Digital currencies and tokens (1)
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Digital currencies, tokens, ICO, ITO, mining – still a controversial topic raising a lot of questions, including VAT treatment.
ICO and ITO
It has been some time since 22 October 2015, when the Court of Justice of the European Union (CJEU) ruled on case C-264/14 David Hedqvist concerning the VAT treatment of exchanging the bitcoin virtual currency for traditional currency or vice versa, and we have seen the emergence of new digital currencies and new financial investment services, such as initial coin offerings (ICOs) and initial token offerings (ITOs). Are we clear about all aspects of the VAT treatment of dealings in digital currencies and tokens?
ICOs and ITOs involve raising public funds and issuing a new digital currency or a token, mainly using digital currency. Although in practice ICOs and ITOs are considered similar to initial public offerings, it is important to note that digital currencies and tokens do not usually guarantee shares in the company offering the project to the public.
The Financial and Capital Market Commission explains on their website that depending on its characteristics, a token is a coupon that represents a digital currency, a security, or any other account receivable from the issuer. Digital currencies and tokens exist only in digital form and are neither considered to be money or securities in their classic meaning nor covered by any national customer protection scheme.
Each ITO and ICO is different, and the token being issued may guarantee –
shares in a company;
the right to another digital currency;
a share of profits from a project;
the right to take part in a project/business (e.g. the right to vote on specified matters);
the right to goods or services in the future;
any combination of these rights.
The Financial and Capital Market Commission finds that each ICO model should be assessed on its merits and in certain cases a token may essentially be consistent with one of the financial instruments listed by the Financial Instruments Market Act and governed by its requirements. However, most ICOs are not regulated, and tokens are traded on the secondary market.
Considering the different types of tokens, their VAT treatment may vary accordingly. This should be taken into account by their issuer, the dealer and the supplier providing services associated with digital currencies and tokens.
Digital currencies and tokens as a means of payment
As long as a token or digital currency essentially represents a contractual means of payment alternative to legal tender, allows the parties accepting it to buy real and digital goods and services, and has no purpose other than to be a means of payment, the VAT treatment of dealings in such digital currencies and tokens should follow CJEU Ruling C-264/14 mentioned above.
In this ruling, the CJEU found that for VAT purposes, exchanging the bitcoin virtual currency for traditional currency or vice versa is considered an exempt financial service. Exempt supplies, including financial services, should be assessed according to the type of service, i.e. they must constitute a separate set of transactions that in fact performs functions that are characteristic of and essential to the supplies of services prescribed by the relevant provision of law. Since the VAT directive exempts transactions associated with “currency, banknotes and coins used as legal tender,” the exemption should be available for supplies of services that involve exchanging traditional currency for virtual currency units or vice versa. The value of a service in digital currency trading is the difference between the price at which an entity buys currency and the price at which it sells the currency to its customers.
In our opinion, if dealings in digital currencies and tokens essentially function as a means of payment, they should be given the same VAT treatment as dealings in traditional currencies. So, in Latvia these services of trading (and intermediation) in digital currencies and tokens are exempt supplies under section 52(1)(21)(d) of the VAT Act.
(to be completed soon)