The VAT exemption for bitcoin exchange transactions

Transactions concerning legal tender are exempt from VAT. The classic Hedqvist judgment shows that exchanging virtual currencies such as bitcoin falls within that exemption too. But not every digital means of payment shares in that outcome.

The Hedqvist judgment

David Hedqvist planned to set up a business exchanging traditional currency such as Swedish kronor for virtual currency (bitcoin) and vice versa. Bitcoin is a digital currency that is not issued or controlled by a central authority and that is used as a means of payment between users online. Hedqvist would buy and sell bitcoins on an international exchange and his profit would consist of the margin between the buying and selling price. He would charge no other fees.

The questions referred

The Swedish court was unsure about the VAT treatment and referred two questions to the Court of Justice of the EU:

• Is the exchange of virtual currency for traditional currency and vice versa, with a margin charged as consideration, a supply of services for consideration?
• If so, are those exchange transactions exempt from VAT?

The margin as consideration

The Court found that exchanging traditional currency for bitcoins and vice versa is a supply of services rather than of goods, because bitcoins are not physical goods but serve only as a means of payment. The service is supplied for consideration, because there is a direct link between the service and the consideration received by the supplier: the margin between the buying and selling price.

The exemption

The Court held that the exemption for transactions concerning legal tender must be construed strictly, but consistently with its purpose: removing difficulties in charging VAT on financial transactions. Bitcoin is not legal tender, but it is used purely as a means of payment and accepted as such by the parties.

The difficulties in determining the taxable amount when exchanging traditional currency for bitcoin are comparable to those arising when exchanging one traditional currency for another. To preserve the purpose of the exemption and respect the principle of fiscal neutrality, the provision must also cover the exchange of traditional currency for a virtual currency functioning as an alternative means of payment. Hedqvist's services are therefore exempt.

Why this matters in practice

Developments around virtual currencies have not stood still, and the question regularly arises whether Hedqvist can apply in other situations. In a recent opinion, Advocate General Kokott addressed whether trading gold in the virtual game environment RuneScape can be treated in the same way as bitcoin for VAT purposes.

Advocate General Kokott sees fundamental differences with Hedqvist. In-game gold is intended primarily for use within the game environment and does not serve as a general means of payment outside it. Its value can also fluctuate considerably and depends directly on the game developer and the game environment. Several Dutch courts have ruled to the same effect and Advocate General Ettema has advised the Supreme Court to follow that line.

Hedqvist therefore does not automatically mean that other forms of digital payment, such as in-game gold, are exempt.