The future of bitcoins in European igaming depends on taxation by Matthias Spitz, Dr Gregor Fuehrich and Jessica Maier, LL.M. hen Calvin Ayre shared his payment – and thereby preserved Europe from perspective on future trends gambling away a technology which could be massively a ecting the industry at last year’s changing our view on the online sector. Malta iGaming Seminar, the is article will rst shed some light on the nature W audience was packed. Many of bitcoins, provide a short analysis of the recent European gaming lawyers, however, could tell a thing CJEU judgment and then enlarge upon the more or two about how taxation has sti ed the development “technical” implications of the VAT exemption. Matthias Spitz of the online gambling sector in their respective countries. Indeed, a couple of European tax On the nature of bitcoins authorities held that bitcoin trading is not VAT Let’s start at the very beginning. Since their alleged exempt under the VAT Directive1. As a consequence, invention by Satoshi Nakamoto in 20082, bitcoins bitcoin trading would have been subject to a “double have become increasingly popular for investors or taxation” under VAT – rst, upon the sale of a service as a form of payment in e-commerce and the online and, second, when exchanging the earned bitcoins for environment in general. is also includes the online hard currency. Obviously, this would have rendered gambling sector where SatoshiDice was one of the bitcoin trading totally unattractive for any earliest betting sites and which sees an increasing Dr Gregor Fuehrich e-commerce and online gambling service. Mr number of bitcoin casinos opening on the internet Hedqvist, who owns Bitcoin.se and intended to nowadays. Entire bitcoin casino solutions are available provide services consisting of the exchange of through so ware providers like So swiss. Even in the traditional currency for bitcoin and vice versa through “real world” bitcoins have gained some momentum, his web portal, brought a corresponding dispute with e.g. in the UK where in 2014 the rst bitcoin cash the Swedish tax authorities before court which then machine was launched in Shoreditch, London3. referred the case to the Court of Justice of the EU (the But what are they? e answer to this question is ‘CJEU’). In a judgment of 22 October 2015, the CJEU not straightforward. solved the dispute in favour of the bitcoin businesses Jessica Maier in declaring that trading bitcoins is VAT-exempt 1. Council Directive 2006/112/EC. 2. Nakamoto, Satoshi, “Bitcoin P2P e-cash paper”, 31 October 2008, “Bitcoin: under art. 135(1)e VAT Directive because it should A Peer-to-Peer Electronic Cash System“, 24 May 2009, not be treated di erently to more traditional means of https://bitcoin.org/bitcoin.pdf. 14 | European Gaming Lawyer | Spring Issue | 2016 One would say bitcoins are a million were lost then. Despite each bitcoin bitcoins in a similar fashion to other “cryptocurrency”, i.e. an electronically being dividable into 100.000.000 units and it nancial products in the banking sector, created currency which only exists in only ever being possible to have a maximum however, at the same time did not allow the virtual world, does not have physical of 24.000.000 bitcoins in the system in total, bitcoins to be de ned as a functional presence and is run on an open, peer-to- i.e. despite bitcoins having to be considered currency or as electronic money. As a peer so ware. Unlike traditional bank rather stable in terms of in ation, critics result, the BaFin came to the conclusion transactions cryptocurrencies do not require still nd there to be nancial risks for users that transactions involving bitcoins were a central payments processor or bank. given the uctuation in the value of bitcoins, not to be taxed in the same way as other ey therefore not only allow for prompt, which in parts can be quite considerable. nancial products, but – since bitcoin immediate (international) transactions but Ultimately one would probably come transactions were to be understood as a also avoid the transaction fees which banks to the conclusion: bitcoins are a form kind of swap or exchange – both, the giving would usually charge. of payment and may be an attractive and the later sale/purchase of bitcoins One would to explain that Bitcoins can opportunity for investments. were each to be considered subject to VAT. be “mined”, i.e. created, by users solving However, the question of what bitcoins E ectively, bitcoins were therefore stuck in CPU-intensive cryptographic tasks and really are heavily depends on how bitcoin the middle of sort of being quali ed as a that the bitcoins created through mining transactions and investments are treated nancial product in terms of regulation but are then transferred to a so-called “wallet” in terms of taxation, as the quali cation of at the same time being subject to a highly where the addresses and keys necessary bitcoin transactions from a tax viewpoint unattractive double taxation. for the veri cation of the transaction (and, acts as the “make or break” with regard to In the UK, the exchange of bitcoins into consequently, for receiving the money) their success in the market. a currency was considered not taxable are stored. A point of concern in the legal at all. In a policy paper of March 2014, debate on bitcoins, speci cally in the Dispute on VAT treatment of bitcoins HM Revenue & Customs provisionally context on gambling, is that these addresses, within the EU concluded that bitcoin transactions are although they verify the transaction do Before the judgement of 22 October exempt from VAT under art. 135 para. 1 not provide insight into who the bitcoins 2015, the VAT quali cation of and the d) of the VAT Directive as falling within actually belong to and consequently bitcoin applicability of VAT exemption rules on the definition of ‘transactions, including transactions involve a money laundering bitcoins was unclear, and there was no negotiation, concerning deposit and risk. Another point of criticism raised in uniform opinion across the EU. current accounts, payments, transfers, the context of bitcoins is that bitcoins may In Germany, the legal assessment of debts, cheques and other negotiable be lost or stolen. Reference is o en made to bitcoin transactions was predominated by instruments’5. the bankruptcy declared in 2014 by Mount the assessment provided by the Federal In a subsequent parliamentary inquiry of Gox, one of the then largest global bitcoin Financial Supervisory Authority (BaFin) May 2015, the Federal Ministry of Finance exchanges, as a result of it having become in 20134. e BaFin de ned bitcoins then stated that the British interpretation subject to hacker attacks. Allegedly bitcoins as “ nancial instruments in the form of is “not relevant and not binding for the rest in the amount of then approximately $ 473 accounting units” and suggested regulating of the Members States” and denied VAT exemption6. 3. http://www.telegraph.co.uk/technology/10682842/UKs-fi rst-Bitcoin-cash-machine-launches-in-Shoreditch.html. All the more important in the eyes of 4. https://www.bafi n.de/SharedDocs/Veroeff entlichungen/DE/Fachartikel/2014/fa_bj_1401_bitcoins.html. critics of this legal assessment was the 5. https://www.gov.uk/government/publications/revenue-and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies/revenue- and-customs-brief-9-2014-bitcoin-and-other-cryptocurrencies awaited CJEU decision in the case C-264/14 6. https://www.bundesverband-bitcoin.de/wp-content/uploads/2014/05/140512-Antwort-PStS-Meister.pdf of Mr Hedqvist. European Gaming Lawyer | Spring Issue | 2016 | 15 CJEU: Bitcoins transactions are VAT Bitcoin payments not subject to VAT taxability, unlike the later (tax-free) exempt! e question of VAT taxability rst arises exchange of bitcoins into currencies against e CJEU now ruled that transactions when bitcoins are used as payment for remuneration (see below)9. Even if two “which consist of the exchange of traditional services, such as online gambling services. supplies were to be assumed in the payment currency for units of the ‘bitcoin’ virtual As an example, the German tax authorities of the service following Germany’s Federal currency and vice versa, in return for assume that the payment of services via Ministry of Finance, the bitcoin sales payment of a sum equal to the di erence bitcoins results in two supplies, i.e. (1) should now be exempt from tax pursuant between, on the one hand, the price paid by the obvious taxable supply of the service to the judgment (art. 135 para. 1 lit. e) VAT the operator to purchase the currency and, and (2) in return the taxable supply of the Directive). on the other hand, the price at which he bitcoins. According to the Federal Ministry sells that currency to his clients, constitute the supply of services for consideration7.” e judgment clari es that this exchange “I think that Bitcoin and blockchain, the is in fact a service against remuneration where the remuneration is not equal to technology behind it, are developing the value of the exchanged bitcoins but our industry and that the application of only equal to the realized margin/spread in return for the exchange. Moreover, the this technology is going to be massive in CJEU decided that this margin is exempt from VAT, since “Article 135 para. 1 lit. e of changing how we view the whole industry.” the VAT Directive also covers the supply of services […] which consist of the exchange of traditional currencies for units of the of Finance, it is yet to be decided whether Consequences for the exchange of ‘bitcoin’ virtual currency and vice versa.” or not the restrictive opinion preceding bitcoins e CJEU thereby accepts that bitcoins fall the CJEU judgment will be amended or As mentioned above, the further question within the meaning of the above art.