A recent legal referral in the EU may be inching the region a little closer to more unity on one small element of bitcoin taxation, but it won’t do much to help global confusion on the matter.
In June, Sweden asked Europe’s highest court, the European Court of Justice (ECJ), whether cryptocurrency exchanges are liable for value-added tax on the fees that they charge for their services. The result could have far-reaching implications for tax in the region.
In Europe, there is a directive on VAT that explains how it should be levied. EU directives are powerful documents, designed as high-level guides that member states can interpret when making their own laws.
VAT on profits from bitcoin exchanges
Cryptocurrencies are so new that few member states have worked out how to interpret the VAT rules for them. Belgium, Croatia, Cyprus, the Czech Republic, Greece, Hungary, Ireland and Italy haven’t decided whether to charge bitcoin exchanges VAT on the service that they provide. Latvia, Luxembourg, Malta, Portugal, Romania and Slovakia have no regulations on the matter either.
Some other states lie at the opposite end of the spectrum, with firm rulings on the matter. The UK was among the first, effectively making bitcoin trading exempt from VAT in a ruling published in March.
While exchanges and miners are off the hook, though, the UK says that VAT should be charged when goods and services are sold for bitcoin.
Several states have taken an opposing view. Estonia made its own decision about VAT on profits from bitcoin exchange services, levying a 20% tax on those trading bitcoins as a service. It is also charging a 10% tax on profits from selling bitcoins. Poland has imposed a 23% VAT on bitcoin mining profits, although its position on bitcoin exchanges isn’t clear.
Some states are imposing various taxes on cryptocurrency trades, but not necessarily VAT. Lithuania has said it will tax bitcoin trading as personal income at 5%. Slovenia treats mining profits as personal income. It won’t tax people selling bitcoins, but it will examine each case individually. Bulgaria wants a 10% income tax on the sale of bitcoins.
Most of these decisions address a question that Sweden decided it couldn’t answer alone. In June, it asked the ECJ a question that it couldn’t decide for itself, arbitrating a dispute between the Swedish tax authority (Skatteverket), and a private defendant, David Hedqvist.
The question – on the subject of Article 2 (1) of the VAT Directive, which describes what transactions should be subject to VAT – asked whether people who exchange cryptocurrency for fiat currency provide a VAT-relevant service; and if they do, whether that exchange service should be exempt from VAT.
“On most banking transactions, the charges that the bank makes are exempt from VAT, so you don’t pay them,” explains Siân Jones, co-lead of the exchanges regulation and accounting working group for the UK Digital Currency Association (UKDCA), an advocacy group for digital currencies. Sweden wants to know whether this applies to the markup charged for virtual currency exchange.
A decision that could change everything
The ECJ could take up to two years to deliver a decision, which can then be used by Sweden in its policy making, explained European tax lawyer Esteban van Goor.
The ruling could prompt other countries to change their regulations, he warned – or it could even prompt the EU to pass legislation broadly addressing VAT on cryptocurrency. It’s a potentially existential issue for European cryptocurrency exchanges, said van Goor.
An exchange may have to reconsider its business and pricing model, he said:
“If you have an exchange and you apply an exemption, and the tax authorities say we will assess you for VAT, then that could be a game changer for your business.”
VAT on the sale of goods and services for bitcoins
VAT on fees charged for exchanging bitcoins into fiat is relevant to exchanges, which make their money that way, and who are a crucial part of the emerging bitcoin economy. But VAT is also relevant to merchants, who make their money by selling goods and services for bitcoin.
Many countries have been asking themselves whether those merchants should charge VAT on the sale of goods and services in exchange for bitcoin.
Ireland’s finance minister has said that while it doesn’t regulate bitcoin as a currency, VAT might be chargeable on the equivalent value of goods and services exchanged for the cryptocurrency, and that such a tax would have to be invoiced in euros.
In Spain, private legal opinion suggests adding VAT on invoices sent in bitcoin, and says that bitcoin should be taxed as a service.
In other states, uncertainty reigns. Austria is floundering. In some countries, legal opinion suggests tax guidelines, but there appear to be no regulations enforcing it. Legal opinion in the Netherlands suggests VAT would be due on bitcoins received because of its lack of status as either money or financial product, and based on statements made by government officials.
There is a third VAT question that countries must answer: should people be charged VAT when they sell their own bitcoins? Opinion is divided on the matter.
Outside the EU, Norway has made its own decision about the commercial sale of bitcoins via a website. The country treats bitcoins as an asset, which renders it taxable. Because this means that bitcoin isn’t a currency in Norway, the commercial sale of bitcoins can’t be a considered a financial service, which would be VAT-exempt. Consequently, as a VAT-relevant electronic service, selling bitcoins commercially invokes a 25% VAT fee.
In Central and South America, few explicit rules have been passed with regards to cryptocurrency, although Brazil’s tax authority has argued that bitcoin is a financial asset rather than a currency. It will tax people selling bitcoins – but only if the value is over 35,000 Brazilian reals (around $16,000).
One of the worries about imposing VAT on the sale of bitcoin is that in some jurisdictions, it could result in a double tax for merchants dealing in cryptocurrency – once when they take bitcoins in exchange for goods and services, and again when they sell those bitcoins.
Germany, for example, delighted bitcoiners when it announced that bitcoins held for over a year wouldn’t be subject to capital gains tax. But it concerned bitcoin investors and businesses when it recommended a tax on the commercial sale of bitcoin. The country, which classes bitcoin as a ‘financial instrument’ rather than a functional currency, classifies its sale as a “miscellaneous service”, which would invoke VAT.
The danger is similar in some areas outside the EU. In Singapore, bitcoins are treated as products. Bitcoin investors will be fine there, because cryptocurrency is treated as capital gains for investment purposes. This means that if Singapore residents buy and hold bitcoin for an extended period, it’s tax-free, because there is no capital gains tax in Singapore.
The story is different for merchants. Bitcoins are considered a means of barter when used to buy goods and services in Singapore, and therefore taxable. They’re also subject to general sales taxes when sold.
This creates the potential for a double or even a triple tax, officials have said. Companies could be taxed when buying bitcoins, when selling them, and potentially when using them as a form of payment.
What is cryptocurrency, anyway?
The ruling from the ECJ could help answer a more fundamental question about bitcoin that could help countries resolve multiple issues: what is cryptocurrency? Is it a legal currency? A financial service? A commodity?
“The answer to this question will be useful,” said Jones. “If it were goods, it would be a question that they wouldn’t need to refer to the ECJ. If it was legal tender, it wouldn’t either. The problem is that virtual currencies sit in this nether world.”
While there might be an opportunity to harmonize some aspects of VAT on cryptocurrency in Europe, it will be far more difficult to achieve a single approach to other taxes, such as personal and corporate income tax and capital gains. These tax regimes are decided mostly at a national level.
Broadly speaking, income taxes are calculated on any income regardless of a country’s particular rules about bitcoin, argue experts.
“It is pretty clear that any transaction that otherwise gives rise to income taxes, is still taxable, regardless of the fact that it is settled in bitcoin,” said Omri Marian, an assistant professor of law at the University of Florida who wrote a paper on the use of cryptocurrencies as tax havens.
However, the details of some tax applications will differ depending on how the country treats cryptocurrency.
“There are some countries where how it’s classified has a bearing on the tax. So perhaps capital gains on real estate but not other assets. Or if it’s a certain type of asset it may only be subject to capital gains if it’s held for under a year.”
In the US, the federal government doesn’t impose VAT on anything, although national sales taxes are imposed on certain goods and services.
However, at the federal level, the IRS made a March ruling categorizing bitcoin as property. For investors, this means that capital gains tax is due for investors selling bitcoin before a year is out. Exchanges may not pay VAT, but when they sell digital currency to a customer, the gross income equals the value for which the currency is sold, say lawyers.
But at a state level, things are less defined. States have generally been slow to issue official guidance on bitcoin and taxes, according to Marian.
He finds two reasons for the lack of state tax regulation of cryptocurrencies:
“First, states seem more concerned about bitcoin when it comes to consumer finance and investor protection issues.”
He argued that it isn’t yet a major source of tax revenues and doubted where state taxes need much clarification.
“If a transaction is subject to sales tax, for example, it is because the nature of the transaction, not because of the nature of bitcoin. Sales tax will apply to a sale in most states regardless if one is being paid with USD or bitcoin.”
In Canada, not much has changed from a tax perspective since the country’s tax authority released guidance on the status of cryptocurrency in November. The Canada Revenue Agency (CRA) still taxes bitcoin as bartered items from a tax perspective, although in a separate document, it warns that profits from commodity transactions could be taxed as income.
We also know of several non-EU countries that have not issued explicit rules for taxing bitcoin presently, but which are considering the issue. Israel is mulling it over; Australia is behind on tax guidance that it has already promised.
Ultimately, some trading blocks may eventually establish uniform rules for some taxes as they relate to cryptocurrency, but Marian warned not to expect everyone in the world to sing from the same song sheet, on all tax issues.
“Harmonization is a lot to expect for in a world where different countries subject similar transactions to different tax regimes,” he said.
And of course, there’s the other important issue: collection. Marian pointed out:
“Difficulty still exists in the context of administration and collection, given the pseudo-anonymity. The more mainstream bitcoin becomes, the more it becomes a worry for tax evasion, and I think this is where we’re going to see much of the focus.”
Regimes may tax bitcoin all they want, he added. But first, they have to understand what it is. And then, they have to understand how to follow the money, commodity, financial instrument – or whatever they decide to call it.
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