With this weeks’ news out of Denmark, European regulators continue to clarify their positions on Bitcoin and other virtual currencies. Two themes are emerging. First, regulators are warning consumers to proceed with caution, given the perceived risks posed by virtual currencies. Second, at least three European countries have now said that virtual currency does not fall within the regulatory definition of currency or money, and that it is instead an asset, meaning that gains from buying and selling virtual currency are taxable.

The current round of European regulatory activity began on Thursday of last week, with the European Banking Authority (EBA) issuing a “Warning to Consumers on Virtual Currencies” to “highlight the possible risks [consumers] may face when buying, holding or trading virtual currencies.” And then yesterday, the Danish Financial Supervisory Authority (FSA) posted a statement supporting and echoing the EBA’s warning.

The Danish FSA also said that Bitcoin and other virtual currencies are not covered under Danish financial regulation and that, for that reason, the FSA had previously found that at least one (unnamed) virtual currency exchange could operate in Denmark without requiring any approval to do so. (This may change. As of today, further news reports out of Denmark have said that the FSA is considering amending its rules to regulate virtual currencies.)

That comment from the Danish FSA about the regulatory status of Bitcoin echoes in part the statement last Friday from Norway’s Director of Taxation as reported by Bloomberg, saying that Bitcoin does not fall within Norway’s definition of money and won’t be a considered a currency. Instead, Norway will treat Bitcoin and other virtual currencies as an asset subject to capital gains taxation. Germany took a similar stance earlier in the year, saying it would treat Bitcoin as “private money” and that gains would be subject to capital gains tax, and sales subject to VAT.

This potential for Bitcoin and other virtual currencies to result in tax liability for consumers who buy or sell virtual currencies was one of the potential risks to consumers flagged by the EBA’s warning on virtual currency. Other concerns expressed by the EBA included:

  • Virtual currency markets and exchanges are not regulated financial institutions that insure against loss.
  • Bitcoin and other virtual currency transactions are irreversible and EU law does not protect the refund rights of consumer who pay with virtual currencies.
  • Virtual currency markets can be highly volatile.

What does all this mean? The warnings about the risks associated with virtual currency are not new. As Bitcoin and other virtual currencies mature, they will have to address those risks.

The apparent trend towards the classification of Bitcoin and other virtual currencies as “non-money” assets subject to taxation, however, may be more significant. In the United States, federal regulators have also taken the view that Bitcoin and similar virtual currencies are not “real currency” in that they are not issued by any national government. But U.S. regulators have not taken the “therefore” step and declared Bitcoin to be an asset or a commodity subject to taxation or another regulatory regime. There may be more U.S. guidance on this point soon, as the Government Accountability Office (GAO) has asked the IRS to look at the issues around taxation of virtual currency transactions.