Norway Rejects Bitcoin As Currency; Taxes As Asset, Instead

An anonymous reader writes "Norway is the latest country to consider the legal implications of cryptocurrencies like Bitcoin. Norway's director general of taxation has come out and said '[Bitcoin] doesn't fall under the usual definition of money,' which means that it will be considered as assets and charged under capital gains laws. This sentiment was echoed last week by the European banking authority as well, where citizens were warned of using the cyrptocurrency."

Comments

How is Norway going to know?

[FlyHelicopters]

If someone makes a bunch of profit on Bitcoins, how is Norway going to know if the person doesn't self report?

Also, how are capital gains taxed there? In the US, capital gains are taxed at a lower rate than most normal income, so if the choice is between normal income and capital gains, I'll take the latter every time (since I'm in the US).

Re: How is Norway going to know?

[therealkevinkretz]

In the US, To be taxed at the lower rate, it must be classified as "long-term" - I.e. the asset must be held for at least a year before it's sold. Other (short-term) gains are taxed at the same rate as income.

Re:How is Norway going to know?

[cdrnet]

Does it need to? It seems tax systems based on self-reporting and trust can work quite well (provided the taxes are reasonably low and people have a say in how the money is spent, as it should be in any democracy). For example, tax fraud is assumed to be low in Switzerland compared to its neighbor states despite the government having no way to know whether people self-report correctly.

Re:How is Norway going to know?

[bentcd]

If someone makes a bunch of profit on Bitcoins, how is Norway going to know if the person doesn't self report?

They won't, but if they later find out they'll nail you to the wall.

As an immediate concern, if you're making lots of bitcoins then there's not really that much to spend them on directly and so you'll want to convert them into national currency. At this point the tax man may notice and start asking questions.

When the time comes that you can easily buy a Ferrari for bitcoins they will also have a chance of noticing, and will ask you how you could afford that Ferrari.

If you go to any length to avoid the tax man noticing any of those two scenarios, you're probably guilty of some shade of money laundering which will get you nailed that much harder if they do discover you.

Also, how are capital gains taxed there? In the US, capital gains are taxed at a lower rate than most normal income, so if the choice is between normal income and capital gains, I'll take the latter every time (since I'm in the US).

I think it's much the same thing here. Capital gains is 28% or thereabouts, whereas income tax is progressive from 28% up to 50%, -ish. There may be important nuances I am omitting, being a wage slave rather than a tycoon.

Re:How is Norway going to know?

[Anonymous Coward]

tax fraud is assumed to be low in Switzerland compared to its neighbor states

Of course it is. Everything that's considered "tax fraud" in the rest of the world is considered a "business opportunity" in Switzerland.

Re:How is Norway going to know?

[PolygamousRanchKid]

For example, tax fraud is assumed to be low in Switzerland compared to its neighbor states.

Tax fraud committed by Swiss citizens may be low . . . but tax fraud committed by citizens of its neighbor states in Switzerland is very high.

Re:How is Norway going to know?

[mysidia]

How or why would they ever know I bought a Ferrari? Are such purchases reportable in Norway? (they aren't in the US)

If you pay cash, or other currency; the dealer is required to file a CTR to report the Large cash transaction.

If you trade something for the ferrari, the dealer had to fill out a 1099B. If you take out a loan or pay by check, your banks will record a transaction.

Large transactions in or out of your bank account are covertly reportable in the US behind your back -- your bank is required to report due to the Bank Secrecy Act and forbidden from informing you that they have reported.

If you bring $100,000 into your bank account, or take out a loan for $250k on a car, or you engage in new unusual spending habits, the tax authorities definitely will almost certainly be made aware that you did that.

Re: How is Norway going to know?

[alexander_686]

To follow up, and make the point even more explicitly, the same logic holds for foreign currency. if I hold Euros for more than a year and the Euro gets strong, I have to pay cap gains on that profit.

Re:How is Norway going to know?

[bentcd]

How or why would they ever know I bought a Ferrari? Are such purchases reportable in Norway? (they aren't in the US)

It would need to be reported one way or the other. The easiest way to try to get around it is possibly not to register it but then you won't have a number plate (unless you fake one) and so couldn't use it on public roads. Maybe you could drive it on foreign plates and hope no one notices/cares that you've been doing so for far too long. You'd still be required to list it as wealth but if you choose not to there may not be any obvious ways for the tax man to find out on his own.

What will happen from time to time though is that someone you pissed off at some point reports you and then you may be in trouble again.

You're right, if they do catch you cheating, the penalties are harsh... the question to ask is, what are the odds of being caught?

If you want to drive the car on public roads it's probably very difficult to avoid registering it. Cheating one's way around this is probably possible but if you ever have an accident or otherwise end up in the spotlight it's game over.

Re:How is Norway going to know?

[oobayly]

Mod comment:
Interesting: For some that may not know about the Swiss banking system
Overrated: For those that do know about the Swiss banking system
Insightful: Well, it's true
Funny: Made fun of the Swiss - always good
Troll: Winding them up about their dodgy banking system

Re:How is Norway going to know?

[Vintermann]

How or why would they ever know I bought a Ferrari? Are such purchases reportable in Norway? (they aren't in the US)

You're not in Kansas anymore, friend! Not only is the Ferrari dealership (I think there is a single one) obliged to report purchases over a certain amount, but how much you're taxed is a matter of public record. They used to print them in the newspaper, even, though there's slightly more restrictions on them these days. Want to know how much I made in 2009? be my guest! (Spoiler alert: I'm not rich :P)

So when your neighbors see you driving a Ferrari, jealousy and/or civic duty might compel them to check the tax records, and if you're listed with zero in income and assets, the tax authorities might get a tip.

Re:How is Norway going to know?

[Captain Hook]

Look for people with a Rolls Royce registered who also claim to earn little money? Then what? Perhaps it was a gift from family, perhaps it was purchased with savings.

The point is, an automated database query is cheap and gives a shorter list of people to investigate compared to everyone in the tax durisdiction.

If you have a car whose purchase price is $40000 and you withdraw $30000-35000 from savings in the months before I think the database query could reasonably file you under the low priority investigation list. If you have a car whose purchase price is $40000 and no transactions which match up with it, then you get filed under the medium priority investigation list.

And if you have multiple houses and no income or savings to account for the purchase costs then you get filed under high priority and a human taxman will start an investigation.

You use the cheapest method available to create ever shorter lists of people with anomalies to pass to the next, slightly more expensive filter.

Re:How is Norway going to know?

[fnj]

e.g. if one day your undisclosed profits amount to something significant and you have a more lavish lifestyle, more expensive house and car than explainable by your tax filings the Tax Dept may require you to prove yourself innocent or get in big trouble.

Maybe I should stop complaining about the US government, maybe it isn't so bad if such nonsense happens in Europe.

How I live is none of the government's business, unless they have cause to investigate, most private financial transactions are out of reach of the IRS.

The only real exception would be the NSA looking for national security reasons, but frankly the NSA doesn't care about tax cheats, they are concerned with terrorism. Since I have zero intention of ever being a terrorist, I'm not really worried about the NSA.

Why do you evidently believe the circumstances are any different whatsoever in the US? It's the same with the IRS. They can suspect via exactly the same kind of observations that you are living beyond your means, they can audit you for that, and in that audit you will have to account for how you acquired your extravagant toys. Otherwise it's going to be a charge of tax evasion and that can be sustained in court through simply making a convincing case against you which you fail to take part. How do you think they nailed Alphonse Capone?

Yes, you are innocent until proved guilty, but that proof of guilt doesn't have to be mathematically perfect. Innocent people are locked up pending trial all the time. Not all of them can make bail. Then they might be freed by winning at the trial, or they might not. Innocent people are convicted at trial and locked up all the time. We might like to think that things have improved since Hitchcock's The Wrong Man , and they may have (or maybe not), but the same type of thing still happens. It is certain that if you are actually guilty, you have even a lot better chance of being convicted.

Re: How is Norway going to know?

[K. S. Kyosuke]

In case of bitcoins, does that mean that you have to track them individually to keep yourself informed for how long you had each one of them?

Re: How is Norway going to know?

[Rich0]

In the US, To be taxed at the lower rate, it must be classified as "long-term" - I.e. the asset must be held for at least a year before it's sold. Other (short-term) gains are taxed at the same rate as income.

Isn't capital gains tax charged on the appreciation of an asset from the moment you acquire it to the moment you sell it?

If you mine a bitcoin and sell it immediately, then the capital gain on it would be zero. You would only have a gain if you bought the bitcoins from somebody else. That is of course how many bitcoins are acquired.

Re: How is Norway going to know?

[aliquis]

I don't see why, average price per share is good enough for stocks and would be good enough for bitcoins.

Keep track of all your purchases and you know what you've paid for them, then inform the right authorities about any sales (of coins, a.k.a. also purchases of other things using them) giving the numbers sold, at what exchange rate and your average price paid for the ones you hold.

Which of course will get pretty tricky if you buy an item which have no value set in NOK, USD, Euro or such.

Re: How is Norway going to know?

[locofungus]

I don't know about Norway's rules but in the UK, yes.

In the UK capital gains are calculated on a last in first out basis where the asset is fungible - shares, gold things like that.

However, I'm not sure exactly how it would work for an asset like bitcoin that you had mined. In theory the electricity costs should be offsetable when you cash in. When you're just buying and selling it would work like any other share or gold.

Anyone doing serious bitcoin mining now (where electricity costs are going to be a substantial fraction of any notional gain) would be strongly advised to get professional advice - it might make sense to setup a company for the mining.

Re: How is Norway going to know?

[alexander_686]

Cap gains start when your purchase something, not when you manufacture it. Normally - there are exceptions. However, if you sell it under 1 year you pay taxes as if it were "ordinary" income.

And yes, if you mined and sold it immediately, your cap gains would be zero. However, you would have generated income and would have to pay taxes on that. Think of it as manufacturing.

Re:How is Norway going to know?

[alexander_686]

As tax systems go, the US requires one of the highest levels of self-reporting. Think small business and all of those deductions.

I am not saying a lot of information is not reported - just the ratio.

Re:How is Norway going to know?

[Anonymous Coward]

Everything that's considered "tax fraud" in the rest of the world *was* considered a "business opportunity" *by certain Swiss banks*.

FTFY

As a Swiss citizen I'd like to point out that many (if not most) Swiss people don't agree with those business practices and are fed up with the bad reputation it has earned all of us. Much like not all Americans agree with US foreign policy (i.e. dropping bombs on innocent people)

Re: How is Norway going to know?

[JoeMerchant]

I don't see why Bitcoin couldn't be treated exactly like gold for purposes of taxation?

If you earn it by "mining" that's pure income, and if you trade it, then you've got capital gain/loss.

Re: How is Norway going to know?

[AcidPenguin9873]

The parent is referring to cost basis analysis for equities. There are several ways. Tracking individual stocks is one option but tedious. See the wikipedia article for details on the other methods: http://en.wikipedia.org/wiki/Cost_basis

Re:How is Norway going to know?

[Chrisq]

Mod comment:

Interesting: For some that may not know about the Swiss banking system
Overrated: For those that do know about the Swiss banking system
Insightful: Well, it's true
Funny: Made fun of the Swiss - always good
Troll: Winding them up about their dodgy banking system

Underrated: Anything that could be put in so many categories must be worth more than that!

Re:How is Norway going to know?

[Chrisq]

Much like not all Americans agree with US foreign policy (i.e. dropping bombs on innocent people)

just to be a pedant that's an implementation detail, not policy,

Re: How is Norway going to know?

[alexander_686]

o.k. – but what is your point? What are you trying to say? You can hedge away most of that risk in real life.

Inflation steals value from past hard work. Deflation steals value from future work. And you can’t have zero inflation.

As you point out, the higher the inflation rate the higher the effective capital gains tax is. Right now in the US, the cap gain rate is lower than the ordinary income rate, so it takes 5 to 10 years for the 2 tax rates to become equivalent.

What would you suggest? And why would you favor one group and income type over another? Index Capital Gains to CPI? That is a idea I might favor – it would treat all income types on a more equal basis but it would make bookkeeping more complex.

Re:How is Norway going to know?

[Actually, I do RTFA]

It seems tax systems based on self-reporting and trust can work quite well

History begs to differ. Look at the introduction of withholding tax in the US, done during WWII. I mean, people were all about buying war bonds, rationing, etc. Yet it increased revenues.

Dishonesty is only one obstacle. Another is planning: Remembering to set aside enough money each year to pay your taxes. It's been shown that not having the cash to pay leads to not/illegitimately filing to avoid embarrassment, which in turn is a cycle that removes honest taxpayers.

tax fraud is assumed to be low in Switzerland compared to its neighbor states despite the government having no way to know whether people self-report correctly.

Isn't that like assuming that no one is speeding on an isolated stretch of road where the cops never set up speed traps (and it's known). That is, totally indeterminate?

Re:How is Norway going to know?

[Hognoxious]

Yeah, it can't possibly work. That's why the Italian equivalent of the IRS didn't do a swoop at some fancy ski resort a few months back and even if they had they wouldn't have caught anyone.

http://www.bloomberg.com/news/2012-02-08/italy-police-pursue-ferraris-to-nab-tax-evaders.html

Perhaps this, perhaps that. Perhaps you're an imbecile.

taxed as asset?

[gadget junkie]

It's a common error in European fiscal policy that assets can be taxed. In reality only financial savings and income are taxed, and the final percentage applied is variously disguised as "capital gains tax", or other quibbles.
to clarify further: for an asset to be taxed, in my small world of financial analyst, it must either produce a taxable financial income, which is then taxed, or it must be an acceptable mean of exchange with no or negligible frictional costs. Houses are only an indexation parameter in taxes, since no tax authority whatsoever accepts a lien on 10 square feet as payment: they want hard cash. If the owner-occupier of a house had the opportunity or willingness to put the house in a separate company, it would be clearer still: the company would never make one cent, and it would be taxed on a fictional rent, which by itself is part of the owner's income. Therefore, the owner's income is taxed twice.
So, on bitcoins, the problem is magnified: if it is a mean of exchange, like banknotes, by itself it should not be taxed. the relevant transactions could be taxable, but not the means of exchange: after all, if I buy a car by bank draft or money transfer I do not pay either X or Y depending on how I paid. the effort of the authorities is to preserve the monopoly on fiat currency, that's it.

Re:taxed as asset?

[gadget junkie]

Real-estate is already taxed in most places in America. Most European countries also tax cars based on their engine's size.

Same as before:tax authorities do NOT tax the car. they tax the buyer on the transaction, and there's some form of "possession tax". that's not a tax on assets. If it were a tax on the car, a car owned for example by a deceased penniless owner would still pay tax, and above all, it would be economically capable of paying such tax. but it does not: even taxes related on car possession tax the owner, not a car.

Bear in mind that these kind of stamp duties bear no relation of the use of public resources that using a car entails: If I want to tax for that, I'd tax the fuels, and that's exactly what governments do. when they do anything else, like "taxing cars based on engine size", they are simply meddling in people choices unrelated to use of resources and so on. I think that it's "politically convenient" to set up a labor intensive organization to collect and check a taxation which could and is more efficiently collected in another way, and above all it is unrelated to usage, income of the owner, efficiency gains and so on.

The article is a bit flawed

[TyFoN]

What really happened was that the norwegian IRS said that the bitcoin does currently not have any status as a currency in Norway and will be taxed as an asset.

They very clearly state that bitcoins have not been banned as a currency, only that it's status still has to be decided by Finanstilsynet (almost like SEC, but with a broader mandate).

The Norwegian IRS does not have the authority to claim it is a currency or not, only Finanstilsynet. All they do is tax what they see as an asset until Finanstilsynet gives other directions.

Nettvalutaen Bitcoins beskattes
Translated
Quite different heading than the /. heading.
Translated it just means "Bitcoins are to be taxed".

Re:What is the cost basis?

[Chrisq]

So if I am mining bit coin, and it costs me more in electricity than I am getting in return from the bit coin I make, does that mean I get to write off my electric bill?

Or lets say I am making money, is my electric bill the cost basis for the bit coin? But I also needed a computer to mine, can I factor that into the basis?

I don't think they realize there are other legal ways to get bit coin besides buying it. Or perhaps then they just figure the basis is $0 and tax you 100% on the actual value.

If they are treating it as an asset then you would be a manufacturer and presumably would benefit from all the usual tax breaks. Whether this would include making your electric costs tax deductible in Norway I don't know, but it should be the same as if you were manufacturing shoes, ships, or anything else.