Bitcoins were dealt a blow in Norway as the government of Scandinavia’s richest nation said the virtual currency doesn’t qualify as real money.
“Bitcoins don’t fall under the usual definition of money or currency,” Hans Christian Holte, director general of taxation in Norway, said in an interview. “We’ve done some assessments on what’s the right and sound way to handle this in the tax system.”
Norway will instead treat Bitcoins as an asset and charge a capital gains tax, after Germany in August said it will impose a levy on the virtual currency.
More and more nations are taking an official stance on the software since it emerged in 2008 as a virtual currency that’s not controlled by any government or central bank. Bitcoins can be used to pay for everything from hand-made rugs to window cleaning. Students at the University of Nicosia in Cyprus can even pay for their tuition with the software.
Paul Ehling, associate professor in the department of financial economics at the BI Norwegian Business School, said the government’s definition of money may be too narrow.
“Currency is any agreed upon means of exchanges of goods and services, so you could have some small stones, as used in history, and if it’s accepted by a sufficiently large population, then that’s enough,” Ehling said in an interview. “These days we do mean that a much larger group of people is willing to exchange goods or services for this currency.”
There are about 12 million Bitcoins in circulation, according to Bitcoincharts. Users of the digital money are finding that its wider adoption depends on policy makers and banks as governments from China to the U.S. try to create a set of rules to protect users.
Bitcoin exchanges, payment processors and other startups say they need banks to connect them to the existing payments system and provide basic services like checking accounts. To do that, the fledgling companies must convince the regulators that police the banks that Bitcoins aren’t being used to conceal illicit activity.
Bitcoins’ volatility has also attracted attention and raised questions about its viability as money.
“I don’t think you can even call something a currency if it can change in value by 20 percent to 30 percent a day,” Sophocles Sophocleous, a director at Argos Capital Management in Cyprus, said in a telephone interview today. “At the end of the day, I think people want something backing a currency.”
The digital currency plunged last week after China’s central bank barred financial institutions from dealing in it. That followed a sudden surge in value in November after a U.S Justice Department official described Bitcoins as a “legal means of exchange.”
The European Banking Authority today released a warning on the risks of using unregulated digital money that is susceptible to hackers. “Cases have been reported of consumers losing significant amounts of virtual currency with little prospect of having it returned,” the EBA said in a statement on its website. “When using virtual currency for commercial transactions, consumers are not protected by any refund rights under EU law.”
The price of Bitcoins topped $1,000, as speculators anticipated broader use of digital money. The price has since dropped to around $850 on Bitstamp, one of the more active online exchanges where Bitcoins are traded for dollars and other currencies. They were trading at about $12 a year ago.
Norwegians marveled at the potential of the virtual currency when it emerged in October that a university student became a krone-millionaire after buying the coins. Kristoffer Koch bought $24 worth of Bitcoins in 2009 and then forgot about them until this year, according to Norwegian broadcaster NRK. When he checked his investment’s value, it had soared to more than $800,000, helping him buy an apartment, NRK said Oct. 25.
In Norway, profits from Bitcoin will fall under the wealth tax and losses can be deducted, Holte said. There will be a 25 percent sales tax that applies to businesses, he said.
Introduced five years ago by a programmer, or group of programmers, going under the name of Satoshi Nakamoto, Bitcoins can potentially reduce banking-transaction fees, making it an attractive option for trading via the Web or in stores.
While tax revenue from Bitcoins isn’t substantial, Holte at the Norwegian tax authority said he plans to work with other countries to hammer out the legal aspects of Bitcoin.
Bitcoins’ survival will ultimately depend on whether consumers and vendors decide they can trust it as a legitimate payment form, Ehling said.
“If there’s a crisis or power outage, you need some bills in your wallet in case your credit card doesn’t work -- same goes with Bitcoins,” he said. “It’s sustainable if people use it more and more, and if they trust it. People start with buying small things, but if they start to make bigger and bigger transactions, it could begin to challenge other currencies. Right now, we’re not there.”