The European Court of Justice has very recently ruled that “Bitcoin” has to be treated on par with traditional currencies for the purposes of exemptions enjoyed by transactions involving traditional money or currency under the European VAT laws.
[See Skatteverket v. David Hedqvist (Judgment dated 22nd October, 2015 in Case C-264/14)]. That judgment effectively silences a long debate throughout the European Union on the subject and brings some much-needed clarity.
A word about Bitcoin: Bitcoin is an unregulated virtual currency, which is used for payments between individuals who are willing to use it as a means of payment. Bitcoin is properly described as an “Internet phenomenon” with no single issuer and no Central Bank or Government or inter-Government organisation issues or controls it.
Half-way accross the world, the Internal Revenue Service of the United States has characterised Bitcoin as “property”. It is submitted that there is nothing new in this: the common law has always recognised all sorts of money – rather all sorts of things – as “property”. The Internal Revenue Service however did not go so far as to describe Bitcoin as “money” itself.
On the other hand, the American Courts do not seem to have made up their minds on what is the real nature of Bitcoin. Caselaw relating to Bitcoin is still sparse and the authors were not able to lay their hands on any judgments apart from those of the Trial Courts in the US discussing whether Bitcoin is money or not.
In United States v. Ulbricht [31 F. Supp. 3d 540], the defendant was charged with the offence of money-laundering. The defendant then relied on the IRS Notice to argue that since Bitcoin is merely property and not “currency” (which forms the basis of the money-laundering offence) he could not be called upon to answer that statute. The Federal District Court, SD New York noted that the money-laundering statute used the word “funds” and not “money”. Noting the close relationship between the words “funds” and “money”, the Court finally concluded that the sole reason for the existence of Bitcoin is to “pay for things” and that “it is digital and has no earthly form; it cannot be put on a shelf and looked at or collected in a nice display case”. The Court finally held that one can launder money using Bitcoin.
The Federal District Court for Texas went one step further and characterised Bitcoin as a “currency or a form of money” and investment in Bitcoin as “investment in money”
[Securities and Exchange Commission v. Shavers Fed. Sec. L. Rep. P.97, 596]. The Federal District Court, S.D. New York which avoided ruling outright that Bitcoin is money, subsequently recognised the principle by relying on the Shavers case.
In the Indian context, particularly in the indirect taxes, the question of whether Bitcoin is money or not will come up under the Sales Tax law as well as the Service Tax law. Section 2(7) of the The Sale of Goods Act, 1930 excludes “money” from the definition of “goods”. However, the term “money” itself is not defined. Darling J gives the most classic definition of “money” in Moss v. Hancock [(1889) 2 QB 111] :
“Money as currency, and not as medals, seems to me to have been well-defined by Mr. Walker in “Money, Trade and Industry” as “that which passess freely from hand-to-hand throughout the community in final discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts and full payment for commodities, being accepted equally without reference to the character or credit of the person who offers it and without the intention of the person who receives it to consume it or apply it to any other use than in turn to tender it to others in discharge of debts or payment for commodities.”
The Service Tax law defines “money”. However, it lays some stress on legal tender and other enumerated forms of instruments which Parliament considers as “money” for the purposes of the Service tax law. The definition ends with an “any other instrument” clause. The authors submit that it may be possible to include Bitcoin in this part of the definition. The Tax authorities will however contest this classification tooth and nail, and hence clarity from the Legislature or the Executive is required.
To conclude, while the world marches towards clarifying rules for the taxation of Bitcoin, India remains hopelessly behind. Canada and Australia have also issued guidelines on the taxation of Bitcoin. We hope that both the State and the Central Governments issue appropriate guidelines to clarify the rules for taxation of this new kind of currency.