Switzerland: Federal Administrative Court rules on VAT treatment of block rewards
There is a positive side to the rainy last weekend in Zurich. I was able to dive into a recent ruling of the Federal Administrative Court (Bundesverwaltungsgericht) published on 29 August 2023 (A-5638/2022). Let me share below my key take-aways.
The case involved an appeal filed by a taxpayer who runs certain validator operations on PoS networks such as Polkadot and Kusama. These validator operations are compensated in both block rewards originating from newly minted tokens as well as transaction fees paid by the sender of the transactions.
In a tax assessment shared by the Swiss Federal Tax Administration (SFTA) in 2022, the taxpayer’s income from staking operations on these blockchain networks has been reassessed and all rewards generated from these activities have been subjected to Swiss VAT following the categorization as considerations paid for electronic services. The tax assessment explicitly accounted for both transaction fees as well as block rewards obtained by the taxpayer under the assumption of a single supply of services to the sender of a transaction on the specific network.
The taxpayer appealed this assessment by outlining the separate nature of the transaction settlement as well as the validation and verification services for the overall benefit of the blockchain network at hand. Thus, the VAT assessment must follow suite this separation and only transaction fees should qualify as a consideration for an electronic service whereas the block rewards should classify as no supply for VAT purposes in absence of an identifiable service recipient (which is the case for a decentralised blockchain network).
The Federal Administrative Court considered the submitted perspectives and ruled as follows:
There is no single supply of services in place in the case at hand as there is sufficient proof that there are blocks generated on the blockchain networks which do not contain any transaction(s) (i.e. empty blocks). Furthermore, in order to aggregate different supplies of services to a single one, a service provider needs to provide these services to the same recipient(s). That being said, whereas the transaction settlement is done for the benefit of an individual transaction sender, the validation and verification of blocks is done for the overall benefit of a blockchain network (which is usually considered not being an identifiable counterparty).
The SFTA’s argument that such block validation and verification services are ultimately provided for the protocol wrapper (e.g. foundation, association) does only hold true as long as such entity truly disposes of an actual power of disposition over the blockchain network. If this is the case, one might argue that the provision of validation and verification services are indeed for an identifiable party, i.e. the protocol wrapper, and in turn potentially subject to Swiss VAT as the blockchain network is not sufficiently decentralized.
The Federal Administrative Court handed back the question to the lower court to define how such sufficient decentralization is defined and assessed. I personally expect that eventually the SFTA will update this term in its public VAT information.
So, if you are a Swiss based taxpayer operating such validator operations in blockchain networks which are compensated in both block rewards and transaction fees, it might be worth to assess your past and current / future Swiss VAT position in light of these implications. This also extends to the consideration of the separate reporting of block rewards and transaction fees which might come with technical data gathering challenges depending on the particular type of blockchain network.
#crypto #web3 #VAT #taxes #Switzerland