VAT on Bitcoin-Related Services

Published on 31 January 2022

Much has been said about taxation in Spain on trading and ownership of Bitcoin, especially in relation to personal income tax (IRPF), wealth tax and the declaration of assets abroad (Spanish tax form 720). This article, however, will briefly outline other issues regarding cryptocurrency-related services as regards Value Added Tax.

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First, the classification of Bitcoin with respect to VAT must be determined, that is, the asset type. In its Judgment C-264/14, the Court of Justice of the European Union defines cryptocurrencies as virtual currencies that can serve as contractual means of payment. Based on this definition, services related to Bitcoin would be considered as “financial” and, as such, we can assume they are exempt from VAT.

Consequently, services provided in “over-the-counter” purchases and sales of cryptocurrencies, that is, in an off-exchange market for Bitcoin trading in which parties negotiate transactions bilaterally, are similar to those provided in foreign exchange transactions. Therefore, and in accordance with Article 20 of the Spanish VAT Law, these services are exempt from VAT as they are considered as financial transactions.

Another financial service exempt from VAT is the so-called practice of “staking.” This is an alternative to mining for block creation and validation. Instead of creating these blocks by way of computing, staking requires validators who leave their coins locked in deposits so that they may be randomly selected at specific intervals by the corresponding protocol to create a block (which generates profit) and thus contribute to the performance of the blockchain of the respective cryptocurrency. Profit obtained by cryptocurrency owners through staking is exempt from VAT because it is the result of a transfer of ownership, i.e. a financial operation.

This does not, however, imply that all services related to cryptos are exempt from VAT. For example, the custody of cryptocurrencies by an offline platform, which usually provides better security to its clients, is a deposit service similar to renting a safe deposit box. As this specific service does not qualify as “financial,” it is subject to VAT. Services related to the execution of “smart contracts,” which allow cryptocurrency owners to engage in the abovementioned practice of staking, are also subject to VAT.

Needless to say, the realm of cryptocurrencies is constantly developing and offers innovative services. It is, therefore, advisable to determine the tax costs involved in such services prior to using them. Indeed, this could very well save us from unpleasant surprises that end up undermining the health (or wealth) of our wallets instead of filling them with cryptocurrency.