When bitcoin was invented in 2009, one of the main goals it sought to achieve was to allow online payments to be sent directly from one party to another without going through an intermediary. Although virtual currency and other cryptoassets can be traded without reliance on traditional intermediaries, like banks and other financial institutions, the crypto sector has created a new type of powerful intermediaries—crypto exchange platforms.
Crypto exchange platforms are online marketplaces where you can buy and sell cryptoassets. You can use them to trade one type of crypto tokens for another or to buy cryptoassets using legal currency, like the euro or US dollar. According to CoinMarketCap, as of July 27, 2022 there were 295 active crypto exchanges with a total 24-hour trading volume of 354.12 billion dollars. Given the important role that these exchange platforms play in the cryptoasset ecosystem, it’s worthwhile to take a look at the value-added tax of treatment of services that they provide.
Crypto Exchanges as Undisclosed Agents
From a VAT perspective, online marketplaces act as agents. They provide an infrastructure to connect sellers and buyers, and receive some remuneration for this activity. VAT law distinguishes between two types of agency relationships: disclosed and undisclosed agents.
An online marketplace is a disclosed agent if it acts in the name and on behalf of the seller. In this scenario, the seller is deemed to be selling directly to the customer. The seller must charge VAT (if due) on the sale and issue a VAT invoice to the customer (if required to do so by the invoicing regulations). The marketplace receives a commission for its intermediation services but is not a party to the sale.
An online marketplace is an undisclosed agent if it acts in its own name but on behalf of the seller. When an undisclosed agent facilitates a sale, VAT law assumes that two transactions take place at the same time: the seller supplies goods or services to the agent and the agent simultaneously resells them to the customer. As the agent is treated as making a supply to the customer, it is responsible for collecting VAT (if due) on that sale and issuing a tax invoice (if required to do so by the invoicing regulations). The commission fee that the undisclosed agent earns is embedded in the sale price of the goods or services.
As it may not be easy to determine in practice whether an agent is acting in a disclosed or undisclosed capacity the EU’s VAT Implementing Regulation establishes a legal presumption that an online marketplace operator that provides electronically supplied services acts as an undisclosed agent unless it explicitly indicates another person as the supplier and this is reflected in the contractual arrangements between the parties. There is also an additional rule that a platform operator who:
- authorizes the charge to the customer;
- authorizes the delivery of the service; or
- sets the general terms and conditions of the sale,
will always be presumed to be an undisclosed agent and is not allowed to indicate another person as the supplier. This means that a platform operator meeting one of the above-mentioned conditions is not allowed to rebut the legal presumption and claim that another party acts as the seller.
Cryptoassets meet the definition of electronically supplied services as they can be delivered over the internet with minimum human intervention and their transfers are not possible in the absence of information technology. The fact that certain cryptoassets may be regarded as financial instruments for the purposes of applying VAT exemptions (see below) does not preclude their classification as electronically supplied services.
Considering that most crypto exchange platforms set the terms and conditions of transactions that they facilitate or authorize the charge to the customer, they will be covered by the legal presumption that they act as an undisclosed agent and it will not be possible to rebut it. This means that a crypto exchange platform, acting as an undisclosed agent, will be required to collect VAT (if due) on the sale and remit it to the tax administration.
Does an Exemption Apply?
Crypto exchange platforms do not have to worry about any tax collection obligations if sales that they facilitate can benefit from a VAT exemption. However, the question whether a VAT exemption applies to a particular transaction is not easy to answer.
In Skatteverket v David Hedqvist (Case C-264/14), the Court of Justice of the European Union ruled that a company purchasing units of bitcoin from third parties and reselling them on its online exchange platform performs exempt services. Although this decision addressed one particular scenario (proprietary bitcoin trading), it created a misconception that all sales of cryptoassets were VAT exempt. Even today many people quote the Hedqvist judgment as providing a legal basis for the view that crypto trading does not result in any tax obligations.
This view is incorrect as the court’s decision mentions only payment tokens (virtual currency)—a type of cryptoasset that seeks to act like money—and cannot be applied to crypto tokens with different characteristics (NFTs, security tokens or utility tokens).
Another question is whether the court’s reasoning is still valid in the present circumstances. In the Hedqvist decision, the court looked at the initial purpose of bitcoin, which was to operate as a means of payment, and concluded that if bitcoin serves the same purpose as national currencies, it should be treated in the same way. The court disregarded the fact that bitcoin was primarily used for speculative investment purposes by traders who sought to benefit from its price fluctuations. As it is now clear that bitcoin is not used as a means of payment, it would be rather inconsistent to claim that bitcoin should benefit from a VAT exemption for means of payment.
The question whether sales of cryptoassets facilitated by crypto exchange platforms are VAT exempt cannot be answered in a one-size-fits-all manner. It depends on the type of token sold (payment token, security token, utility token, NFT or a hybrid token).
If the sole purpose of the token is to act as a means of payment, the VAT exemption for transactions involving coins and banknotes used as legal tender can be applied (in line with the Hedqvist judgment).
A security token that resembles traditional securities may benefit from the exemption for transactions in financial instruments (shares, bonds and other securities).
As utility tokens are similar to traditional vouchers, the tax consequences of selling utility tokens will depend on whether both the place of supply of the goods or services to which the token relates and the VAT due on those goods or services is known at the time of the token sale. If this is the case, VAT must be charged on the sale of the utility token, which is considered to be a single purpose voucher. However, if the tax consequences of a future exchange of goods or services for the token cannot be determined at the time of the token sale, the sale is out of scope of VAT as the token is assumed to be a multi-purpose voucher.
Although there is not much official guidance on NFTs, the Spanish and Belgian tax administrations have confirmed that they are not exempt. An online platform is therefore required to charge the tax of the customer’s country on the NFT sales that it facilitates. This can be a difficult task if the platform does not collect any location data about its users.
There may be some confusion about the application of VAT exemptions to services provided by crypto exchange platforms as the European Commission’s VAT Committee indicated in one of its Working Papers that services “related to intermediation provided by Bitcoin exchange platforms could not be seen as exempt.” The working paper, however, does not talk about the most common scenario—crypto exchange platforms acting as undisclosed agents—but addresses a different situation where the platform is considered to act as a disclosed agent that does not participate directly in the transaction.
While this article does not intend to examine the reasoning of the VAT Committee, it should be clarified that there is no general prohibition to apply VAT exemptions to crypto sales by undisclosed agents.
As VAT law considers most crypto exchange platforms not to be just intermediaries facilitating crypto transactions but as actual sellers of cryptoassests, it is very important that exchange platforms are aware of their potential tax collection obligations. Given the large volume of sales that they facilitate, failure to collect VAT can become very expensive. Although many types of digital tokens are exempt, some do attract VAT. The question of which sales can benefit from a VAT exemption depends on the type of token sold.
The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organizations with which the author is affiliated.
This article does not necessarily reflect the opinion of The Bureau of National Affairs, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Aleksandra Bal is indirect tax technology & operation lead at Stripe.