ICOs are revolutionising traditional fundraising but they are still subject to legal and fiscal insecurity. As the token has no legal qualification, which is required for tax matters, especially for applying VAT, the challenge is to decide whether the tokens are equivalent to cash, securities or the supply of goods or services.
In a decision dated 22 October 2015, the ECJ defined Bitcoin as a means of payment. Exchanging Bitcoin for fiat money may fall within the scope of the VAT exemption set out in Article 135 of the VAT directive 2006/112/EC. Exchanging ICO tokens for other cryptocurrencies or fiduciary currencies could also constitute a VAT exempt operation pursuant to the same directive. Singapore seems to have taken an opposing position, viewing cryptocurrencies and token sales as the provision of a service subject to VAT.
Regarding utility tokens, VAT must be applied. The big question is determining when the VAT related to the economic operation is payable. The answer is quite simple but needs to be decided: at the start or at the end. VAT could be payable when the token is issued, for a value that is determined based on a fiat money, or when the right related to the token is exercised when the token is transformed into the provision of goods or services, whose value will be determined based on a cryptocurrency after possible speculation, which could pose some problems.
The ICO could also generate investment tokens, which would probably be considered as securities. In fact, this is the position adopted by the USA. The qualification as a security was retained by the Securities and Exchange Commission (SEC) on 25 July 2017 as part of the DAO ICO. The SEC based its decision of the definition of securities as per American law, according to the 1933 Securities Act, noting that the tokens in question should be qualified as securities. This position eliminates VAT issues insofar as securities cannot be subject to indirect taxation.
To summarise, the application of VAT to tokens mostly seems to come into effect from the moment they are related to the provision of goods or services. So, determining the VAT status applicable to tokens requires a case-based analysis of their nature.
The global digital currency environment changed in 2017, thanks to Japan and Australia which recognised cryptocurrencies as a legal means of payment whose transactions on the cryptocurrency markets are exempt from indirect taxation. Conversely, Singapore, through the IRAS, seems to be implementing VAT payable when the cryptocurrency is issued or sold. For its part, Israel’s tax authority has suggested subjecting ICOs to VAT, splitting them into two categories: sales transactions and services transactions. The Australian Securities and Investments Commission has a unique approach that appears to be particularly appropriate. It believes that the legal status of ICOs depends on their circumstances, their structure, their operating method, and rights related to the tokens sold. In conclusion, determining the VAT status applicable to tokens requires a case-based analysis of their nature, which seems to be the most effective solution.
