Application of VAT to bitcoin transactions in light of the Hedqvist case (Case C-264/14)

1. The main proceedings

Mr Hedqvist intended to carry out bitcoin buy-sell services in exchange for Swedish kronor. At the time, the bitcoin virtual currency was not regarded as a means of payment under the legislation of any state. Before starting his activity, he requested a preliminary ruling from the Swedish Revenue Law Commission to establish whether or not he had to pay VAT on the services he intended to provide. In this ruling, the Commission exempted the buy-sell transactions described above from VAT, treating bitcoin as a means of payment in the same way as other means of payment provided for by law. The Swedish tax authority challenged this ruling.

The case, like all the other types of bitcoin transactions described below, raises two issues:

1. Does bitcoin trading activity constitute a taxable transaction under the VAT Directive?
2. If so, is the activity exempt under Article 135 of the same Directive?

In the Hedqvist case, the CJEU answered both questions in the affirmative, but the VAT Committee has continued to examine the other types of transactions involving bitcoin.

To clarify the matter, reference is made to Council Directive 2006/112/EC of 28 November 2006 on the common system of value added tax. More specifically, it examines each type of transaction through the lens of two articles of the Directive, which stand in a general rule-special rule relationship: Article 2 and Article 135.

Under Article 2(1)(c) of the Directive, is subject to VAT “the supply of services for consideration within the territory of a Member State by a taxable person acting as such;”

Under Article 135(1), “Member States shall exempt scutesc the following transactions: [...] (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.”

2. Using bitcoin to purchase goods or services

Outside the scope of application: VAT should not be charged on the value of the bitcoin itself

3. Supply of goods or services subject to VAT, remunerated in Bitcoin

Subject to VAT, like any other supply of goods or services. Under Article 73 of the Directive, the taxable amount must be everything which constitutes the consideration obtained or to be obtained by the supplier, in return for the goods or services. Where the consideration is paid in bitcoin, the taxable amount should be the equivalent value in a currency provided for by law - more specifically, the national currency of the Member State in whose territory the supply of goods or services takes place, calculated at the moment the transaction occurs.

This method requires converting bitcoin into traditional currency, which raises questions as to the exchange rate to be used. Although there is no definitive solution to this problem, the Commission has proposed using the market value of the virtual currency, the determination of which falls to the taxpayer.

4. Services provided by digital wallet providers)

Digital wallets are used by users to store virtual currency, to keep track of balances, and to interact with other holders of virtual currency. Typically, these “digital wallets” are provided by third parties and can be stored either offline, on the currency holder's computer, or via an online connection. Holders of virtual currency can carry out transactions with other holders, and can therefore send or receive currency through a “digital wallet”.

The VAT treatment of the supply of digital wallets is assessed according to whether the provider charges a price. Thus, the transaction is not taxable where the “digital wallet” provider supplies the service free of charge. The position changes where the provider charges a price in exchange for supplying the service, such that the transaction should be subject to VAT. The Court notes a common mechanism between these digital wallets and platforms such as Netflix and Spotify: users access digital information through software.

Does Article 135(1)(e) apply to services provided by digital wallet providers? The answer is indicative: in theory, it is possible. The main argument in favour of exempting these transactions from VAT is the correlation between the service of providing a digital wallet by a provider and the activity of banks, for example, which store money in exchange for a price through bank accounts. If this latter activity is exempt from VAT, why should it not be the same for the services of a digital wallet provider?

5. Bitcoin transaction verification services (mining)

Through bitcoin mining, individuals use specialised software to process and confirm virtual currency transactions. To be confirmed, a transaction must be verified at least once, but nothing prevents it from being verified multiple times. The more times a transaction is verified, the more secure it is considered to be. In exchange for these services, Bitcoin miners may or may not request consideration.

Outside the scope of application: The absence of an obligation to pay a transaction fee is correlated with the lack of a direct link between the service and the consideration. Furthermore, the optional nature of the consideration removes the reciprocity and interdependence of the two parties' obligations and, therefore, the synallagmatic character of the relationship. The situation is simpler where the virtual wallet provider operates free of charge. In the absence of a price, the question of VAT liability no longer arises. A notable exception, however, is where the provider performs the services for purposes other than those of the business (for its own benefit or that of its staff). In this case, art. 26 of the Directive applies, and the transaction is regarded as a supply of services for consideration.

Where the provider charges a price in exchange for performing the service (and it is quite likely to do so), the transaction should be subject to VAT. Does art. 135 (1) e) apply to services provided by virtual wallet providers? In other words, does the special rule exempting the service from VAT apply? The answer is, broadly: theoretically, it is possible. The main argument in favour of exempting these transactions from VAT is the correlation between the service of providing a virtual wallet by a provider and the activity of banks, for instance, which store money in exchange for a fee through bank accounts. If the latter activity is exempt from VAT, why should the services of a digital wallet provider?

6. Intermediation services of bitcoin exchange platforms

The situation is somewhat different from the Hedqvist case, in which the company bought and sold bitcoin not as an intermediary, but as a holder of the currency. Intermediaries provide a virtual marketplace in which holders of virtual currency can interact, for a price. Naturally, if intermediaries provide the service free of charge, the question of taxation no longer arises. If, however, these services are provided for a fee, the situation is not so straightforward. The Committee considers that such services are subject to VAT in light of art. 2 (1) c) of the Directive because: i) there is a direct link between the activity and the consideration; ii) there is a price; iii) the development and operation of an online exchange platform constitutes an economic activity under art. 9 (1) of the Directive.

Does art. 135 (1) e) apply? Unlike the Hedqvist case, the services provided by such platforms are seen more as activities of making software available in exchange for a price. Thus, art. 135 (1) e) of the Directive applies only to limited cases of currency transactions, and not to intermediaries such as bitcoin exchange platforms. These services nu are exempt from VAT.