The VAT treatment of transactions carried out with certain crypto assets is a controversial issue as these are products that are difficult to classify from a legal perspective and are constantly evolving due to the fast changes that exist in the digital economy. The CJEU already issued an opinion on the VAT treatment of bitcoin transactions in 2015 (Case 264/14, David Hedqvist). This case was limited to transactions concerning the exchange of bitcoins for traditional currencies. Since then, the world of crypto assets and in particular virtual currencies has changed enormously. It is therefore particularly important to have a common framework for determining their VAT treatment under the EU VAT Directive.
We must define what we are referring to when we talk about crypto assets since, as mentioned above, there is a growing universe of options around this topic. In this regard, there is a proposed definition by the EU legislator (Proposalfor a Regulation of the European Parliament amending EU Directive 2019/1937) which is as follows: “digital representation of value or rights which may be transferred and stored electronically, using distributed ledger technology or similar technology(…)”
We, therefore, see how a crypto-asset can be not only what we normally know as «currency», but it can be any other type of asset that represents a value and that can be traded in exchange for a consideration. This should undoubtedly have VAT consequences.
Once the crypto-assets have been created (this can be done in several ways and with its own implications for VAT), they must be put into circulation and made available to potential users who will acquire them usually for consideration. If these activities fall within the scope of VAT because the supplier qualify as a taxable person and because there is direct link between the supply and the consideration received (reciprocal performance between the provider of the service and the recipient) it is fundamental determining whether they can be exempt from VAT.
The exemption that may apply should be one of the two following:
- Article 135(1)(d) of the VAT Directive (transactions concerning payments); or
- Article 135(1)(e) of the VAT Directive (transactions concerning currencies)
The EU Commission has stated in the past (VAT Committee Working Paper No.892) that the exemption concerning currencies (Article 135(1)(e) of the VAT Directive) could apply to transfer of certain crypto assets like crypto currencies.
However, there may be other activities which do not necessarily involve the transfer of the asset itself but which are necessary for the functioning of the whole process of creation (like, for example, mining), supervision and tranding of these assets. These other side activities may also be exempt from VAT by application of Article 135(1)(d) of the VAT Directive.
According to the above and always bearing in mind the difficulty involved in classifying this type of activity, it may be justified that the exemptions provided for financial activities listed in Article 135 of the VAT Directive would apply to the majority of transactions carried out with crypto assets.
An increasing activity in the market is the exchange of crypto assets. There should be no difference between their exchange and the exchange of any other “normal” currency. Thus, the transactions should be exempt from VAT by, again, application of Article 135(1)(e) of the VAT Directive.
It is also becoming common to pay for goods and services using virtual currencies. There is no reason to treat this type of activity differently than if payment were made in traditional currencies. If the transaction is a taxable activity subject to VAT, the fact that it is paid with a crypto currency should be irrelevant. The supplier should account for the VAT and charge the corresponding VAT amount to the recipient of the goods or services. The only possible difficulty here could be the correct determination of the taxable amount. However, we insist that no distinction should be made and therefore the standard provisions of Article 73 of the VAT Directive should apply (the taxable amount should be everything which constitutes consideration obtained or to be obtained by the supplier). It will be, therefore, necessary to determine what is the value of the crypto asset delivered in exchange for the goods or services.
The above is a brief summary of the VAT implications of the most common and basic transactions in the world of crypto assets. The universe around these products is huge and we are sure that while we were writing this article, new products and new ways of trading them are being developed somewhere in the world. This means that we are dealing with an extremely complex type of activity, which makes also extremely complicated to fit into the EU VAT rules. This should not prevent from seeking common standards for their VAT implications. This will provide certainty for the traders. It will also help the legislator to understand the type of activity he is dealing with and it will protect the consumer from situations that are often extremely difficult for them to understand.