Last week, the European Union took a progressive step towards clarifying how digital currencies will be recognized in the EU for purposes of taxation. The EU now recognizes virtual currencies as legal tender, not commodity, and they are therefore exempt from VAT (Value Added Tax), a sales tax added to products.
Bitcoin is the most popular and widely used digital currency (a digital or virtual currency uses peer-to-peer technology for the payment of goods and services). It is an internet-based currency that was established in 2009 and is produced via a method called mining.
The decision made by the European Court of Justice (ECJ) was a result of a case that originated in Sweden: Skatteverket (Swedish Tax Agency) v. David Hedqvist. The dispute was about adding a VAT to the exchange of traditional currency (pounds, euros, dollars) and Bitcoin. The case was brought to the ECJ when the Swedish Tax Authority determined that Bitcoin would be treated like a commodity and taxed as such. The ECJ overturned that ruling and set a legal precedent that digital currencies are now recognized as a legal tender, not as a commodity.
Unfortunately recognition of bitcoin as legal tender is yet to go global as the U.S. has a very different opinion on the matter.
According to the United States Internal Revenue Service (IRS), the U.S. recognizesBitcoin (and other digital currencies) as a commodity, similar to gold, and will tax it as such. In fact, last month, the U.S. Commodity Futures Trading Commission (CFTC) made this point clear by setting an example with Coinflip, a San Francisco-based Bitcoin operator who was not complying with CFTC trading regulations. The company has since settled their case with the CFTC.