Cryptoassets and VAT do not good bedfellows make. To date, HMRC’s VAT guidance is limited. While it covers some events, such as the exchange of cryptoassets for fiat currency (government-backed currency, for example, the Euro) and mining, it is silent on other aspects, such as the treatment of non-fungible tokens (NFTs). 

Hedqvist – Bitcoin exchange services

In the area of VAT and cryptoassets, the case of Skatteverket v David Hedqvist C‑264/14 (Hedqvist) is often commented on. 

It is an interesting case as it was one of the first to be heard on the subject at the Court of Justice of the European Union (CJEU). It concerned the VAT position for the services of a Bitcoin exchange that exchanged Bitcoin for fiat currency. The CJEU considered the exchange to be a supply, following the principles in the case of First National Bank of Chicago C-172/96. The question then was what was the VAT liability of the supply? 

Here, the judgment took the particularly interesting position that “it is common ground that the ‘bitcoin’ virtual currency has no other purpose than to be a means of payment”. Skatteverket (the Swedish tax administration) did not challenge this point, although, in fairness, the CJEU referred to a 2012 report by the European Central Bank on “virtual currencies”.

Therefore, the CJEU considered Bitcoin’s only purpose was a means of payment and concluded that the currency exemption under Article 135(1)(e) of the VAT directive applied. This exemption applies to ‘legal tender’, although the CJEU considered the exemption to be wider than legal tender and related to currency as a whole. 

It has been a decade since the case and today few see Bitcoin as a means of payment due to its limited acceptance, so did the CJEU err in its view that Bitcoin is a currency? Perhaps. If it is not a currency, could it be a security, or something else? 

The complexities that need to be bottomed out include: 

1. Are Bitcoin/other digital assets seen as goods, a service or a third type of property? 
2. Is there a clear counterparty to a provision of Bitcoin? This may be clearer where Bitcoin is used to pay for supplies or is sold through an exchange.

The CJEU’s position in Hedqvist is reflected in HMRC’s VAT guidance at VATFIN2330, which states that “Bitcoin is seen as the world’s first decentralised digital currency”. However, HMRC’s wider cryptoasset manual states that Bitcoin is not money. HMRC confirms at CRYPTO45000 that it considers the exchange of Bitcoin to fiat, and vice versa, to be an exempt supply under Item 1, Group 5, Sch 9, Value Added Tax Act (VATA) 1994.

This is probably the right answer, although it does seem that the position has been reached in a circuitous manner. However, the industry has developed significantly, which has led to more complexity in the UK and overseas regarding taxability.

NFTs – UK position

One such development has been the creation of NFTs. These can be proof of ownership of an original digital artefact; as cryptographic tokens that cannot be replicated, they can also be used as proof of identity when validating transactions using blockchain technology.

HMRC’s provisional view on cryptoassets and the application of VAT is noted in VAT Finance Manual VATFIN2330 and Cryptoassets Manual CRYPTO45000. Broadly, the key points established by the manuals are: 

• When Bitcoin is exchanged for goods and services, no VAT is due on the value of the Bitcoin itself.
• Bitcoin received by miners for their Bitcoin mining activities will generally be outside the scope of VAT. This is on the basis that the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration received.
• Charges made by miners and others for performing specific Bitcoin transactions will be exempt from VAT under Item 1, Group 5, Sch 9, VATA 1994.
• Charges (in whatever form) made over and above the value of the Bitcoin for arranging any transactions in Bitcoin that meet the conditions outlined in VATFIN7200, will be exempt from VAT under Item 5, Group 5, Sch 9, VATA 1994.
• However, in all instances, VAT will be due in the normal way on any goods or services sold in exchange for Bitcoin or other similar cryptocurrency. The value of the supply of goods or services on which VAT is due will be the sterling value of the cryptocurrency at the point the transaction takes place.

Given the nature and usage of NFTs, the scope to utilise this guidance when considering the VAT treatment of NFTs appears limited. Additional guidance from HMRC would be welcome to provide certainty on the VAT treatment of NFT transactions, in addition to wider cryptoasset transactions in general. 

International position

The Hedqvist decision also has limited application to NFTs, so it is no surprise that various tax authorities around the world are themselves considering the taxability of these tokens. These rules require due consideration for businesses as overseas indirect taxes can often apply regardless of the location of the supplier. Developments include:

France

The French tax authority issued a public ruling on 14 February 2024 noting that general VAT principles will apply to the underlying transaction. NFTs are not similar in nature to security, utility or exchange tokens and do not fall within a VAT exemption.

Under French rules, digital collection cards (if automated) would likely be treated as an electronically supplied service (ESS) for VAT purposes and subject to VAT based on the location of the recipient.

However, if the NFT is related to tangible artwork then the VAT rules for tangible artwork could apply. Where NFTs are issued to finance video game development, such NFTs are taxable as a service when the video game is put into use.

Ultimately, consideration of the French VAT rules is required on a case-by-case basis.

Belgium

On 30 June 2022, the Belgian tax authorities issued guidance on the VAT treatment of NFTs suggesting NFTs are not like a means of payment and the VAT exemption cannot apply, therefore they are likely to be considered as taxable ESS. However, this guidance is only through the lens of NFTs representing ownership of a digital asset.

Spain

A public ruling was issued in March 2022 on a case where NFTs related to an online auction website which granted rights to but not ownership of digital assets. Here, the Spanish tax authority defined NFTs as digital tokens that function as certificates of ownership and the Directorate of General Taxes of Spain considered that NFTs are ESS.

Case by case

As HMRC has not published its own guidance in this area, taxpayers need to apply fundamental VAT principles on a case-by-case basis (similar to that advised by the French tax authorities) to ascertain the VAT treatment. However, given the international nature and use of all forms of cryptoasset, advisers also need to be cognisant of potential VAT liabilities overseas.

Members of ICAEW’s digital assets working party who have contributed to this article include Dion Seymour (Andersen LLP), Royce Adcock (BDO LLP) and Ishvinder Bedi (BDO).