VAT treatment of services provided by crypto exchange platforms

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 crypto-assets can be traded without relying on traditional intermediaries, such as banks and other financial institutions, the crypto sector has created a new type of powerful intermediary – crypto exchange platforms.

Crypto exchange platforms are online marketplaces where you can buy and sell crypto assets. You can use them to exchange one type of crypto-tokens for another or to buy crypto-assets using legal currency, such as euros or US dollars. 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. Given the important role that these exchange platforms play in the cryptoasset ecosystem, it is worth taking a look at the VAT for processing services they provide.

Crypto exchanges that did not disclose 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. The VAT Act distinguishes between two types of agent relationships: disclosed and undisclosed agents.

An online marketplace is a disclosed agent if it trades in the name and on behalf of the seller. In this scenario, the seller is considered 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 this is required according to the invoicing regulations). The marketplace receives a commission for its mediation services, but is not a party to the sale.

An online marketplace is an undisclosed agent if it trades in his own name but on behalf of the seller. When an undisclosed agent facilitates a sale, the VAT Act requires 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 under the invoicing regulations). The commission fee earned by the undisclosed agent is incorporated into the sale price of the goods or services.

Since in practice it may not be easy to determine whether an agent is acting in a disclosed or undisclosed capacity, the EU VAT Implementing Regulation establishes a legal presumption that an online marketplace operator offering electronically delivered services is acting as an undisclosed agent unless it expressly indicates another person as 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 provision of the Service; or
• sets the general conditions for the sale,

will always be assumed to be an undisclosed agent and is not permitted to name another person as the supplier. This means that a platform operator who fulfills one of the above conditions is not allowed to rebut the legal presumption and claim that another party is acting as a seller.

Crypto assets meet the definition of electronically delivered services as they can be delivered over the internet with a minimum of human intervention and their transfers are not possible in the absence of information technology. The fact that certain crypto-assets can be considered financial instruments for the application of VAT exemption (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 are acting as an undisclosed agent and it will not be possible to disprove 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 send it to the tax authorities.

Does an exception apply?

Crypto exchange platforms do not have to worry about any tax collection obligations if sales they facilitate can benefit from VAT exemption. However, the question of whether a VAT exemption applies to a specific transaction is not easy to answer.

IN The Swedish Tax Agency against David Hedqvist (Case C-264/14), the European Court of Justice ruled that a company that buys units of bitcoin from third parties and resells 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 exempt from VAT. Even today many quote Hedqvist judgment that provides a legal basis for the view that crypto trading does not entail any tax liability.

This view is incorrect as the court’s decision only mentions payment tokens (virtual currency) – a type of crypto-asset that attempts to function as 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 under the present circumstances. IN Hedqvist decision, the court looked at the original purpose of bitcoin, which was to act 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 ignored the fact that bitcoin was primarily used for speculative investment purposes by traders trying to take advantage of 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 VAT exemption for means of payment.

The question of whether the sale of crypto assets facilitated by crypto exchange platforms is VAT exempt cannot be answered in a uniform way. It depends on the type of token being 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 notes used as legal tender can be applied (in line with Hedqvist judgement).

A security token similar to traditional securities can benefit from the exemption for transactions in financial instruments (shares, bonds and other securities).

Since 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 applies and the VAT on those goods or services are known at the time of the token sale. If this is the case, VAT must be charged on the sale of a utility token, which is considered to be a one-time 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 outside the scope of VAT as the token is presumed to be a multi-use voucher.

Although there is not much official guidance on NFTs, the Spanish and Belgian tax authorities have confirmed that they are not exempt. An online platform is therefore required to charge the customer’s country tax on the NFT sales it facilitates. This can be a difficult task if the platform does not collect location data about the users.

There may be some confusion about the application of the VAT exemption to services provided by crypto exchange platforms, as the European Commission’s VAT Committee indicated in one of its working documents that services “related to intermediation provided by Bitcoin exchange platforms could not be considered exempt.” However, the working paper does not talk about the most common scenario – crypto exchange platforms acting as undisclosed agents – but addresses another situation where the platform is considered to act as a disclosed agent that does not directly participate in the transaction.

Although this article does not intend to examine the rationale of the VAT Committee, it should be clarified that there is no general prohibition against applying VAT exemptions to crypto sales by undisclosed agents.

Conclusion

Since VAT legislation considers most crypto exchange platforms not just intermediaries facilitating crypto transactions, but actual sellers of cryptocurrencies, it is very important that exchanges be aware of their potential tax collection obligations. Given the large sales volume they facilitate, failing to collect VAT can be very costly. Although many types of digital tokens are exempt, some attract VAT. The question of which sales can benefit from VAT exemption depends on the type of chip being sold.

The opinions expressed in this article are those of the author and do not necessarily reflect the views of any organization 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.

Author information

Aleksandra Bal is head of indirect tax technology and operations at Stripe.