Key takeaways
- In the UAE, VAT applies to goods and services exchanged for cryptocurrency, treating these transactions as barter.
- Businesses accepting cryptocurrency must calculate VAT based on the fiat value (in AED) at the time of the transaction.
- Commercial mining and cryptocurrency wallet services are generally subject to VAT. For personal mining, VAT applies if the activity reaches a commercial scale, and businesses providing exchange or wallet services must charge VAT on service-related fees.
- Certain activities, such as crypto-to-crypto transfers and personal cryptocurrency mining for non-business purposes, are exempt from VAT in the UAE.
VAT (value-added tax) is a consumption tax levied on the supply of goods and services at each stage of production or distribution, where value is added.
In the United Arab Emirates, VAT was introduced on Jan. 1, 2018, at a standard rate of 5%. This move was part of the government’s strategy to diversify the economy and reduce its dependence on oil revenues. By introducing VAT, the UAE aimed to create a more stable revenue stream to fund essential public services, such as healthcare, infrastructure and education.
Businesses that meet the mandatory registration threshold are required to register for VAT, charge it on their sales, and reclaim VAT on their business-related purchases, ensuring that only the end-consumer bears the full tax burden.
VAT applies broadly across most sectors in the UAE, covering everything from physical goods to services, and since its introduction, the scope has expanded to include digital goods and services. This means that industries such as e-commerce, digital subscriptions and streaming services are subject to VAT.
With the rise of digital assets like cryptocurrencies, the tax framework has had to adapt to account for their unique properties, particularly following the updates released by the UAE’s Federal Tax Authority (FTA) on Oct. 2.
Did you know? VAT was first introduced in France in 1954 by a French economist named Maurice Lauré. Initially applied to large businesses, VAT quickly became a key revenue tool for governments around the world due to its efficiency in collecting taxes across all stages of production and distribution.
Here’s a brief overview of what's taxable and exempt under the latest VAT law updates:
Now, let’s delve into more details.
How does VAT in UAE work for cryptocurrency transactions?
When it comes to buying, selling and trading cryptocurrencies, VAT in the UAE applies when businesses provide goods or services in exchange for cryptocurrency. In such cases, the transaction is treated as a barter, where the cryptocurrency is considered the equivalent of money used to purchase goods or services. However, there are a few complicating factors:
- The fluctuating value of cryptocurrencies can complicate the accurate calculation of VAT.
- The decentralized nature of cryptocurrencies, being traded without a central authority, causes difficulties in tracking transactions and determining the applicable VAT at each stage.
- The volatile nature of cryptocurrencies can lead to complications in valuing transactions since VAT is calculated as a percentage of the transaction value. In short, fluctuations in cryptocurrency prices can affect the taxable amount.
- It’s also important to note that certain transactions, particularly crypto-to-crypto transfers, are typically exempt from VAT in the UAE. This exemption is intended to foster innovation to an extent. As such, transfers between cryptocurrencies — like converting Bitcoin (BTC) to Ether (ETH) — are not considered taxable events, as there is no exchange of goods or services.
VAT implications for businesses using or accepting cryptocurrency
For businesses that accept cryptocurrency as a form of payment, VAT compliance works similarly to traditional transactions.
Indeed, when a business accepts crypto as payment for goods or services, it must still account for VAT on the value of the transaction in fiat currency (UAE dirham) at the time of sale. The business must calculate VAT based on the market value of the cryptocurrency at the moment the transaction occurs.
Invoicing for transactions where cryptocurrency is accepted requires merchants to include both the value of the cryptocurrency in AED and the VAT applied. This can add a layer of complexity to the reporting process, especially when dealing with volatile cryptocurrencies.
Businesses must track the market value of the cryptocurrency at the point of sale to ensure accurate VAT calculation. Failure to properly report and pay VAT on crypto transactions could lead to penalties or noncompliance issues.
VAT on mining, wallet services and exchanges
In the UAE, the VAT treatment of crypto-related activities, including mining, wallet services and exchanges, varies based on the nature of the services provided and whether they are for personal or commercial purposes.
Commercial mining and VAT
For commercial mining operations, where mining is conducted as a business activity, VAT is generally applicable. This means that if a business mines cryptocurrencies with the intention of selling them, the sale would be treated similarly to other taxable supplies.
The company would need to account for VAT on the value of the mined cryptocurrency at the time of sale. However, the VAT treatment may depend on whether the activity is classified as a service (such as providing mining capacity) or the creation of a product — i.e., the cryptocurrency itself.
Personal mining and VAT
For individuals mining cryptocurrencies for personal use or investment, VAT may not apply if the mining is considered a non-business activity.
However, when mining is done at a scale large enough to be seen as commercial, VAT obligations come into play. In such cases, miners are required to register and report VAT on their activities, following the standard procedures outlined by the UAE’s FTA.
VAT on wallet services and crypto exchanges
Businesses providing cryptocurrency wallet services or running exchanges are also subject to VAT in the UAE. These services, which include transfers, custody and exchange operations, are treated as taxable supplies, meaning that the businesses must charge VAT on the fees they collect for these services.
This VAT applies to both transaction fees and service-related charges, ensuring that wallet and exchange services fall under the country’s general VAT rules.
VAT implications for staking and other forms of crypto passive income
Staking rewards and other forms of passive income in the crypto space — such as yield farming or lending protocols — can have specific VAT implications.
If staking is considered a service provided to a blockchain network, the rewards received could be subject to VAT. Similarly, for businesses or individuals staking cryptocurrencies as part of a commercial operation, VAT may be charged on the value of the rewards earned.
In contrast, if staking is done on a personal basis with no regular business activity, it may fall outside the scope of VAT.
It’s essential to distinguish between passive income generated as part of a business (which would be taxable) and personal investments (which may not be).
For example, if a business provides staking services for customers or generates significant income from yield farming, VAT would apply. However, small-scale personal staking for hobby purposes might not trigger VAT obligations.
Did you know? In decentralized finance (DeFi) staking, participants can earn passive income by locking up their cryptocurrencies to support blockchain operations. The average annual yield on DeFi staking can range from 5% to 15%, depending on the platform and the specific cryptocurrency being staked.
Treatment of initial coin offerings (ICOs) and token issuance under VAT
In the context of an initial coin offering (ICO), VAT implications arise when tokens are sold in exchange for fiat or other cryptocurrencies. If the tokens represent a right to future goods or services, the sale could be subject to VAT, similar to pre-sales or vouchers. VAT would apply at the point when the goods or services are eventually delivered.
Importantly, funds raised during an ICO are generally not considered taxable until the tokens are used to access goods or services. However, the treatment may vary depending on whether the tokens are purely utility tokens, security tokens or payment tokens.
Of course, utility tokens, which grant access to future services, are more likely to trigger VAT once the promised services are provided. Security tokens, on the other hand, may be exempt depending on how they are classified under local regulations.
Did you know? The UAE’s favorable tax environment, combined with progressive crypto regulations, makes it one of the most attractive locations for crypto startups. This environment includes dedicated free zones like DMCC and ADGM, offering flexible business setups and access to global investors.
The future of VAT law in the UAE
The most notable upcoming change is the VAT exemption for the transfer and conversion of virtual assets, which comes into effect on Nov. 15, 2024, with retroactive applicability to Jan. 1, 2018. This major update, part of Cabinet Decision No. 100 of 2024, eliminates the 5% VAT on most crypto-related transactions.
The retroactive nature of these amendments, to clarify, provides clarity for businesses that were previously unsure of their VAT obligations concerning virtual assets. With this, companies will likely review their historical VAT filings and make necessary adjustments to comply with the new regulations.
As Dubai continues to attract major players in the cryptocurrency market, these VAT reforms will likely encourage further investment, especially in sectors such as decentralized finance (DeFi) and non-fungible tokens (NFTs).
In the future, you could anticipate that the UAE’s VAT laws will continue evolving in line with international standards, particularly as cryptocurrency adoption grows and new forms of digital assets emerge.
Written by Bradley Peak