Norway Rejects Bitcoin As Currency; Taxes As Asset, Instead
yro.slashdot.org
yro.slashdot.org
Artificially restricting the use as a currency because it doesn't work as a currency at the moment makes it a self-fulfilling prophecy.
Just imagine how sensible strong internet regulations would have been in 1992
Laws can be changed. If Bitcoin starts acting more like a currency, then the laws can be changed to suit. Right now, it is not very currency-like, and that is unlikely to change very much in the next five years or so, and so treating it as one doesn't make a lot of sense.
It's not quite like anything else, so why pigeonhole it? Call it a "decentralized cryptocurrency" or just "bitcoin" or "a perfect simulation of gold in electronic form"
If you brough gold bars into the country you'd be taxed in the same way.
If a worker on an assembly line in South Carolina makes a window motor for a car, he is paid in USD. But the USD he is paid is not the output of his labor; the output of his labor is a window motor that is eventually put into a car, that some software engineer may drive on his way to work creating other productive (albeit non-physical) things. It's the economic web.
Bitcoin is an economic dead-end. It takes CPU cycles to make a Bitcoin, and those cycles aren't used for anything else. It is an output of production that has no intrinsic value. Well, that's not ENTIRELY true: Bitcoin has had some fleeting value as a loophole that allows the economy to reclaim some dead weight loss from government regulation, but as those loopholes close, the economic value of Bitcoin diminishes.
Bitcoin is different from other stores of value that behave like currencies (such as gold) because it has no use other than as a store of value. Gold has industrial uses due to its physical and chemical properties, and it is desired in the consumer space as a material to make jewelry out of. But Bitcoin is not an input to production: its sole purpose and use is as a store of value. The price of Bitcoin will never stabilize for this reason: even if people decide to stop using gold as a store of value, it will continue to have a price floor based on its industrial and consumer use.
Thus my position that Bitcoin is not truly a currency, and the way it's being traded today is much more akin to something like a junk bond. It is an asset because it is limited by the factors of production: it is the exclusive output of production. Currency is different than an asset specifically because there is a central authority that can issue new currency without increasing production. This is necessary because they issue new currency as a reaction to increased production; not the other way around. Currencies like the USD and EUR are stable because the central banks control the conversion rate of those currencies by manipulating the supply of currency.
I think you're essentially comparing fiat currencies guaranteed by governments with the fixed supply of Bitcoin that isn't guaranteed to be stable.
That doesn't mean it's not a currency, just an unstable one with fixed supply.
You're right that bitcoin completely lacks the properties of gold that give it use outside of being a currency. But is gold's use in electronics really why it became used as a store of value? It has other properties, too: it doesn't corrode, it's quite rare, it can be easily tested for purity. Bitcoin adds to those the ability to be stored on a piece of paper, the ability to be transferred in minutes anywhere, and a difficult-to-obfuscate ledger.
Of course bitcoin loses the price floor granted by its real-world applications, but that doesn't necessarily mean it's as doomed as dogecoin (the world's first internet-meme based cryptocurrency).
The difference between the cost of printing paper money and the cost of Bitcoin mining is that, to the best of our knowledge, paper money cannot be made significantly cheaper. However, electronic payment systems can be made significantly cheaper than the cost of Bitcoin mining. We already know how to do that from a technical point of view. The hurdles tend to be of a regulatory nature.
Those regulations have good reasons to exist, but if Bitcoin becomes sufficiently successful and practical simply as an electronic payment system, one of two things will happen: either, regulation will expand to cover Bitcoin to such an extent that Bitcoin loses advantage, or regulation will be reduced. In any case, there will be a market opportunity for non-Bitcoin systems to provide the same functionality, but cheaper.
This would then lead to Bitcoin's decline.
So if you want to argue that such a decline based on market forces will not happen, you have to have an argument that is not based on Bitcoin simply being an electronic payment system.
It seems very popular to argue that the decentralized nature of Bitcoin is what gives it a sufficient edge, and that the properties arising from its decentralized nature are impossible to replicate at a lower cost.
I'm not sure that I buy the line of argument that the decentralized nature causes a sufficient appeal. The public at large doesn't seem to care too much about that kind of thing.
Obviously, it was sufficient to spark the initial uptake of Bitcoin, which seems to have been driven by a mixture of cypherpunks, Libertarian and Austrian ideologues, and drug traders -- all three are groups that care much more about the properties that come with decentralization than the general public. And that initial spark was enough to attract broader interest, which may even be sufficient to carry Bitcoin over into long-term viability in a number of niches (similar to what happened to gold). So, if you personally have skin in the game, your investment may be safe.
You simply don't understand bitcoin. It is not like Satoshi couldn't come up with "useful" computations with "intrinsic value". He deliberately chose "useless" computations. Why? Because these computations serve very important role in the network: they make fraud(like double-spending) very costly(you have to control 20-30% of network computing power to have even smallest change to execute your attack, and 50%+ to have 100% chance of doing it). Computations having "intrinsic value" == extra incentive to attack.
Also, you miss all the work done by armed guards to protect large piles of cash( https://en.wikipedia.org/wiki/Cash-in-transit ). Do you think they do their work for free? And this is only obvious work. How much does current banking costs to us in total?
> Gold has industrial uses due to its physical and chemical properties, and it is desired in the consumer space as a material to make jewelry out of.
Gold was used for thousands of years long before it had some uses in the industry. It has no really special chemical properties: it doesn't react much with other chemical elements (which is actually awesome for a currency: it means it can preserve its value for many many years). Jewelry - maybe, but isn't it so desired for jewelry because it is scarce? You could make jewelry out of less noble metals.
You're right, people want it because it's shiny and rare. That makes demand for it. People can and do make jewelry out of other metals, but it's not as "prestigious". You highly underestimate how materialistic the majority of the world is.
As a physical good, the desirability of gold is simply to own it and stare at it. We can get into a philosophical debate about how you define utility, but for some people the fact that they find the appearance of gold aesthetically pleasing is enough. It's hard to find much aesthetic value in a Bitcoin. If people decided to stop using gold to store value tomorrow, it would still have industrial and asthetic uses. If people decided to stop using Bitcoin to store value tomorrow, the Bitcoins just lose all value.
Current banking is most certainly a product with associated value -- it's just not a currency. Bank checks are issued in USD, wire transfers are denominated in EUR, etc. I'm saying that Bitcoin, as it exists currently, is a digital asset with a high market value but no intrinsic value. It's not really a currency though, because modern currency is almost by definition controlled by a central bank to make it more useful as a transactional tool. If you have regular spikes and drops in the value of the currency, you don't know whether to buy bread on Tuesday or Friday. Everyone starts trying to time the market and you fall into a boom-bust cycle that is excruciatingly painful for individuals who get the timing wrong (see the US economy of the mid-to-late 1800s).
Actually, gold's lack of chemical interaction is one of its prized properties, which is part of why it is so desirable in jewelry, electronics, and medicine/biology--it doesn't corrode or rust or otherwise diminish over time. Few other elements even come close, and most of them are gases.
/sarcasm
Because this is just like Bitcoin. Except Bitcoin's data is decentralized, not centralized, and the rules for its slow release into circulation are fair (IMHO) and unchangeable (at least without 51+% agreement of the entire node network).
The work miners do has 2 utilities:
1) A computer can reliably estimate how much work was done by the output. This is "proof of work." You unfortunately can't use something like folding@home for this purpose, because the latter requires a human agent deeming what good "work" in that area is, and Bitcoin can't have any centralization and most certainly can't have any human agents involved making decisions about what "worthy work" is or not.
2) The "work" is nearly the same "work" that a brute-force attacker would do if such an attacker were trying to attack the network itself. Rewarding mining therefore incentivizes mining OVER brute-force hacking because the likelihood of a mining reward (given the same computing work) is much higher than the likelihood of a brute-force "reward."
I'm not saying that that Bitcoin was poorly designed or anything; just that there are some big challenges with issuing currency if you don't have a nation-state backing it up. Nation-states have the ability to issue currency by policy, to remove currency from circulation through taxes, and resolve international disputes (with military force, if necessary.) Bitcoin, through its decentralized nature, has none of this.
And before anyone checks in saying that it's impossible to get 51+% of the Bitcoin node network... you don't understand the level of resources that banks can bring to bear if they have the right motivation. I wouldn't be surprised if we see one or more of them collude to take over the Bitcoin cloud and print money for their own purposes. If they could do it with LIBOR, they can do it with Bitcoin. Goldman Sachs has been driving up the price of Aluminum by controlling a significant portion of the global stock and keeping it out of circulation. It's naive to think that these companies couldn't/wouldn't exploit the fact that Bitcoin is almost entirely unregulated: if they can get control of the node network and print money, it's not clear there's anything illegal about it.
This is also its Achilles' heel if this central authority acts poorly. There are MANY worldwide currencies which are very poorly managed.
> you don't understand the level of resources that banks can bring to bear if they have the right motivation
The Bitcoin mining network is now more powerful than ALL of the top 500 fastest computers COMBINED. So, good luck with that!
> It's naive to think that these companies couldn't/wouldn't exploit the fact that Bitcoin is almost entirely unregulated: if they can get control of the node network and print money, it's not clear there's anything illegal about it.
There isn't, but consider this: If word got out that this happened, people would flee Bitcoin, eliminating any incentive to do so, unless your only goal is destruction, and that's a pretty shitty motivation to do anything by.
Instead the activity of Mining should be thought of as minting new coins and miners are people trying to get lucky; similar to how someone mining for gold. Remember even the worthless paper dollar needed to start somewhere.
Without this ability to adjust on-the-fly, the exchange rate of Bitcoin will continue to be very volatile. There's a reason we don't use gold as the basis of our currency anymore: every time the value of gold rose, waves of people went out looking to dig it out of the ground. They were successful, and suddenly there's a lot more money floating around. But not any more bread, oil or cloth, so a loaf of bread that used to cost $1 now costs $2.
With a fiat currency, you have a store of value that is created by decree, not by the efforts of any individual in the system. So now, if there's an gold rush, the value of gold (denominated in dollars) will rise. People will probably go mine more gold and the value of gold will decrease again, but the value of wheat (as denominated in dollars) will stay more of less stable. If you can take $1 million worth of servers, electricity, etc. and are able to mine $5 million worth of Bitcoin, you get the same effect.
Is the same true for currency conversions? If I convert my Krone to Dollars and then back again when the exchange rate is more favourable, will I have to pay taxes?
Genuine question, I don't know how forex trades typically work.
The main point I understood was that when you deal with bitcoin (and I am not an accountant, and this fellow is not your accountant) there's a "realization" event where your asset is realized into a gain, I think it's called a capital gain, and like selling your business after putting your own capital into it for many years, that is the moment where you owe taxes.
It's not any point of withdrawal, since you might argue "it's not realized, it's just numbers on my screen until it hits my bank account" but this accountant would argue more conservatively that even if you are a US customer of Mt.Gox (and therefore can't get access to your USD without paying a bribe or taking a trip to Japan? I think that was the last story I heard, not claiming firsthand knowledge)...
If you pay $100 for 1BTC and sell it for $1250, and buy 1BTC at $850, you have $1250 of income and $950 of expense to offset.
You will not be able to claim only $400 of income and you may not be able to defer that tax payment (on $1250 minus whatever percent of $950 expenses you can claim against your business' net income.)
This is not exactly how forex works and I believe the US situation wrt. Bitcoin is exactly like the Norway situation given this news, from my limited understanding. Hopefully someone with more background will be able to give a better explanation that actually answers your question, and point out if I'm wrong on something.
Otherwise, you're claiming $1250 of income and $950 of expenses, and I would guess if you're lucky, you can write off 75% (wild guess) of that $950 so you pay tax on $538, even though your real gain is only $200.
If your tax rate is 33%...
After paying taxes on $538, you profit $22 from the sale and pay $178 in taxes. UNLESS you can structure the timing of the exchanges (hold the asset long enough) to frame the activity as a capital gain with a cost basis of $950, in which case you made out a little better.
This example may be too small to be real, but I think I have it right. If the gain happened while holding the asset over a longer period of time (how long?) then it's capital asset and capital gains tax. You might not pay 33% in taxes and you also might not be able to deduct 75% of your expenses.
I also have no idea what you're talking about when you say that you get to "write off 75%" if you're lucky. That would be incredibly unlucky (you want to write off assets/income, not liabilities/expenses, for purposes of determining taxable income).
I am really a person who has never claimed any income outside of what has come in a biweekly paycheck from an employer who does withholding for me, so it's clear, I have no idea what I'm talking about and I'm repeating things I've heard from people smarter than me.
In your example, you have $1250 of realized gain and $1150 of recognized gain (i.e., taxable income) from the sale of your old bitcoin, and $850 of basis in your new bitcoin.
So if you were a miner and you spent $600 on hardware
Which brought you 6BTC... and you cashed out 0.6BTC as $700, and bought more hardware with 0.8BTC, which so far nets you $0 (hasn't arrived yet)
Hopefully you'll indulge my line of inquiry...
You don't owe taxes on the remaining 4.6BTC because you have no realized gain from that asset, you paid taxes on the money you used to buy the first batch of hardware (say it all came from your employer and they did withholding, so you've paid those taxes)
So that leaves you with $1300 of "realized" income and a cost basis of... which of either $600 or $1300? Not sure which because in this slightly different case you haven't actually bought and sold the bitcoins, and your hardware could belong to your ongoing mining operation, right?
$700 is the cash value of the 0.6BTC sold. $870 is the cash value of the 0.8BTC order for more hardware at the time the order was placed.
So you've got 4.4BTC in assets as unrealized gains, $1570 (700+870) in realized gains, and $1470 in mining expenses.
Does that mean you owe taxes on $100 in recognized gains, and the rest are unrealized assets that are not taxed until they are sold?
I think I understand. That sounds a lot more favorable to the miner than the speculative buyer, but it seems to be correct.
I imagine the answer is yes, I know you have to in Sweden. In Sweden the taxes rules are basically the same whether you trade in forex, stocks or derivatives.
Essentially, it comes down to two things -- what are taxes paid in (they don't want a 10th of your apples or cattle these days) and what final settlement is enforced by law in contract disputes. Even if you have a contract stating I owe you 4 pork bellies or chunks of gold or bitcoins, if we end up in a court of law, they'll only enforce settlement in currency.
So yeah this comes as no surprise. People can (depending on jurisdiction and subject to details and scale and taxability etc) by and large "barter" in other media of exchange all they want, especially on a small peer-to-peer scale. Just don't expect too much legal protection / contract enforcement in anything other than legal tender. ;)
This makes bartering more expensive when bartering with foreigners. For example if a Norwegian where to trade 1000 USD worth of gold for a new pc with someone in the us, the Norwegian would have to pay 1250 USD for the same gold (1000 USD in gold, 250 USD in vat). Same for BitCoin. One will need to pay vat when buying them.
However one can buy 1000 USD in gold coins for 1000 USD because the coins are considered a currency, and thus not subject to vat.
I believe it would go something like this:
* You want to barter for a 1000 USD pc located in the US and pay 1000 USD worth of gold.
* In Norway you then pay 1250 USD for that weight in gold (1000 USD for the gold, 250 USD in vat) and send it to the US.
* The pc is sent to you, but is now worth 1250 USD because that was what you paid for it, so you pay an additional 312 (25%) in custom duty.
* Making your 1000 USD pc costing you 1562 USD.
So bartering with assets like gold and now BitCoin may not be a good idea as a private citizen. Companies of course are exempt from vat, so other rules apply.
If a company buys a 1000 USD computer to sell it, then the ultimate buyer pays the VAT. However, what happens when a company buys a 1000 USD computer to replace a server rack? At what point does "consumption" happen?
In practice it works so that everyone, both private citizen and company’s pays the vat, but companies can fill out a form and get the vat returned if the product was for internal use. They then add vat to their end product.
For example:
* A company buys a 1000 USD server and pays 1250 USD (server + vat). It sells it to a private citizen for 1250 USD (no profit). It can then keep 1000 USD and must give 250 USD to the state.
* A company buys a 1000 USD server and pays 1250 USD (server + vat). It sets it in a rack for internal use, and can then ask for the 250 USD vat back from the state.
(In reality you might do a lot of these deals b2b, and not actually transfer/invoice the VAT -- but that's the basic idea).
Oh, yeah, also not a lawyer, but a Norwegian.
What is to stop a Norwegian going to an EU state and buying gold there as the EU treats investments such as gold and stocks and shares as exempt from VAT (sales tax)
Just in March this year someone was arrested for smuggling in 421 kilo of gold: http://www.aftenposten.no/nyheter/iriks/Politiet-Nettverk-sm... (in Norwegian).
I guess one could also melt gold coins to obtain the gold without paying vat.
I don't know what the legal (tax) status of that gold would be (Norway has a modest tax on savings/holdings (1.1% for a total net worth above ~142.000 USD) -- so as a private citizen you might have to pay tax on that -- or, where you're keeping it if tax is applicable there)).
As others have mentioned if you want to import it legally, you'd have to pay VAT.
Here in the Netherlands there is no tax on capital gains.
Edit: if something looks like an asset, being traded like an asset and has a bubble like an asset..
In Norway assets are subjected to value added tax, but currencies are not. This makes bartering problematic. For example a 1 oz gold bar will cost about 10000 NOK in Norway (8000 NOK for the gold, and 2000 NOK in vat).
But a 1 oz gold coin will only cost 8000 NOK because the coins are considered a currency, and thus not subject to vat. If you are going to barter 1 oz of gold for something it is thus better to use a gold coin, then a gold bar.
Bitcoin is mined. It's limited. It's an asset.
Currency is not mined. It's unlimited. It's currency.