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It’s almost official. Bitcoin will be VAT-exempt in the EU

You’ve heard of Bitcoin. Is it primarily a currency or a service?

Its users probably could not care less; for many it will be both. Yet a distinction is necessary. Why? Well, taxes, of course! What else?

If it is primarily a currency, buying or selling bitcoin (exchanging it for your ordinary currency) will make it exempt from VAT. If it is primarily a service, VAT may apply.
So far the treatment differs substantially by country. While Germany or the USA see it primarily as a service (the latter eventreating it as property for tax purposes), UK, Denmark or Spain see it more as a currency and therefore generally not liable for VAT.

Since the EU likes to standardize, it was only a matter of time before an EU-wide decision was called for. The call came from Sweden. The European Court of Justice is technically still deliberating but it usually follows the advice given by its Advocate General. That advice has now been published in mid-July and declares that -

Digital currencies are primarily a currency and should be exempt from VAT.

This is a welcome decision. If confirmed, this verdict would not, of course, affect the taxability of a good purchased with Bitcoin – but it would be rather strange to then charge the buyer and seller an extra tax only because of the choice of currency.

Of course we don’t know how widely-used digital currencies will become, but it is interesting to note they have a chance to be even less taxed than regular currency like, say, the Euro. Government-run currencies generally are taxed by a so-called “inflation tax”. When a Government (or its central bank) print more money than is warranted by economic (and technological) growth, it generally (eventually) results in decreased value of the currency. If today’s Euro can only buy 90 cents’ worth of goods tomorrow, it’s as if a 10% tax were applied.

Bitcoin is not immune from fluctuations in value either – but that value will be determined by the relative scarcities of goods it can buy, not by arbitrary changes in its quantity in circulation. (Only 21 million Bitcoins can ever exist.This is determined by a computer algorithm integral to the whole system. At present Bitcoin users can still “mine” new Bitcoins by running very lengthy calculations on supercomputers, but each one is increasingly more difficult as we approach the absolute maximum.)

Bitcoin as a currency therefore in a certain sense also provides a service (!) called “insurance against government currency’s inflation tax”. Similar service can also be bought by other means on standard financial markets – but it needs to be paid for extra, it does not come automatically with the currency function.

In fact, Bitcoin offers many further services, usually involving insurance, usually against strong government action: speed and security

Speed. Transfering value across state boundaries or even continents can be instantaneous, something which banks do not generally match. Instant wire transfers through non-bank services are usually rather expensive. True, bank cards can achieve similar speed (if the money is a payment for a purchase), but again - at a higher price (usually borne by the seller). Bitcoin fees are much smaller, if any at all.
Security against buyer. Credit cards can be “schemed” by cardholders when they ask their bank for (and often get) a chargeback after they received the goods. Bitcoin payment is final.

Security against seller. Identity and payment details are often retained by the seller who passes it on, voluntarily or through hackers. Bitcoin payment information is by design undisclosed. Trying to replicate this “insurance against identity theft” service would involve reliance on cash and would therefore exclude online purchases.

Security against government confiscation. Government can attack your wealth stored in a traditional currency (in a bank) not only through an inflation tax, but as the example of Cyprus in 2013 demonstrates, also through outright confiscation. Even if the money is in officially licensed banks. When things get worse still, not even cash in the wallet is safe – governments can (and do) declare a general currency reform.

So, in spite of the published opinion, services actually turn out to be an important component of what Bitcoin is and does. When they are bought through other means, VAT normally applies.

Future is uncertain.

No doubt some EU governments will continue to try to tax digital currencies in one way or another, in spite of any current Court decision. Especially if they become more popular.

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