Bitcoin will be used more often for trade and investment if the Court of Justice of the European Union confirms an advocate general opinion categorizing bitcoin as a currency because transactions will be exempt from value-added tax.
In a July 16 reasoned opinion, AG Juliane Kokott said digital currencies, such as bitcoin, should be considered a currency rather than property or other financial instruments, and therefore shouldn’t be subject to VAT in line with the exemption provided for currency transactions under the EU’s VAT Directive (2006/112/EC).
For VAT purposes, bitcoin is more akin to other recognized currencies, Kokott said.
Hedqvist welcomed the AG’s opinion in a July 17 statement as it lends support to the case he is currently arguing before the Swedish Supreme Administrative Court.
The case, Skatteverket v. David Hedqvist (C-264/14), was brought by the Swedish tax authority to determine whether Hedqvist should be charged VAT on transactions involving bitcoins.
The authority had appealed a lower court ruling to the Swedish Supreme Administrative Court, which requested a preliminary ruling from the CJEU.
Presuming the CJEU takes the same position as the AG, the ruling will only apply to bitcoin currency trades. Other forms of taxation levied on virtual currencies, such as capital gains or income tax on gains in the currency’s value, won’t be affected by the ruling.
Ahead of the CJEU’s ruling on the case, Kokott examined whether bitcoin could be deemed to be “securities” according to the VAT directive. Article 135.1.f of the directive provides an exemption on transactions in shares, debentures and similar instruments. She found that bitcoin couldn’t be categorized as such.
Kokott also examined whether bitcoin could be defined as “negotiable instruments” according to article 135.1.d of the directive, which refers to instruments deriving their value from other currencies and not instruments with their own value. Kokott found that the exemption under this provision shouldn’t apply to bitcoin either.
In addition, she examined whether bitcoin could be characterized as “currency” under article 135.1.e of the directive, which refers to transactions concerning currency, bank notes and coins used as legal tender. Gold, silver or other metal coins aren’t included in this definition.
Kokott noted that the definition of legal tender appeared to vary in different translations of the VAT Directive. While the German version appeared to limit the definition to official national currencies, other translations—such as the Finnish and Italian versions—appeared to imply a broader scope.
Using this broader definition, Kokott said that the purpose of bitcoin appeared to be the same as that of a traditional currency and the VAT exemption was applicable under this provision.
In a July 16 statement, Anders Hultqvist, associate professor of law at Stockholm University, said the AG’s opinion and the CJEU’s expected preliminary ruling will have a significant impact across the EU.
“The AG’s conclusion is that the exchange of bitcoins to Swedish kronor is a service within the scope of the VAT Directive, but also that it is an exempt service according to article 135.1.e,” he said.
“This has been one of the hard questions, since there is no national bank or other institution that issues this as legal tender,” he noted.
However, the AG found it to be unclear as to what can be defined as legal tender. As such, she compared different language versions of the VAT Directive and concluded from a more purposeful view that bitcoin are used as tender and exchange, and therefore should be considered to be exempt on these grounds, Hultqvist said.
“Some member states, with good reason, don’t define legal tender this way, but the AG has a good point,” Hultqvist said. “Bitcoins are used and work mainly in the same manner,” he said.
“The result is that the exchange service is exempt from VAT,” he explained. No VAT needs to be charged for the exchange of bitcoins to Swedish kronor, nor to any other currency when performed within the EU. “Provided the EU court reaches the same conclusion, those countries who have charged VAT on these services must now change their practice,” Hultqvist said.
“The judgment will of course have a great impact in all EU countries, since all of them will have to follow the CJEU judgment,” Hultqvist pointed out. “The Supreme Administrative Court in Sweden will certainly deliver a judgment with reference to the CJEU ruling,” he added.
While the AG’s opinion only refers to currency trades involving bitcoin, David Hedqvist stated that it would likely prove beneficial to the general use of bitcoin as an investment and a means of payment. “This means that when it is traded it will be treated much the same as any other currency,” he said. “It will not be more expensive for consumers to exchange between bitcoins and other currencies.”
“If you look at how it is used as a payment in stores, online and such, it has been gaining traction now over a number of years, I don’t think this [opinion] changes a lot there,” he said. “But if you look at the bigger picture, now that the rules are clearer, people will be less hesitant to get involved in bitcoin.”
The CJEU concurs with the AG’s opinion in the vast majority of cases.
Hedqvist added that his legal team had also argued for a VAT-exempt status to be granted on the grounds under article 135.1.d of the VAT Directive, which was rejected by the AG. “It was interesting,” he said that the AG went with 135.1.e, which “puts it together with other currencies.”
The AG noted that 135.1.e is different in different translations of the VAT Directive, Hedqvist said. “Because of that it was important to look at the purpose of bitcoins,” he added, welcoming the AG’s decision to look at the purpose of the exemptions as a whole.
“To us at least, it was obvious that bitcoins should be exempt because if you look at how bitcoin is used and what it is, then it fits very well into that [135.1.e] category.”
However, Hedqvist noted that differing tax treatment in jurisdictions where bitcoin is used and traded could still cause problems in the future because the CJEU’s ruling would only affect trading within the EU. “If you look at the global situation, I think this is something that will be still being discussed for many years,” he said. “But it’s good that the situation has become clearer here,” he added, referring to the EU.
Hedqvist said he now expects the Swedish tax authority to “leave bitcoin alone” and accept the CJEU’s decision. “A few months ago, the tax authority published something about bitcoin mining,” he noted.
In that context, “they came to the conclusion that it was exempt from VAT. The authority here seems pretty reasonable, so I think that they will leave it alone now after this, but of course there will be more discussion.”
Old Laws, New Technology
“There are other laws, too, that need to be made clearer with regards to where bitcoins fit in” Hedqvist said. “I guess the problem is that when the laws were written there were no such things as bitcoins. It’s like a clash between old laws and new technology.”
Although he hasn’t seen any figures for bitcoin use in the EU, “if you look at the investments in bitcoin companies internationally, it is steadily increasing,” Hedqvist said. “I think that in 2015 the numbers will be higher than last year.”
Many people “just look at the exchange rate and see that bitcoins are booming one year and crashing the next year and so on,” he said, “but if you look at the interest from investors, there has been a steady increase. I haven’t seen that so much in Sweden, but internationally this is certainly the case.”
Hedqvist agreed that other obstacles existed to the virtual currency’s acceptance, such as concerns about the potential anonymity of transactions.
“I think that some people will fight it,” he said. “To me, it’s kind of similar to when the Internet first came into existence, and anyone could get online. People were pointing out that there were all kinds of terrible stuff out there, kids could find out how to build a bomb, that kind of thing.”
As time went on, people realized that, on the whole, the Internet was a positive thing, he said. “I think it’s kind of the same with bitcoins. There will be a lot of discussion about the potential for criminality but I don’t think that it will be enough to stop it,” Hedqvist said.
“I certainly don’t think Sweden is the type of country that would actually pass new laws prohibiting bitcoins,” Hedqvist added.