Bitcoin transactions are exempt from VAT as legal means of payment

Entrepreneurs who wish to exchange 'bitcoin' virtual currency for other currency, are not required to declare and pay VAT. The consequence is that the 'bitcoin' virtual currency is treated in a similar way to other currencies (traditional means of payment). 

The VAT-exemption to legal means of payment, such as provided by the VAT-Directive 2006/112/EC, would be undermined if the activities of bitcoin companies would be subject of VAT. 

The bitcoin is a virtual currency, which is used for payments made between private individuals via the Internet and in certain online shops that accept the currency. Users can buy and sell these currencies on the basis of an exchange rate.

This judgment intervened following a request for a preliminary ruling from the Supreme Administrative Court of Sweden. That Court had to give a ruling in proceedings between the Swedish Tax Authority and an entrepreneur who wishes to provide services consisting of the exchange of traditional currency for the 'bitcoin' virtual currency and vice versa. 

According to the preliminary decision of the Swedish Revenue Law Commission to the entrepreneur, the sale and purchase of 'bitcoins' are exempt from VAT, but the Swedish Tax Authority appealed against this decision. In those circumstances, the Swedish Supreme Court asked the European Court of Justice whether such transactions are subject to VAT and, if so, whether they are exempt from such tax. 

The VAT Directive provides that the supply of goods and services for consideration within the territory of a Member State by a taxable person acting as such is to be subject to VAT. However, the Member States have to exempt those transactions under the provision that they are related to "currency, bank notes and coins used as legal tender". 

In his judgment of 22 October 2015 (C-264/14), the Court holds that transactions to exchange traditional currencies for units of the 'bitcoin' virtual currency (and vice versa) constitute the supply of services for consideration within the meaning of the directive, since they consist of the exchange of different means of payment and there is a direct link between the service provided by the entrepreneur and the consideration received by him, namely the margin created by the difference between, on the one hand, the price at which he purchases currencies and, on the other hand, the price at which he sells them to his clients.  

The transactions to exchange the 'bitcoins' also fall within the scope of the VAT Directive and they are in principle subject to VAT.  

However, the Court of Justice also holds that those transactions are exempt from VAT under the provision concerning transactions relating to "currency, bank notes and coins used as legal tender". It considers that the trade of 'bitcoins' are not subject to VAT, because these services fall under the exemption to transactions which are " by there nature, financial services, even though they do not necessarily have to be carried out by banks or financial institutions". 

This exemption applies for transactions related to services having a money transfer component. This is the case since the 'bitcoin' virtual currency forms a contractual and direct means of payment between the market participants who accept it.