Bitcoin faces many hurdles before it may become an everyday currency. For businesses, one of these hurdles is the uncertainty surrounding its tax status.

Across Europe, sales tax is known as Value Added Tax (VAT). When a nation begins to charge tax against bitcoin, many may interpret it as acceptance.

However, it’s possible that the application of VAT could serve to kill bitcoin too.

Private money

When news broke earlier this year that Germany was regarding bitcoin as “private money”, many rejoiced because it was the first time a European country had laid down any rules about bitcoin at all.

The tax situation there still remains uncertain, though. While it’s clear that Germany excludes bitcoin from capital gains tax after the first year of possession, the original article published in De Welt makes no definite reference as to how sales tax would be handled.

Because tax laws are harmonised across the European economic area, the German case is being watched by many.

A good

The status of bitcoin as a currency, or not, and the consequent application of tax law may lead to a chilling effect on the adoption of bitcoin.

For example, consider this anecdote about Swedish VAT on the Bitcoin Forum. Here the post claims that bitcoin is regarded as a good, not a currency in its own right.

Therefore, VAT is applicable to the whole volume of a trade in bitcoin.

Note that the case for fiat currency conversion is that VAT is not changed on the volume of the trade, but only on the service charge.

In the UK, businesses only have to register for VAT collection once its turnover reaches £79,000 (for this tax year).

For a business looking to setup as a bitcoin exchange, the matter of whether bitcoin is regarded as a currency or a good makes a critical difference.

A voucher

As Tom Gullen described on his blog, Her Majesty’s Revenue & Customs (HMRC) seems to be classifying bitcoins as vouchers, which means VAT would be due on any sales.

A 20% mark-up on bitcoin prices would make UK exchanges untenable. In addition to Gullen’s statement, an independent source told us that HMRC had given them the same classification.

We also spoke to Dr Tom Robinson of the UK-based bitcoin exchange BitPrice and consulting firm Blockchain Consulting, who recently attended the Financial Innovators Summit at 10 Downing Street.

At the time, it was said that he “left the meeting feeling largely optimistic”.

However, his subsequent communications yielded the following statement from HMRC: “Our Policy teams’ view is that these are not currency. It is our view that the provision of bitcoins is the sale of vouchers. These are likely to be ‘single purpose’ vouchers.”

Inappropriate classification

Robinson said: “This is obviously an entirely inappropriate classification for bitcoin: they aren’t issued by anyone, they don’t have a ‘face value’ and they can be redeemed for a wide range of goods and services.”

He added:

“I have heard anecdotal evidence of at least one bitcoin trader in the UK having received a VAT demand from HMRC, relating to bitcoin they have sold. This is one of the key things that we have been addressing with HM Treasury. It obviously stems from a misunderstanding of what bitcoin is and hopefully can be remedied fairly easily.”

Robinson also posted to reddit, saying: “We do now have a commitment from the Treasury that they will seriously consider how bitcoin might achieve official recognition in the UK. In doing this the government is seeking input from bitcoin businesses.”

Any businesses that want to submit a comment should do so through this link.

HMRC told CoinDesk that “There is a VAT exemption for currency transactions but the currency in question must be legal tender. We will of course listen to arguments for alternative VAT treatments under existing VAT law.”