The CJEU, Europe's highest court, said that although the activity constitutes "the supply of services for consideration" under the VAT Directive, it should be considered exempt from VAT under provisions contained in the legislation. The Directive exempts transactions concerning "currency, bank notes and coins used as legal tender", subject to some exceptions, from VAT.
The CJEU was asked for guidance by a court in Sweden. Swedish national David Hedqvist, a moderator of a bitcoin internet forum, had asked for a ruling on the issue because he wanted to start exchanging traditional currencies for bitcoin and vice versa. The Swedish Revenue Law Commission had previously said that bitcoin is a means of payment used similarly to other, legal means of payment, and so the transaction must be exempt from tax, but Sweden's tax authority challenged that view before the country's supreme administrative court, which in turn asked the CJEU to help it rule on the matter.
There is a direct link between the services provided by Hedqvist and the compensation he receives, which is the margin between the price at which he buys and sells currencies, the CJEU said. That constitutes the supply of services for consideration, the court said.
However, it said the transactions also fall under the VAT exemption for currency, bank notes and coins. It came to this conclusion after explaining that the aim of the exemption is to "alleviate the difficulties connected with determining the taxable amount and the amount of VAT deductible which arise in the context of the taxation of financial transactions".
"Transactions involving non-traditional currencies, that is to say, currencies other than those that are legal tender in one or more countries, in so far as those currencies have been accepted by the parties to a transaction as an alternative to legal tender and have no purpose other than to be a means of payment, are financial transactions," the CJEU said.
"Furthermore … in the case of exchange transactions in particular, the difficulties connected with determining the taxable amount and the amount of VAT deductible may be the same, whether it is a case of the exchange of traditional currencies, normally entirely exempt under Article 135(1)(e) of the VAT Directive, or the exchange of such currencies for virtual currencies with bi-directional flow, which — without being legal tender — are a means of payment accepted by the parties to a transaction, and vice versa," it said.
"It therefore follows from the context and the aims of Article 135(1)(e) that to interpret that provision as including only transactions involving traditional currencies would deprive it of part of its effect. In the case in the main proceedings, it is common ground that the ‘bitcoin’ virtual currency has no other purpose than to be a means of payment and that it is accepted for that purpose by certain operators," the CJEU said.
"Consequently, it must be held that Article 135(1)(e) of the VAT Directive also covers the supply of services … which consist of the exchange of traditional currencies for units of the ‘bitcoin’ virtual currency and vice versa, performed in return for payment of a sum equal to the difference between, on the one hand, the price paid by the operator to purchase the currency and, on the other hand, the price at which he sells that currency to his clients," the Court said.
The UK decided last year that it would not charge VAT on bitcoin trading.