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Bitcoin is VAT exempt according to the position taken by the Italian tax authority that might also have some side effects.
This a guest post by my tax colleagues, Giovanni Iaselli and Alberto Sandalo. I have already been discussing about the legal issues of bitcoin also in relation to the gaming sector, but below the matter is covered from a different perspective.
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For the first time ever, the Italian Tax Authorities provide guidance on the tax treatment of bitcoins, specifically focusing on transactions involving the exchange of bitcoin in national currency and vice versa (“bitcoins exchange transactions“).
Bitcoin exchange transactions are VAT-exempt!
The Italian Tax Authority recently issued an administrative document wherein for the first time bitcoins make the appearance on the Italian tax law stage.
The document deals with the case where a company provides the service of “currency” exchange between national currencies used as legal tender, and bitcoins (euros into bitcoins, and vice versa).
The case at stake is similar to the one dealt with in the recent landmark decision rendered by the Court of Justice of the European Union in the Hedqvist case which we covered in a previous article.
In determining the tax treatment of bitcoin exchange transactions, the Italian Tax Authority adopts an approach in line with the one of the European Court of Justice to reach the conclusion that bitcoin exchange transactions are VAT-exempt.
The reasoning of the authority is
- transactions involving the exchange of bitcoin into national currencies (and vice versa) ‒ where the company in charge for the exchange retains a margin of profit as consideration ‒ do not amount to exchange of goods, qualifying instead as provision of services;
- As such, the transactions at stake fall into the scope of application of VAT;
- However, “as far as virtual currencies and legal tender share the same function of pure means of payment, the applicable tax treatment must be the same“;
- According to the VAT Directive, the exchange of national currencies and, pursuant to the ECJ decision, of alternative means of payment even if not used as a legal tender ‒ including virtual cryptocurrencies like bitcoins ‒ is VAT-exempt;
The conclusion of the Italian Tax Authority is good news for local operators intending to start a business in this field. However, it might bear a bitter consequence: as long as VAT does not apply on the exchange services rendered to clients, companies cannot deduct the amount of input VAT, i.e. VAT borne on the purchases of goods and services (e.g., royalty paid for the use of software, purchase cost of hardware, rental fee on the lease of offices, etc.).
Moreover, the Resolution provides guidance as to the treatment of bitcoin exchange transactions in the field of direct taxation stating that:
- The profit realised by the company providing the exchange service (g., difference between the costs at which it buys bitcoins on the market and the price it charges bitcoins to the client) qualifies as operating profit taxed as business income at 27,5% rate ‒ 24% starting from FY 2017 and
- In case at the end of the FY the company holds bitcoins, their fiscal value should be the average of the market quotations at the close of the financial year (31/12).
Can the exchange of bitcoins into legal tender realise a taxable capital gain?
We must now shift the focus on taxation of individuals not acting in the context of their business activity.
It may occur that one decides to exchange the bitcoins he holds for national currency (say Euros). Let’s assume that bitcoins have gained value from the moment of their original purchase to the moment of their disposal: in this case, you benefit from the difference of the exchange rate.
Have you realised a taxable capital gain?
According to Italian Tax Law, the capital gain derived from the disposal of foreign currency is subject to 26% tax only if it is a forward sale. Instead, when you perform a currency exchange you realise a spot sale which is not taxable. Therefore, even if bitcoins were to be assimilated to legal tender for capital gain taxation purposes, no tax should be due on the exchange of bitcoins for Euros.
The conclusion would be different should bitcoin exchange occur in the context of online trading contracts on the Foreign Exchange Market (FOREX). In that situation, the TA recognises a speculative aim and qualifies the arrangements as derivative contracts. Therefore, in case you realise a bitcoin capital gain on the FOREX market this should be subject to the 26% tax.
Anti-money laundering applies to bitcoin exchange transactions
An extremely relevant point raised by the Resolution regards the extension of the scope of application of the anti-money laundering (AML) provisions to bitcoin exchange transactions.
According to the Italian TA, companies which render the service of bitcoin exchange should be assimilated to the “subjects which professionally provide currency exchange services“, which qualify as financial intermediaries and therefore are subject to the anti-money laundering compliance regime.
Following the view of the Italian TA, companies professionally involved in bitcoin exchange transactions should:
- perform the customers due diligence;
- register the identification data of the clients and the relevant transactions; and
- report suspect operations to the relevant authorities.
It must be highlighted that, even though the Tax Authority does not appear to have the power to provide interpretative guidance in the field of anti-money laundering, the approach seems to be consistent with the European Commission’s proposal for the fourth AML Directive.
If you want to further discuss the topic, you can contact Giovanni Iaselli and Alberto Sandalo.
