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HMRC internal manual

VAT Finance Manual

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HM Revenue & Customs
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Money (including transfer of money) and related services: examples of services and products falling within item1: Bitcoin and similar cryptocurrencies

Introduction

Bitcoin is seen as the world’s first decentralised digital currency, otherwise known as a “crytocurrency”. Bitcoin operates via a peer to peer network, independent of any central authority or bank.

All Bitcoin transactions are recorded in a shared public database called a ‘block-chain’. New Bitcoin is produced when a new block is attached to the chain. A new block can only be added to the chain when the answer to a complex cryptographic algorithm is solved. Participants in this activity are known as ‘miners’.

As well as mining, activities include the buying and selling of Bitcoin and providing exchange facilities for parties to trade Bitcoin with recognised currencies. Bitcoin may be held as an investment or used to pay for goods or services at the (generally on-line) merchants where it is accepted.

Supply and Liability

Bitcoin exchanges

In the Swedish CJEU case, David Hedqvist (C-264/14), Mr Hedqvist planned to set up a business which would exchange traditional currency for Bitcoin and vice versa. Mr Hedqvist did not intend to charge a fee for this service but rather to derive a profit from the spread (i.e. the difference between his purchase and sell price).

Questions were referred to the CJEU on whether such exchange transactions constitute a supply for VAT purposes and if so, would they be exempt.

The CJEU referred to the judgment in First National Bank of Chicago (C-172/96) and concluded that the exchange transactions would constitute a supply of services effected for consideration. 

The Court also ruled that the exchange of traditional currencies for non-legal tender such as Bitcoin virtual currency (and vice versa) are financial transactions and fall within the exemption under Article 135(1) (e) of the VAT Directive.

Other supplies

The VAT liabilities outlined below are provisional pending further developments; in particular, in respect of the regulatory and EU VAT positions. HMRC will not apply any changes retrospectively.

For VAT purposes Bitcoin and similar cryptocurrencies are to be treated as follows:

  • Bitcoin received by miners for their Bitcoin mining activities will generally be outside the scope of VAT on the basis that the activity does not constitute an economic activity for VAT purposes because there is an insufficient link between any services provided and any consideration received.
  • Charges made by miners and others for performing specific Bitcoin transactions will be exempt from VAT under Item 1, Sch 9, Gp 5 VATA.
  • When Bitcoin is exchanged for goods and services no VAT will be due on the value of the Bitcoin itself.
  • Charges (in whatever form) made over and above the value of the Bitcoin for arranging any transactions in Bitcoin that meet the conditions outlined in VATFIN7200,  will be exempt from VAT under Item 5 Sch 9, Gp 5 VATA.

However, in all instances, VAT will be due in the normal way on any goods or services sold in exchange for Bitcoin or other similar cryptocurrency. The value of the supply of goods or services on which VAT is due will be the sterling value of the cryptocurrency at the point the transaction takes place.