VAT and cryptocurrency transactions
We've already discussed the tax treatment of bitcoin and cryptocurrency in general previously. This time around we're going to focus on VAT and cryptocurrency transactions as we understand this may be an issue for businesses operating in this sector.
HM Revenue originally published their guidance on bitcoin over 4 years ago and to a large extent they haven't changed their viewpoint.
Probably the definitive ruling on VAT and cryptocurrency transactions is the Skatteverket v David Hedqvist tax case.
Mr Hedqvist planned to set up a business consisting of the exchange of traditional currency for the bitcoin virtual currency and vice versa. Before starting his venture, he asked for a preliminary decision from the Swedish Revenue Law Commission on whether VAT must be paid on the purchase and sale of bitcoin virtual currency units. The commission decided the transactions would be exempt from VAT.
The Swedish tax authorities appealed and the matter was referred to the Court of Justice of the EU.
Whilst it was decided that these transactions would constitute a supply of services for consideration (and thus potentially VATable). The court also ruled that these transactions would be exempt from VAT on the basis they related to currency, bank notes and coins used as legal tender. The fact that bitcoin was not legal tender in any country was irrelevant because it remained, for VAT purposes, a currency.
Therefore in practice this means that the services of a cryptocurrency exchange will be exempt from VAT.
This can potentially cause problems for a business that is a cryptocurrency exchange as they won't be able to recover VAT on costs. Therefore where a cryptocurrency exchange either has a subsidiary trading activity or one operating in tandem it's important to ring fence this activity so that VAT can potentially be recovered.
VAT and cryptocurrency transactions - initial coin offerings
Initial coin offerings are equivalent to crowd funding. A business sells its own ‘coins’ to purchasers and then uses the money to build the business or develop a new project. The ‘coins’ may be redeemable against future products or services from the fundraising business. The ‘coins’ are often purchased using a cryptocurrency such as bitcoin.
These ‘coin’ offerings are usually tradeable so you don't have to wait until a service or product is developed to be able to benefit from the ‘coin’ acquired. You may also be able to sell these 'coins' on an exchange.
Some ‘coins’ carry other types of rights, such as the right to participate on an advisory panel. The issue of these types of ‘coin’ is unlikely to be regarded as being within the scope of VAT, as there is no service or goods being provided in exchange for the money provided.
However some ‘coins’ may carry an entitlement to redemption for something in the future. It might be argued that these are prepayments, vouchers or something else. If that's the case then the VAT treatment of these cryptocurrency transactions might potentially be subject to VAT as in the case of Lunar Missions Ltd v HMRC.
VAT and cryptocurrency transactions - supplies of goods and services paid in cryptocurrency
As a general principle supplies of any goods and services are subject to VAT. Therefore if these are paid by way of Bitcoin or another similar cryptocurrency, they should be treated in the same way as any other supplies for VAT purposes.
When paid in cryptocurrency, the taxable amount on which VAT is charged should be the £sterling equivalent value at the time of the supply. However HM Revenue acknowledge that there is not always a single exchange rate for cryptocurrencies. Therefore as long as a reasonable effort is made to use an appropriate valuation for the transaction this should accepted.
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