VAT Views: Initial Coin Offerings Need Clarity from EU

Bitcoin is not the only type of cryptocurrency attracting the attention of businesses and investors. New forms of cryptocurrency, also known as “tokens,” are being sold – for other cryptocurrencies or traditional legal currency – as an innovative way to raise capital to finance projects via initial coin offerings (ICOs), or “token sales.” ICOs now need more attention, in the form of greater clarity, from regulators. To date, no official statements have been issued on the value added tax (VAT) implications of token sales in the European Union (EU).

In contrast to crypto coins like Bitcoin, which are designed to serve as a means of payment, tokens are used as a means of investment. They can be equipped with multiple functionalities: utility tokens can be exchanged for future products of the company issuing the tokens, whereas security (investment) tokens are similar to shares and debt instruments as they entitle their holders to fixed or variable payments. The differences between coins and tokens imply that the case law and guidance documents addressing coins are of limited or no application when it comes to tokens.

Under the EU VAT rules, all supplies of goods and services by an entrepreneur for consideration attract VAT unless a specific exemption applies. Therefore, it needs to be investigated as to whether:

1. The initial sale of tokens (ICO); and
2. Subsequent sales of tokens on secondary markets may have VAT implications.

According to established case law, the issuance of shares and debt instruments falls outside the scope of VAT. If tokens are considered similar instruments to shares and debt instruments, an ICO may be treated in the same way as a share or debt issue. As traditional means of financing are outside the scope of VAT, it would seem discriminatory if an alternative way of financing, such as an ICO, was subject to VAT. However, the initial sale of utility tokens (which do not resemble traditional securities) is within the scope of VAT.

Sales of tokens on secondary markets are subject to VAT unless a specific exemption applies. The EU VAT law exempts transactions involving shares, debentures and other securities. Investment tokens could benefit from this exemption as they are comparable in nature to shares and debt instruments. For utility tokens, the special VAT rules for vouchers could apply (utility tokens seem to resemble vouchers in that they can be redeemed for goods or services). The VAT treatment of vouchers is complex and depends on whether a voucher is a single- or multi-purpose one. A transfer of a single-purpose voucher is treated as a supply of goods or services to which the voucher relates, and VAT should be accounted for accordingly. Multi-purpose vouchers are only subject to VAT when the voucher is redeemed (i.e., no VAT is due when the voucher is transferred through the supply chain).

The VAT treatment of token sales depends on the properties of the tokens in question. As such, companies considering conducting an ICO should conduct a case-by case examination of the token characteristics to determine the potentially complex VAT consequences of token sales.