General trends of bitcoins’ taxation

11/02/2019
The sale or exchange of virtual currency, like Bitcoin, or their use to pay for goods or services in a real-world economy transaction, has tax consequences that may result in a tax liability. This article will examine general trends of the tax treatment of bitcoins and will describe some recent developments in this area in EU (I) and at the national level of some non-European countries (II).


I/ European approach
If there is currently no tax legislation on virtual currencies at the level of the EU (1), the CJUE has already had the opportunity to apply EU VAT legislation to some bitcoins transactions (2).

    

1/ EU regulation
The European Central Bank defines a virtual currency as ‘a digital representation of value, not issued by a central bank, credit institution or e-money institution, which in some circumstances can be used as an alternative to money’[1] .

There is currently no European legislation on virtual currencies taxation at the level of the UE, which does not mean they are completely unregulated in Member States. The rules on taxation of gains from transactions performed in a private capacity vary from country to country. Most nations consider that the fact that Bitcoin does not constitute money (either in the economic or in the legal sense) should not prevent profits expressed in bitcoins from taxation. It seems that Germany has the most elaborate rules in the area. The country considers virtual currencies as units of account, thus not conferring them legal tender status. In Germany, income generated from bitcoin transactions could fall within the business income or the miscellaneous income category[2].

In France the finance bill for 2019 tax year provides that that crypto-assets sale, like bitcoin sale, is subject to the 30-percent flat rate in the case of French tax residents. Bitcoins enter into the scope of French inheritance and gift taxation[3] but they should not be submitted to the new French wealth taxation that applies only to real estate assets.


2/ Court of Justice of the EU
Until now tax authorities of EU states have different views on the status of bitcoin and the application of the VAT exemption to bitcoins transactions. However in the recent case Hedqvist the CJUE ruled that transactions that consist of the exchange of traditional currency for Bitcoin (and vice versa) constitute supplies of services for consideration for VAT purposes even where the taxable person derives their profit from the spread (and not commission). This type of services is, therefore, exempt from VAT on the basis of the ‘currency’ exemption.

The decision can be welcomed by the Bitcoin community as it provides an important degree of certainty and should help virtual currency exchanges set up in Europe, and may make Europe a more competitive location for exchanges. However, as the CJUE decision is valid only in the EU, differing tax treatment in other jurisdictions where bitcoin is used and traded could still cause problems in the future. In addition, the scope of the case in Hedqvist is limited to transactions concerning the exchange of bitcoins for traditional currencies, but there are other activities which can be carried out in relation to Bitcoin (for example, services concerning the arrangement of transactions in Bitcoin (digital wallets)). It is not necessarily clear whether these other activities constitute taxable transactions and if so whether they could profit from VAT Directive exemptions.

It is interesting to note that national tax authorities of some EU countries have already started to apply Hedqvist case under their domestic law. For example, on 2 September 2016 the Italian Tax Authorities have issued guidance on the VAT treatment of financial transactions related to the virtual currency, Bitcoin. The guidance clarifies that Bitcoin transactions undertaken by economic operators (businesses) should be considered to be VAT exempt services with no right of deduction.



II/ National approach
We look here at recent developments of bitcoin’s taxation at national level in some non-European courtiers, like the USA (1) and Russia (2).


1/ USA and FATCA legislation
The USA is one of the countries that paid most attention to tax issues of digital currency. According to the recent notice 2014-21 issued by the IRS, virtual currency is treated as property for federal tax purposes and general tax principles applicable to property transactions should apply. Income earned through theses operations should be included in the taxpayer’s  gross income, and would be subject to income tax at applicable rates. In addition, these bitcoins could be subject to self employment tax. It is important to note that under currently applicable law, the taxpayers will be required to determine the fair market value of virtual currency in U.S. dollars as of the date of payment or receipt[4]. Within the U.S. many states are also pursuing legislative/regulatory efforts to cover crypto instruments[5].

According to our researches, no guidance on the treatment of bitcoin under FATCA has been provided so far. However, due to the broad definitions of foreign financial institution and financial account under FATCA legislation, it seems that foreign bitcoin exchanges and payment services may be considered as foreign financial institutions subject to FATCA reporting obligations.


2/ Russia
To date, cryptocurrencies in Russia are not officially regulated under federal or regional level. In the information letter N ОА-18-17/1027 issued by the Russian tax office on 03/10/2016, it is emphasized that the Russian laws do not define such terms as money surrogate, cryptocurrency, or virtual currency but do not contain any prohibitions as to operations with cryptocurrencies conducted by Russian citizens and organizations. The Russian tax office believes that operations related to procurement or sale of cryptocurrencies involving currency values (i.e. foreign currencies or external securities) and/or Russian currency are essentially monetary operations and should be submitted to Russian currency control rules with all restrictions and prohibitions[6].




Based on this brief analysis, it can be concluded that, whereas the current law in the EU countries is generally able to capture transactions in virtual currencies, taxpayers need more practical guidance on how the rules apply to their particular situation. 

Should you require more information or wish to discuss some of theses matters, please contact Ivan Yakovenko, Senior Tax Consultant at i.yakovenko@rosemont.mc


This article is published in issue 28 of MONACO БИЗНЕС (Monaco Business) Magazine -