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Introduction

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Crypto - Assets are digital tokens such as crypto-currencies or NFT's (Non Fungible Tokens) which are cryptographically secured digitally and are valued like any other asset and can be:

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• Transferred

• Stored Digitally

• Traded Electronically

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Crypto Assets are secured using Block Chain or Digital Ledger Technology (DLT) which is a digital system that records details of transactions in multiple places at the same time. Unlike traditional databases, distributed ledgers have no central data store or administration functionality. The ledger acts as an immutable record of all the transactions that have happened within the network previously.

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Due to its secure nature, the concept of DLT is generating interest in many sectors including banking and fintech. A well-known application of DLT is the Bitcoin blockchain, which acts as a public record of all the transactions that have ever taken place.

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Cryptocurrencies and VAT​

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There are a number of different types of cryptocurrencies such as Exchange Tokens (bitcoin) ,  Stablecoins, Unity Tokens etc and using them as payment for goods or services supplied instead of money does not change the the requirement to account for VAT.

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VAT is due in the normal way on any goods or services sold in exchange for Crypto Asset Exchange Tokens.  The value of the supply of goods or services on which VAT is due will be the pound sterling value of the exchange tokens at the point the transaction takes place. 

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The Specific VAT Treatment for Bitcoin and other similar Crypto Assets is as follows:

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• Exchange tokens received by miners for their exchange token mining activities will generally be Outside the Scope of VAT

• No VAT will be due on the exchange of tokens itself when using them to buy and sell goods and services

• Any charges levied for arranging the transaction will be Exempt from VAT under Item 5, Schedule 9, Group 5 of the Value Added Tax Act 1994.

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Case Background to VAT Treatment for Bitcoin Currency Exchange Trading

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In 2014, HMRC decided that under Item 1, Group 5, Schedule 9 of the Value Added Tax Act 1994, the financial services supplied by bitcoin exchanges - exchanging bitcoin for legal tender and vice versa - are exempt from VAT.

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This was confirmed in the Court of Justice of the EU (CJEU) in the Swedish case, David Hedqvist (C-264/14). Mr Hedqvist planned to set up a business which would exchange traditional currency for bitcoin and vice versa. Mr Hedqvist did not intend to charge a fee for this service but rather to derive a profit from the ‘spread’ (the difference between his purchase and sell price).

Questions were referred to the CJEU on whether such exchange transactions constitute a supply for VAT purposes and if so, would they be exempt.

The CJEU referred to the judgment in First National Bank of Chicago (C-172/96) and concluded that the exchange transactions would constitute a supply of services effected for consideration.

The Court also ruled that the exchange of traditional currencies for non-legal tender such as Bitcoin (and vice versa) are financial transactions and fall within the exemption under Article 135(1)(e) of the VAT Directive.

A supply of any services required to exchange the exchange tokens for legal tender (or other exchange tokens) and vice versa, will be exempt from VAT under Item 1, Group 5, Schedule. 9, of the Value Added Tax Act 1994.

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-Contains public sector information licensed under the Open Government Licence v3.0.

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