BITCOIN and other digital currencies are to be exempt from VAT, the European Court of Justice has ruled.
The judgment puts cryptocurrencies on a more even footing with conventional currency after it was ruled its exchange should be VAT-free, although capital gains levies will still apply.
Cryptocurrencies are cyber currencies which use cryptography to secure transactions and control the creation of new units. Highly controversial, the best known is Bitcoin, though Ethereum and Litecoin are also widely used. Today, there are more than 530 Cryptocurrencies in use around the world. There is now central issuing authority for any cryptocurrency as yet.
The case was first raised in a dispute between David Hedqvist, who sells Bitcoins on his website, and the Swedish tax authority, the Skatteverket, which disagreed with a Swedish court’s ruling that Bitcoin exchanges were exempt from VAT.
After it was passed up to the ECJ, it was ruled digital currency exchanges could be considered a means of payment and thus are exempt from VAT.
The ruling is a boost for the UK’s hopes for becoming a hub for global bitcoin exchange, claims VP of global tax at tax automation provider Avalara, Richard Asquith.
HMRC scrapped its plans to attach VAT to the exchange of cryptocurrencies last year.
Countries such as Germany, Poland and Sweden considered bitcoin more like a commodity or good used for barter, and so subject to VAT. Since the average EU VAT rate is over 21%, could have potentially rendered the exchange and use of bitcoin as subject to a substantial tax bill.
Asquith said: “Today’s ruling will help boost the UK’s prospects of securing its position as the European and global hub for the bitcoin sector. As long as the VAT treatment of bitcoin remained uncertain, intense competition from global exchanges such as Switzerland, Singapore and Hong Kong, threatened to take market share.
“This is also the first step in securing bitcoin’s future as a genuine alternative to national currencies. The next stage will be receiving regulatory compliance approval from national banks. Today’s ECJ ruling will help lay the path to this. It will also give the wider general public the confidence to adopt digital currencies for their day-to-day use. Retailers and payment platforms will now likely step-up their investment in bitcoin management in anticipation of this.”