Despite the absence of legal regulations or even because of it bitcoin is slowly becoming a universal form of payment. There is also no shortage of economic operators interested in profiting from exchanging currencies into bitcoins. However, permanent and professional pursuit of such activity poses one basic problem – if, on what and to which extent the VAT should be charged.
This question was answered recently by Julianne Kokott, Advocate General of the European Court of Justice (opinion of 16 June 2015, case C-264/14 David Hedqvist) and her position is contrary to the one presented hitherto by the domestic tax authorities.
What are we dealing with
First, we should consider what bitcoin, i.e. a unique sequence of characters created on the basis of a specific algorithm, stored in a personal computer in the form of a wallet file or kept in an external service operated by third parties which stores bitcoins really is.
The interpretations issued by the tax authorities sometimes state that bitcoin (meaning money) plays a role of electronic currency, and bitcoin (meaning a payment system) allows sending and receiving units of this currency. Bitcoin is used for barter transactions in order to pay for goods and services and for investment transactions based on exchange rate fluctuations. This currency is not a legal tender and its functioning is based on a contract concluded between the users accepting such form of payment (see: interpretation of the Fiscal Chamber in Katowice of 21 June 2013, IBPP2/443-258/13/ICz, and of 14 November 2013, IBPP2/443-762/13/ICz) and of the Fiscal Chamber in Poznań of 8 January 2014, ILPP1/443-910/13-2/AWa and ILPPI/443-912/13-2/AW).
This currency has no central supervisory authority. It is not used by any public institutions and it does not function as a money market instrument. Bitcoin is not recognised as a legal tender in Poland (according to the Foreign Exchange Act the domestic means of payment in Poland is the Polish zloty) or in any other country in the world.
Problematic classification
While there is no doubt that bitcoin is not a “legal tender”, it is not so easy to determine how transactions involving it should be taxed with the VAT. Since bitcoin is used for paying (it has limited power to amortise obligations) and it can be exchanged for domestic currencies at a specific rate, then what sort of a service are we dealing with here? What is the turnover of bitcoin’s holder? And finally, which tax rate should be applied?
Certainly no supply of goods
According to the VAT Act, only supply of goods, i.e. supply of things and their parts, and any and all forms of energy, as well as provision of services, i.e. every other performance which is not a supply of goods is subject to taxation. As bitcoin cannot be held in a hand there is no doubt that a supply of bitcoins is not a  supply of goods. Therefore, only services connected with bitcoin could be taxed.
 According to the position presented by the tax authorities a sale of bitcoin should be treated like a sale of other “virtual objects” and classified as “electronically supplied services” within the Council Implementing Regulation (EU) No. 282/2011 of 15 March 2011 laying down implementing measures for Directive 2006/112/EC on the common system of value added tax (see interpretation of the Fiscal Chamber in Łódź of 7 April 2014, IPTPP2/443-52/ 14-6/IR ).  According to this provision electronically supplied services are “services which are delivered over the Internet or an electronic network and the nature of which renders their supply essentially automated and involving minimal human intervention, and impossible to ensure in the absence of information technology”. However, this position fails to take into account the fact that the purchased bitcoin is not used for “consumption” (like other virtual objects), but for further sale or exchange for goods or a service, just like a voucher or, simply speaking, a foreign currency.
Unfavourable interpretation of the tax authorities...
However, the tax authorities maintain that exemptions provided for specific financial transactions cannot apply to transactions involving bitcoins. In their opinion an economic operator performing transactions involving bitcoins may not take advantage of:

• exemption regarding transactions, including negotiation, concerning deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments (Article 135(1)(d) of Directive 2006/112),
• exemption regarding transactions, including negotiation, concerning currency, bank notes and coins used as legal tender (Article 135(1)(e) of Directive 2006/112),
• exemption regarding transactions, including negotiation but not management or safekeeping, in shares, interests in companies or associations, debentures and other securities (Article 135(1)(f) of Directive 2006/112).

The representatives of the fiscal authorities maintain that bitcoin is not very different from real goods, and so the 23 per cent rate should be applied to its nominal value, i.e. the purchase price of bitcoin should include the VAT and a transaction involving exchange of bitcoin for goods should be taxed at both ends.
...is not necessarily correct.
As it turns out, this position may be incorrect. The final judgement is to be passed on this quire soon by the European Court of Justice in a case pertaining to Mr Hedqvist, a Swedish national, who intended to buy and sell bitcoins using an Internet platform. The Swedish tax authorities adopted a position similar to the one taken by the Polish authorities and refused to treat an exchange of SEK into bitcoins as a financial transaction exempted from the VAT. A prejudicial question in this case has been submitted to the European Court of Justice and at present Julianne Kokott, Advocate General, has presented her position. In her view by determining the tax regime of bitcoins it is necessary to take into account their basic function, i.e. that of a means of payment. In the opinion of the Advocate General bitcoins are not used for purposes other than amortisation of obligations. Therefore, the principle of neutrality requires that they should be treated like other means of payment, regardless of whether they are a legal tender or just an actual means of payment (see opinion point 15) According to the Advocate General, this position is consistent with the current case-law pertaining to vouchers and the right to promotion points exchangeable for goods and services.
Bitcoins should be treated like other currencies.
Having regard to the current knowledge regarding the method and purpose of issuing bitcoins, classifying them as means of payment seems a rational solution. Consequently, it is justified to treat bitcoins like other currencies, apply the exemptions provided for financial transactions and determine turnover only on their exchange. However, we cannot rule out a possibility of the European Court of Justice having a different opinion in this matter. Ultimately, it may be in the interest of individual Member States to reduce the interest in this unofficial currency and maintain supervision over the circulation of bitcoins, albeit indirectly, in the form of the need to register and tax such transactions.
The payment function of the quasi-currency is most important.
Analysing earlier case-law of the European Court of Justice, including the judgement passed in case C-172/96 First National Bank of Chicago, the Advocate General reminded that a transfer of the right to dispose of means of payment may not in itself constitute a service subject to the VAT. Such taxable service may only be an exchange of means of payment, and the resulting turnover is the difference between their purchase and sale price. Since bitcoins have only payment functions, they should be treated like other means of payment. Therefore the judgement in case C-172/96 must apply to them directly. Consequently, any potential tax cannot be imposed on the price of bitcoin, but on the turnover generated as a result of transactions involving purchase and sale of this currency.
Referring to the possibility of applying individual exemptions from the VAT to such services, the Advocate General excluded the application of the exemption pertaining to securities, since neither the exchanged currency, nor bitcoin constitutes them. She also considered incorrect classifying the trade in bitcoins as services pertaining to payments and transfers, since the object of currency exchange is not a cash or cashless transfer of funds to the recipient. Also a transaction involving other “disposable financial instruments” cannot be classified as exchange since by nature it concerns means of payment, and not the instruments pertaining to them, while only the exemption provided in Article 135(1)(e) of Directive 2006/112 may apply to means of payment.
In the opinion of the Advocate General this latter exemption is the only one which could apply to transactions involving exchange of bitcoins, and its application is justified. The Advocate General observed that the purpose of this exemption is to reduce the costs of exchange and support free movement of capital. Therefore, it applies to exchanges of a currency for another one (if a consideration has been envisaged for this), and not to an exchange of a tender for goods or services. Since an exemption applies to a “transaction”, such exchange should lead to the creation, modification or amortisation of a right or obligation pertaining to a given currency, bank note or coin.
What is more, according to the regulations, the service is to be connected with means of payment. Therefore, it should involve making them available in a cash or cashless form (although in the case of cashless means of payment the exemption pertaining to payment transactions using electronic money is more fitting).
The provision refers to transactions concerning currency, bank notes and coins used as legal tender”, but in the opinion of the Advocate General it is unclear whether both parties to the same transaction must operate legal tenders (e.g. exchange of PLN into EUR), or whether an exchange of a legal tender into a means of payment which does not have this status (e.g. Exchange of PLN into bitcoins) would suffice. For this reason, in the opinion of the Advocate General, bearing in mind the earlier case-law of the ECJ, including case C-461/12 Granton Advertising, and the ratio legis of the regulation discussed here, the exemption should also apply to an exchange transaction where only one means of payment has been officially recognised, if the other one (“utility”) has only a payment function (i.e. does not constitute goods and is not used for consumption, like other virtual objects won in games) and is accepted as a means of payment in the trade. Such exchange of means of payment will create rights and obligations pertaining to means of payment, i.e. will meet the assumptions of the regulation discussed here.
According to the position taken by the Advocate General, exempting bitcoins exchange from the VAT will ensure coherence with other regulations and compliance with the principle of neutrality. Any treatment of exchanging legal tender into bitcoins to the contrary would require demonstrating a material difference between such transaction and typical currency exchange. The Advocate General was unable to observe any such difference.