VAT Effects of Operating Blockchain Networks

Published on 9 January 2024

In this short article, we will discuss the VAT effects of operating Blockchain networks in the strict sense, i.e. mining and payment of miners, both in the form of cryptocurrency assets and/or commissions.

As is generally known, in blockchains, transactions, which are actually exchanges of cryptocurrencies, are recorded in so-called blocks. These transactions are validated through the consensus of multiple nodes, i.e. through computers connected in a decentralised network which participate in a so called blockchain network. The completed block then must be validated through a hash (cryptographic key), calculated by the nodes, that closes the block in what is known as the mining process.

In the Bitcoin network, miners who successfully perform this task are rewarded with cryptocurrencies in addition to the corresponding transaction commissions.

In this context the question arises whether mining as an activity would be subject to VAT. Usually, when ordering factors of production (resources) on one’s own account to intervene in the market against payment, i.e. receiving an equivalent of value for the goods or services supplied, the corresponding transactions for such supply of goods and services would be subject to VAT. Accordingly, it would be logical to conclude that mining transactions were subject to VAT as well.

However, according to the case law of the CJEU, for a provision of services to be considered rendered “against payment”, there must be a legal relationship between the provider and the recipient of the services. Furthermore, within such relationship the parties must reciprocally exchange performances, and the payment (consideration) received by the provider must constitute an effective equivalent for the services provided to the recipient.

Bitcoin mining operations enable the creation of new blocks from which new Bitcoins are derived and are remunerated by the system with a certain quantity of Bitcoins (reward). Accordingly, the mining activity does not lead to a relationship between a provider and a recipient of services, so that there is no identifiable customer or recipient of the services. Moreover, the service provider does not receive an equivalent as consideration for the services rendered, as the new Bitcoins are automatically generated by the network. Therefore, these transactions are NOT subject to VAT.

As we can see, understanding the technical details of how these technologies belonging to what we already call the “digital revolution” work, is essential to determine their tax consequences. Hence, as lawyers, we must broaden our knowledge beyond the strict legal field. Let’s get to work!