EU’s VAT Committee reviews VAT treatment on cryptocurrency payment tokens
The European Commission’s VAT Committee is reviewing the Value Added Tax issues arising from cryptocurrencies such as bitcoin, Spice and utility tokens. The discussion covers the VAT position, including whether taxable supply, and then, if a supply, whether taxable or exempt.
The European Court of Justice (C- 264/14 Hedqvist4.) has previously ruled that such crypto-assets are non-fiat currencies, generally exempt from VAT as with other financial services and payments. They are therefore not physical commodity traded assets, such as gold or oil.
VAT on cryptocurrencies
|Crypto-assets||Payment, security or utility tokens||Treated as currency|
|Creation of tokens||Mining or forging||Out of scope of VAT|
|Supplies free of charge||Airdrop||Out of scope of VAT|
|Supplies for consideration||Taxable; but exempt|
|Storage and transfer||Hot or cold digital wallets||Taxable; but exempt|
|Exchange for crypto-assets or cryptocurrencies||Taxable; but exempt|
|Cryptocurrencies as consideration for supply||Taxable; VAT due|
|Token modification||Modifications, forks or splitting of tokens||Out of scope of VAT|
Cryptocurrencies and blockchain
Electronic non-fiat currencies, cryptocurrencies or crypto-assets exist as peer-to-peer payments systems without the support or regulation of state central banks. They generally use linked computers (‘nodes’) as distributed ledger systems (‘blockchain’) to record and provide proof of currency exchanges whilst protecting the identify of individuals. There are many examples, including bitcoin, Ethereum and Ripple.
Types of crypto-assets payment tokens
The Commission views crypto-assets as coming in three forms of tokens:
- Payment tokens, a virtual payment currency such as bitcoin
- Security tokens, investment tradeable assets such as Spice
- Utility tokens, a virtual prepayment for goods or services similar to vouchers
VAT and mining of cryptocurrencies
When a payment token or cryptocurrency is created – minded or forged – it is then supplied to the user. Typically this is without remuneration or transaction free and so for free and outside the scope of VAT. However, even though transaction fees for mining are not obligatory, they are in fact often paid as they constitute an incentive to make sure that a particular transaction is verified more quickly by the miner16. The miner may be entitled to a mining reward paid through being given new tokens or a protocol transaction fee, which is a percentage of the value of the transaction that is being processed and is paid from that transaction.
Nevertheless, even when within the scope of VAT, it is likely to be an exempt supply since it is a transaction concerning payments and currency – Articles 135(1)(d) and Article135(1)(e) of the VAT Directive.
VAT and digital wallets services
Cypto-assets or currencies then need to be held. There are four types of methods:
- Hot custodial wallet – third-party internet based service
- Hot non-custodial wallets – internet-based controlled by use
- Cold hardware wallet – offline device to hold the tokens and may be linked to internet for transfers
- Cold paper wallet – a paper evidence based record of the address and key.
Where any of the above are provided for a fee, then they are within the scope of VAT and VAT is due.
Exchange services and VAT
Crypto-assets, either as assets or fiat currency, can be traded online or office. The trade is exempt (see Heqvist ECJ).
Token modifications and VAT
Modifications or ‘forks’ to tokens in the chain come in two forms:
- Soft fork: a modification to the overall protocol for all users, with no new tokens being created; and
- Hard fork: creates new tokens within the blockchain – known as chain split.
From the VAT perspective, modifications of a token are relevant, but their treatment would be similar to the treatment of mining/forging. Supplies of services which lead to the improvement of an existing token or to the creation of a new token would be subject to VAT and possibly exempt on the basis of Article 135(1)(e) of the VAT Directive as services concerning means of payment.
Summary of VAT issues on Crypto-assets
The discussion and above analysis is summarised as follows:
- General principle: crypto-assets are treated as a currency.
- Supplies of crypto-assets following their creation:
- Free of charge (e.g. airdrop): in principle, out of scope,
- For consideration (e.g. in principle – mining/forging): taxable, but exempt (Article 135(1)(e) or (d) of the VAT Directive).
- Storage and transfer – digital wallets: taxable, but exempt (Article 135(1)(e) of the VAT Directive).
- Exchange (crypto-assets for fiat currency or for crypto-assets): taxable, but exempt (Article 135(1)(e) of the VAT Directive).
- Supply of goods or services remunerated in crypto-assets: the same treatment as any other supply for the VAT purposes.
- Modification of a token: the same treatment that as of mining/forging.
- Mining, forging, modification of a token for own use: out of scope.