bitcoin in the Hedqvist case. It is noted that these suggestions will probably be taken into consideration by regulators or courts but currently they have no legal effect. 

(a) Use of bitcoins for acquiring goods or services:

The pure activity of using bitcoins to acquire goods or services is outside the scope of VAT, thus no VAT should be charged on the value of the bitcoins themselves. Bitcoins represent only a means of payment and the transaction is not a barter. However, if the goods or services are taxable, VAT should be charged on their value (see point b). 

(b) Supplies of goods and services, subject to VAT and remunerated in bitcoins:

Supplies of goods and services remunerated in bitcoins should be treated in the same way as taxable supplies of goods or services remunerated in traditional currencies. According to Article 73 of the VAT Directive (see References at the end of the article), the taxable amount of a transaction is the consideration received by the supplier for the supply of goods or services. If the consideration is expressed in bitcoins, the taxable amount should be the equivalent amount in the main currency of the relevant Member State at the time of the transaction. However, it is not easy to identify the most suitable rate for the translation of bitcoins into traditional currency. The VAT Directive provides two alternatives for the conversion of foreign currencies into the main currency of a Member State: (a) the latest exchange rate recorded on the most representative exchange market of the Member State, or (b) the latest exchange rate published by the European Central Bank (ECB). The challenge in respect to bitcoins is that Bitcoin platforms are used worldwide, therefore the most representative exchange market for each Member State is not clear and Bitcoin is not controlled by ECB or any other central authority. A potential solution given by the Committee is "to use as an exchange rate the open market value of the virtual currency, determined under the responsibility of the taxpayer".

(c) Services concerning the arrangement of transactions in Bitcoin (digital wallets):

Digital wallets are software platforms (e.g. applications on smartphones) that allow Bitcoin holders to hold their bitcoins, keep a record of their balance and send or receive bitcoins. Digital wallet services are usually provided free of charge and therefore they fall outside the scope of VAT because there is no consideration, unless the provisions of Article 26(1)(b) apply (see References at the end of the article). 

However, in some cases, the providers of digital wallets may charge fees for the provision of their services. The provision of digital wallet services for consideration constitute an economic activity for VAT purposes. The question is whether such services should be considered as exempt from VAT. On the one hand, they could be considered as exempt because digital wallets are directly concerning currency within the meaning of Article 135(1)(e). If we consider the principle of fiscal neutrality, such services should be treated in the same way as services provided by banks for opening a bank account for a traditional currency. On the other hand, they could not be considered as exempt based on Article 135(1)(d) because digital wallets provide just the virtual environment that allow transfers and payments of bitcoins to take place and the service does not in itself has the effect of transferring funds. This follows the same logic as the judgement in the case C-350/10 Nordea for SWIFT services, where the Court decided that SWIFT services are subject to VAT.

Based on a circular issued by the German Tax Authority on 27/02/2018, Germany decided to follow this approach treating fees charged by digital wallet providers as consideration for electronically supplied services, thus not exempt. It is noted, however, that other Member States may adopt a different position. 

(d) Services concerning the verification of Bitcoin transactions (mining):

In order for a Bitcoin transaction to take place, a verification process is needed, which is called mining. A request for transfer of bitcoins from one user to another should be verified by miners. Miners work on a voluntary basis and they are rewarded with new bitcoins by the system for each transaction validated. Also, Bitcoin users can offer a transaction fee to miners to avoid delays in the verification process.

In the first place, the Committee discussed whether mining can be considered as a transaction subject to VAT and stated that in cases where there is no transaction fee for the activity of mining, the transaction seems to be outside the scope of VAT, except if the provisions of Article 26(1)(b) apply. Some people may argue that the new bitcoins generated by the system constitute a consideration for the mining activity. However, there is a limit of 21 million bitcoins in circulation, which is expected to be almost met by 2040 and therefore, in the future, the basic consideration for miners will be the transaction fee. 

Nevertheless, even if there is a transaction fee, the transaction may still be outside the scope of VAT on the basis that the transaction fee is paid voluntarily. On the one hand, there is no direct link between the mining activity and the transaction fee because the transaction fee is paid voluntarily as an incentive for the miners to verify a specific transaction over others. A Bitcoin transaction may be verified even in the absence of a transaction fee, if the users are willing to wait for a number of days or weeks. On this basis, the transaction fee may be seen as a tip rather than a consideration, in line with the tip given by a passer-by to a street musician in the case C-16/93 Tolsma. On the other hand, as mentioned above, the transaction fee will become necessary in the future and a direct link between the transaction fee and the mining activity will be created. In addition, even now that the transaction fee is not necessary, digital wallets present the payment of a transaction fee as the default option and a transaction fee is actually paid in most cases. Therefore, there is a possibility for such services to constitute supply of services for consideration and fall within the scope of VAT.

Due to this possibility, there is a need to determine if such services qualify for an exemption under Article 135(1). The Committee supports that mining activity is closely related to the supply of bitcoins because it keeps the Bitcoin system operating effectively. Therefore, it can be considered as a transaction concerning currency and be treated as an exempt activity under Article 135(1)(e). The transaction can be also seen as exempt under Article 135(1)(d) because, unlike SWIFT and digital wallet services, mining constitutes an essential activity for the actual transfer of funds and not simply a contact point for the Bitcoin users or a support service for the transfer of funds.

Based on the position adopted by the German Tax Authority in their circular issued on 27/02/2018, a transaction fee paid voluntarily is not subject to VAT. It is noted, however, that other Member States may adopt a different position.

(e) Services related to intermediation supplied by exchange platforms:

In the Hedqvist case, the Court decided that exchange services, where the supplier bought and sold bitcoins acting as a principal (i.e. owner of the bitcoins), are exempt from VAT under Article 135(1)(e). There are also exchange platforms which act as intermediaries to enable buyers and sellers of bitcoins to transact with each other in a virtual market place, sometimes in exchange for a fee to use the platform. Again, if there is no consideration for the services provided, such services will fall outside the scope of VAT, unless the provisions of Article 26(1)(b) apply. However, if the exchange platform charges a fee to provide access to its virtual market place, the services provided will fall within the scope of VAT. The Committee examined whether exchange services provided by an intermediary and exchange services provided by a principal differ sufficiently in order for the opposite VAT treatment to be justified. In the Hedqvist case, the exchange services were considered as exempt under Article 135(1)(e) because they were closely related with a means of payment. In contrast, services related to intermediation supplied by exchange platforms cannot be seen as exempt because, in this case, exchange platforms do not offer exchange services in relation to a means of payment but they actually offer a virtual market place where Bitcoin transactions take place. 


Over the last years, Bitcoin and other decentralised digital currencies disrupted the global economy, bringing a revolution to the way that we perceive the idea of money. For the first time in the history of money, technology enables the use of a means of payment which does not require the intervention of a central authority and cross-border payments can be made in substantially less time at a lower cost. Given the increasing popularity of cryptocurrencies, economies that rely in the financial sector should be able to take advantage of the latest financial developments in order to attract foreign investments. However, in order for a country to be in a position to exploit any opportunities in relation to cryptocurrencies, a clear and precise legislative framework should be in place, including tax laws. Following the judgement of the ECJ in the Hedqvist case and the Working Papers issued by the European Commission, the Member States can update their laws and issue specific guidelines in relation to the VAT treatment of cryptocurrencies. The growth of cryptocurrencies in Europe makes the issue of relevant regulations necessary. It is expected that all the Member States will shortly adopt a unified position in relation to the VAT treatment of cryptocurrencies and only minor differences will remain. Currently, given the ambiguity of the legislative framework and the absence of a clear set of rules, companies which intend to get involved with cryptocurrencies have to ensure that they follow a reasonable and consistent tax treatment in order to avoid unnecessary disputes with the tax authorities in the future.


References (extracts from the VAT Directive)

Article 2(1)

The following transactions shall be subject to VAT:

(a) the supply of goods for consideration within the territory of a Member State by a taxable person acting as such;

(b) the intra-Community acquisition of goods for consideration within the territory of a Member State by:

(i) a taxable person acting as such, or a non-taxable legal person, where the vendor is a taxable person acting as such who is not eligible for the exemption for small enterprises provided for in Articles 282 to 292 and who is not covered by Articles 33 or 36;

(ii) in the case of new means of transport, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1), or any other non-taxable person;

(iii) in the case of products subject to excise duty, where the excise duty on the intra-Community acquisition is chargeable, pursuant to Directive 92/12/EEC, within the territory of the Member State, a taxable person, or a non-taxable legal person, whose other acquisitions are not subject to VAT pursuant to Article 3(1);

(c) the supply of services for consideration within the territory of a Member State by a taxable person acting as such;

(d) the importation of goods.

Article 26(1)

Each of the following transactions shall be treated as a supply of services for consideration:

(a) the use of goods forming part of the assets of a business for the private use of a taxable person or of his staff or, more generally, for purposes other than those of his business, where the VAT on such goods was wholly or partly deductible;

(b) the supply of services carried out free of charge by a taxable person for his private use or for that of his staff or, more generally, for purposes other than those of his business.

Article 73

In respect of the supply of goods or services, other than as referred to in Articles 74 to 77, the taxable amount shall include everything which constitutes consideration obtained or to be obtained by the supplier, in return for the supply, from the customer or a third party, including subsidies directly linked to the price of the supply.

Article 135(1)

Member States shall exempt the following transactions:

(a) insurance and reinsurance transactions, including related services performed by insurance brokers and insurance agents;

(b) the granting and the negotiation of credit and the management of credit by the person granting it;

(c) the negotiation of or any dealings in credit guarantees or any other security for money and the management of credit guarantees by the person who is granting the credit;

(d) transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments, but excluding debt collection;

(e) transactions, including negotiation, concerning currency, bank notes and coins used as legal tender, with the exception of collectors' items, that is to say, gold, silver or other metal coins or bank notes which are not normally used as legal tender or coins of numismatic interest;

(f) transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities, but excluding documents establishing title to goods, and the rights or securities referred to in Article 15(2);

(g) the management of special investment funds as defined by Member States;

(h) the supply at face value of postage stamps valid for use for postal services within their respective territory, fiscal stamps and other similar stamps;

(i) betting, lotteries and other forms of gambling, subject to the conditions and limitations laid down by each Member State;

(j) the supply of a building or parts thereof, and of the land on which it stands, other than the supply referred to in point (a) of Article 12(1);

(k) the supply of land which has not been built on other than the supply of building land as referred to in point (b) of Article 12(1);

(l) the leasing or letting of immovable property.

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