Bitcoin Big Problem Transaction Times
The continued delay in processing bitcoin transactions coupled with the increased cost has led to record levels of complaints. Reuters/Benoit Tessier

LONDON -- Europe's top court has ruled that purchasing bitcoin through exchanges will not be subject to value added tax (VAT) in a decision that has far-reaching implications on the continent for the viability of the world's most popular cryptocurrency.

The European Court of Justice ruled Thursday that digital currencies like bitcoin should be treated in the same way as fiat currency and consumers should not be taxed when trying to buy or sell them. The Financial Times reports the ECJ said bitcoin transactions "are exempt from VAT under the provision concerning transactions relating to currency, bank notes and coins used as legal tender."

The ruling comes after its Advocate General Juliane Kokott published an opinion in July urging the court not to impose tax on bitcoin sales and purchases. "I therefore propose that the Court should reply...[that] these operations are exempt from tax under section 135, paragraph 1, point e) of the VAT Directive,” Kokott said.

The case was brought before the court after Swedish man David Hedqvist sought to set up a bitcoin exchange in his home country allowing people to buy and sell bitcoin using Swedish krona. The Swedish Tax Authority referred the issue of whether bitcoin exchanges should be tax exempt to the Court of Justice, asking clarification on two issues:

"Whether or not a service for remuneration rendered by a bitcoin (virtual currency) exchange can be treated as a VAT relevant service; and (2) in case the bitcoin (virtual currency) exchange service is VAT relevant, whether a VAT exemption can be applied.”

The second question has become a moot point after the court ruled that the bitcoin exchange is not a VAT-relevant service. The decision will be good news for the hundreds of bitcoin startups that have sprouted in Europe in the last couple of years. Until today, EU member states had come to their own decisions on the VAT-status of bitcoin, with Poland levying a 23 percent VAT and the UK making bitcoin trading exempt from VAT in a ruling in March.

Had the court decided bitcoin should be taxed, it could have had a negative impact on those companies' competitiveness. "From a strategic perspective, this decision, which appears to ensure virtual currencies will be seen as cash, should be an opportunity for emerging forms of financial services and FinTech to get a shot in the arm – bringing growth and consolidation" Jonathan Rogers, partner in the Financial Services Regulatory group at Taylor Wessing told International Business Times.

Rogers added: "Greater clarity can now emerge in the debate about how to regulate virtual currencies, leading to increased credibility and consumer confidence; in turn, virtual currencies will have a much greater critical mass in the financial services system. This sector is always looking for greater certainty about how it should be treated for official purposes, so at first glance, this decision will probably be welcome."

Not everyone agrees with the ECJ ruling however. “Many with a vested interest in cryptocurrencies will be overjoyed by the ruling," Jens Bader, chief commercial officer of Secure Trading told International Business Times. "It is easy to see why an un-regulated currency not subject to sovereign states taxes is an enticing prospect. However, it is a shame to see the ECJ cave in on this issue, and for Bitcoin not to be held to universal VAT standards."

The problem, as Bader sees it, is that bitcoin and other cryptocurrencies are products not currencies, and should be taxed as such. "While we call it a 'currency', in fact bitcoin is a tradable commodity, like gold and silver. Where currencies come under a highly regulated framework, tradable goods do not, which means that their value is always in flux. The bottom line is that bitcoins are products attributed and traded for a value, and nothing more."