Bitcoin is money.
That was the gist of a ruling this week from the European Court of Justice (ECJ), the highest court in Europe. The ruling was in response to a dispute originally filed in Sweden. In the case, Skatteverket (Swedish Tax Agency) v. David Hedqvist, the ECJ was asked to rule on whether transactions to exchange a traditional currency for bitcoin (or vice versa) would subject to value added tax (VAT). The question was important because Hedqvist intended to use the currency in commerce as part of on online bitcoin exchange. At first, the Swedish Revenue Law Commission advised Hedqvist that bitcoin was exempt from VAT but the Swedish Tax Authority disagreed. Eventually the question made its way to the ECJ.
The ECJ ruled that bitcoin was exempt from VAT because it is not tangible property. Instead, the ECJ cited the Advocate General’s position that “virtual currency has no purpose other than to be a means of payment.” That means that in the European Union, for purposes of tax, bitcoin is considered – and taxed – as currency. By rule, in the EU, there is no tax on “currency, bank notes and coins used as legal tender.”
You can read the decision in English here.
The ruling is an important step towards resolving lingering tax disputes globally over how to treat bitcoin. In 2014, the UK finally clarified its position on the taxation of bitcoin, finding it to be a currency while Germany’s official position had been that bitcoin was “personal” or “private” money, to be treated like a commodity and subject to sales taxes. Those conflicting positions have been clarified in the EU.
But don’t count your tax-free bitcoin just yet: while the ECJ has ruled bitcoin a currency in the EU, the U.S. disagrees. Just last year, the Internal Revenue Service (IRS) issued guidance to taxpayers on how to treat bitcoin – and other virtual currency – for federal income tax purposes. Their decision? It’s not money. Noting in IRS Notice 2014-21 (downloads as a pdf) that “virtual currency is not treated as currency that could generate foreign currency gain or loss for US federal tax purposes,” the IRS determined that bitcoin and similar currencies are to be treated as a capital asset. For taxpayers, this means that bitcoin and other virtual currency will be subject to capital gains rules for any applicable gains or losses.
(You can read more on the IRS tax treatment of bitcoin for income tax purposes here and more on the IRS treatment of bitcoin for FATCA purposes here.)
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That treatment is fairly consistent with other U.S. treatment of bitcoin and virtual currency. Earlier this fall, the U.S. Commodity Futures Trading Commission (CFTC), in a decision involving Coinflip, Inc. d/b/a Derivabit (Coinflip) and its chief executive officer Francisco Riordan, ruled that “[B]itcoin and other virtual currencies are properly defined as commodities.”
The characterization of bitcoin has been confusing for users since its introduction more than five years ago. Bitcoins are widely digital currency. Bitcoin doesn’t rely on an exchange of paper and there is no centralized bank that records your transaction. Instead, bitcoins – sort of like online credits – are stored in a digital “wallet” which can be found on your computer and can be exchanged for anything from buying cupcakes to shopping at Overstock. A New Hampshire State Representative is even hoping to add bitcoin to the list of ways you can pay your taxes.
(You can read more about how bitcoin works here.)
While the U.S. treatment may stand in the way of efforts to characterize bitcoin as money, the ECJ ruling was met with relief in Europe. The EU is the largest economy in the world. It’s also the largest trader of manufactured goods and services, ranked as the top trading partner for 80 countries (in contrast, the US is the top trading partner for about 20 countries).
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That was the gist of a ruling this week from the European Court of Justice (ECJ), the highest court in Europe . The ruling was in response to a dispute originally filed in Sweden. In the case, Skatteverket (Swedish Tax Agency) v. David Hedqvist , the ECJ was asked to rule on whether transactions to exchange a traditional currency for bitcoin (or vice versa) would subject to value added tax (VAT). The […]