The decision turned on whether bitcoins are to be considered a form of currency, but did not address whether they are legal tender.
The Court of Justice of the EU had been asked by the Swedish Supreme Administrative Court to interpret the 2006 EU directive on a common VAT system as it applies to the operation of a bitcoin exchange.
Would-be bitcoin operator David Hedqvist and the Swedish tax authority, Skatteverket, had asked the administrative court whether Hedqvist would have to charge his clients VAT when exchanging bitcoins for Swedish kronor.
The 2006 directive says that VAT must be levied on the sale of goods or services, but makes a number of exceptions.
The Swedish court asked the CJEU to rule whether the exchanging of bitcoins for traditional currencies in return for a margin or commission constituted the sale of a service, and if so, whether that service benefited from one of the exceptions in Article 135(1) of the directive.
The exchange of bitcoins cannot be considered the sale of goods, the CJEU said, as bitcoins are not tangible property, having no purpose other than to be a means of payment. But exchanging them for conventional currency at a higher price than had been paid to obtain them is indeed the supply of a service within the meaning of the directive, as the exchange receives a consideration -- the margin or commission -- that is directly linked to the performance of the service, the provision of the bitcoins.
That being so, the court then examined whether any of three exceptions relating to the provision of financial services could be applied to the operation of a bitcoin exchange.
Its task was made difficult by the different ways in which EU member states had translated the directive into national law. Germany, for instance, had used a term for "currencies" that meant only foreign currencies, and not its own, while other countries referred variously to currencies in the singular and the plural, further changing the meaning if one were to interpret the laws strictly.
However, the court said, it was obliged to consider the purpose of the directive, rather than the precise wording of national laws, since the directive's goal was to harmonise the treatment of goods and services for the purposes of VAT across the EU.
Bitcoins are to be treated like money itself, because they can be directly exchanged, the court said. As a result, it concluded, bitcoin exchanges cannot benefit from the VAT exemption in Article 135(1)d for transactions involving "deposit and current accounts, payments, transfers, debts, cheques and other negotiable instruments" because they are instruments that operate as a means of transferring money, and not money itself.
The Article 135(1)f exemption doesn't apply either, the court said, because bitcoins are not "shares, interests in companies or associations, debentures and other securities."
However, Hedqvist struck virtual gold with Article 135(1)e, source of the court's linguistic dilemma. The English version holds that transactions involving "currency [and] bank notes and coins used as legal tender" are exempt.
The court held this to mean that currency is exempt whether or not it is legal tender, as "to interpret that provision as including only transactions involving traditional currencies would deprive it of part of its effect."
As a result, the CJEU ruled Thursday, bitcoin exchanges based in the EU need not charge VAT on the margins they make or commissions they charge when swapping bitcoin for traditional currencies, making doing business in bitcoin that little bit cheaper.