In a recent decision, the Swedish Tax Agency has declared that converting a virtual currency to a traditional currency is not a transaction that falls within the scope of VAT. The logical conclusion is that the Swedish Tax Agency has accepted virtual currencies as legal tender and the exchange is simply a conversion of one currency to another currency.

The Agency is currently auditing companies that mine virtual currencies or who provide hash power to clients who mine currencies. The Swedish Tax Agency has recently denied an alleged mining company reimbursement of VAT, on the grounds that the company did not have a business activity falling within the scope of VAT.

The Swedish Tax Agency have asserted that the mining of a crypto coin is not a transaction, as there is no purchaser of the mining company’s service. The subsequent exchange or sale of the mined coin into a fiat currency is not a transaction from a VAT perspective, as the miner is performing the exchange on their own behalf.

The Agency’s judgment on this matter makes it clear that this decision applies irrespective of the virtual currency that is exchanged.

The ramifications of the Swedish Tax Agency’s decision

It should be noted that the European Court of Justice has ruled that the service of changing one legal currency to another is a service transaction. It has further ruled that a bitcoin is not goods and consequently a service, but neither a legal currency nor a negotiable instrument. A supply of services has a very broad scope and is in essence everything that is provided under a legal relationship where the provider is remunerated for the supply of the service.

preTAX has asked the Swedish Tax Agency if the legal arguments being presented are the individual tax officers’ own opinions or the Agency’s official standpoint. We have recently received the following answer:

“The draft decision presents the results of the Swedish Tax Agency's investigation. The legal conclusions are part of the outcome. It is therefore the Swedish Tax Agency's investigation and the Swedish Tax Agency's conclusions, which the Swedish Tax Agency stands for. I can't make it clearer than that”.

Judging from the above statement, we might infer that the legal arguments presented reflect the official stance of the Agency and in extension the Swedish government.

Arguments could be made that the mining activity is subject to VAT. However, the Agency’s view that the exchange of a virtual currency to another currency is not a transaction is ground-breaking. Either the Agency has invented a new (non-) transaction form for VAT purposes, or it accepts all virtual currencies as legal currency and the exchange as simply a transfer of one currency to another at the equivalent value.

A few conclusions can be made when interpreting the Swedish Tax Agency decision in the light of the rules set out by the European Court of Justice:

1. The Swedish Tax Agency considers that all virtual currencies should be treated the same irrespective of the characteristics and rights derived from the individual coins;
2. The conversion of a virtual currency to a legal currency is not a transaction and, it would seem, irrespective of what value you give the virtual currency;
3. The only reasonable conclusion to the non-transaction is that the opinion of the Swedish Tax Agency is that the parties to the exchange are only trading legal currency at equivalent intrinsic values.  

At the same time, the Swedish Tax Agency’s decision leaves a number of unanswered questions, including:

• What are the boundaries of a virtual currency, and to what extent can diverse services and rights be included in the virtual currency?
• Is it possible to give a virtual currency any given value at a sale and thereby shift profits between entities and countries?
• What are the income tax consequences for private individuals and for companies exchanging virtual currencies?
• What are the consequences from a regulatory standpoint?

Although it is not entirely clear what the legal basis for the Swedish Tax Agency’s decision is, it appears that the Agency is taking radical steps in both the tax treatment of virtual currencies and what constitutes a virtual currency. Right now, it is difficult to fully appreciate the full impact of the Agency’s decision, and to know whether the Agency’s decision will stand up in court. Finally, while this does create opportunities and challenges from a taxation perspective it also raises a number of important regulatory issues as well.

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