Europe's ruling is going to have a big impact on Bitcoin. Flickr / Steven Depolo Europe's highest court is due to rule on the value-added tax (VAT) status of bitcoin exchanges in Europe on Thursday — a legal decision that could have far-reaching consequences for the digital currency in Europe.

The European Court of Justice could say that purchases at exchanges are VAT-exempt, as bitcoin enthusiasts are hoping. This would mean Europeans can continue to buy bitcoin with fiat currency without paying tax. Alternately, it could rule that the tax should apply, arguably damaging the competitiveness of European bitcoin businesses. Or it could decide that bitcoin itself should be subject to tax — a significant setback for the digital currency.

We spoke to Roger van de Berg a tax lawyer at law firm Baker & McKenzie in the Netherlands about the potential consequences. Here's what you need to know.

The forthcoming ruling stems from a Swedish court case.

"It [concerns] David Hedqvist, who planned operating the Swedish bitcoin exchange service on his website. Through his website it would be possible to exchange bitcoin into Swedish Krona and vice versa. The website operates a bid price and offer price, the difference constituting the remuneration for the services," van de Berg explains. "David Hedqvist and the Swedish Tax Authorities were in dispute whether or not the exchange of bitcoin into fiat and vice versa should be considered as a VAT taxable or VAT exempt activity."

A Swedish court subsequently referred two questions to the ECJ in June 2014: " (1) whether or not a service for remuneration rendered by a bitcoin (virtual currency) exchange can be treated as a VAT relevant service; and (2) in case the bitcoin (virtual currency) exchange service is VAT relevant, whether a VAT exemption can be applied."

In short: Does VAT apply to bitcoin — and if it does, should an exemption be applied?

Bitcoin could become more expensive in Europe.

The consequences of an affirmative ruling "will depend on the exact nature of the ruling and whether the court chooses for a strict or a broad approach to answer the questions. In case a strict approach is taken (so only answers will provided on the VAT-taxability of exchange services), customers will face additional charges since VAT is added to purchases, making it more expensive to buy/acquire bitcoin."

It could cause a headache for European bitcoin businesses too.

Van de Berg thinks the higher prices any VAT would cause would likely cause customers to look outside of Europe, harming local digital currency businesses.

He explains: "VAT taxing bitcoin exchange services would impact the competitiveness of startups. If these services are treated taxable, customers will less likely buy or trade with bitcoin due to the higher prices. Also, European exchange services will be less attractive for consumers, who will likely buy their bitcoins in third countries where no VAT is due. The “borderless” characteristics of bitcoin make this quite easy."

Don't panic just yet — this isn't guaranteed.

In a legal opinion, an advocate general — a kind of legal advisor to the ECJ — has advised the court to exempt bitcoin exchanges. The court doesn't always follow such opinions, but it often does.

The advocate general recommends that Europe "keep payments with bitcoin out of scope of VAT as bitcoin can be considered a 'pure payment system,'" says van de Berg. "Additionally, the UK has already legislation in place which is similar to the AG’s opinion. The Dutch Ministry of Finance has already indicated that they are willing to follow UK’s example as well."

But if VAT is applied, the consequences could be very significant.

It's possible that the ECJ will rule that VAT applies to bitcoin itself, rather than just at exchanges. It would create significant bureaucratic red tape for anyone who uses bitcoin as a payment method.

Here's van de Berg on why: "This would be the case if the ECJ decides to choose for a broad approach in answering the raised questions. In order to answer the question regarding exchange services, the ECJ might reason that it first needs to assess what such an exchange is actually doing and how the underlying assets should be qualified. As such, it might also investigate the VAT treatment of bitcoin and thus decide whether or not bitcoin itself is subject to VAT. Should the court decide that VAT is due on bitcoin itself, the consequences would be far-reaching. In case the use of bitcoin is VAT taxed, EU citizens who are on a regular basis paying with bitcoin could become a VAT entrepreneur, effectively engaging in VAT taxable bartering activities every time they buy something. For these barters, VAT compliant invoices should be raised to the sellers. Also, each individual should be compliant with filing VAT returns, sales listings etc., not to even mention being able to recover VAT on certain expenses."

A non-VAT ruling could have positive knock-on effects for bitcoin in Europe and beyond.

If bitcoin is regarded as a "pure payment method" — as the advocate general recommends — this would "put bitcoin on a level playing field with fiat currency which may be essential for the growth of bitcoin adoption, its community and businesses. Also, non-EU countries might follow the ECJ ruling and implement similar legislation in their own tax laws, making the international approach to taxation and bitcoin even more harmonized."

"Also," van de Berg adds, "recognition of bitcoin as a 'pure payment method' by the highest European Court would in my view also lead to a more positive view on bitcoin in the market."