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Ireland's VAT plan contributes to the 'legitimization' of cryptocurrency

Updated: Sep 26, 2022

The Irish VAT plan to impose a 23 percent VAT on cryptocurrency purchases, according to crypto-asset exchanges and platforms, brings clarity and legitimacy to the industry.

The Irish VAT guidance would "further legitimise this technology and the potential it holds," according to BUX Zero, a neobroker and investment trading platform.

The decision was made in response to Revenue's guidance on the taxation of crypto-assets, which included VAT. It stated that if crypto is used to purchase goods or services that are normally subject to VAT, the VAT charge will be applied to the transaction as well.

The tax due would be the amount in euros equal to the VAT percentage in effect on the day of the transaction.

Under Section 6(1)(D) Schedule 1 of the VAT Consolidation Act 2010, where the company performing the exchange acts as a principal, buying crypto with regular currency would remain VAT-free.

This follows the ruling of the Court of Justice of the European Union (CJEU) in the Hedqvist case (C-264/14), which determined that financial services provided by platforms for the exchange of bitcoin for traditional currency are VAT-free.

Pedro Trento, Binance's global tax director in Paris, hopes that this is the first step toward greater harmonisation of EU VAT systems for cryptocurrency.

"We welcome additional clarity and look forward to more technical developments relating to crypto-assets that keep a uniform landscape across the EU," Trento says.

He thinks the Irish guidance on the tax treatment of various transactions involving cryptocurrencies and crypto-assets is a good thing because it aligns Irish rules with existing EU guidance and case law.

VAT would be payable by suppliers of any goods or services sold in exchange for bitcoin or other cryptocurrencies, according to Revenue.

In a research paper, Conor Walsh, director of indirect tax at Deloitte in Dublin, stated, "This is clearly a logical position to adopt and is beyond any reasonable contention."

The euro value of the cryptocurrencies at the time of the transaction would be the amount taxable for VAT purposes.

Because crypto-assets have no standard exchange rate, platforms must make "a reasonable effort" to "use an appropriate valuation for the transaction in question," according to Revenue's taxation of crypto-asset transaction guidance.

The cryptocurrency industry could become a victim of its own success. The rise in cryptocurrency trade, use, and market capitalization has prompted tax authorities to consider more regulation.

Because of the lack of centralized control and the anonymity of their owners, virtual currencies raise difficult questions for tax policy. Cryptocurrencies also have a lot in common with financial instruments and intangible assets.

The Hedqvist case and Article 2(1)(c) of the EU VAT Directive (Council Directive 2006/112/EC) serve as the foundation for Revenue's application of VAT to the supply of goods and services when cryptocurrencies are used.

It states that a transaction is taxable if there is a direct link between the consideration received and the provision of services, as long as the two parties have a legal relationship with reciprocal performance.

"Any supply of goods or services subject to VAT, the consideration for which is paid in crypto-assets, should be treated in the same way as any other supply of VAT purposes," according to the European Commission.

The treatment of cryptocurrencies varies greatly between EU member states. Some countries are well-developed, with VAT regimes in place for everything from cryptocurrency mining to digital wallet holdings, while others have no such policies.

Although there is currently no uniform EU system, the European Commission has called for an agreement among EU member states. Harmonizing the principles governing the VAT treatment of cryptocurrency transactions would be critical.

The EU's move to harmonize VAT regulations on cryptocurrencies is seen as a first step in a regulatory landscape for virtual assets that is becoming increasingly stringent. The Department of Revenue is the most recent tax authority to target the industry.

Ireland has a long way to go in terms of developing a VAT framework for digital wallets and mining. Traditional VAT systems do not cover either of these areas.

The Irish government, on the other hand, may be taking the next steps toward harmonisation with other EU members. Ireland's decision to charge VAT on cryptocurrency payments for the supply of goods and services follows a trend in the EU to regulate crypto-assets.

As more countries face economic challenges as a result of COVID-19 and high inflation, tax authorities will undoubtedly be tempted to extend VAT obligations in order to tap the tax revenue potential of crypto-assets and fill budget gaps.

However, the Irish VAT plan demonstrates that targeting the crypto market is not necessarily harmful to the industry.


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