Tax and VAT relating to Bitcoin and other virtual currencies
Virtual currency originated online and is a type of unregulated, digital currency.
The most well-known and prominent virtual currency today is Bitcoin. The information shown here is based on the general tax and VAT implications of using the Bitcoin asset but will also apply for other virtual currencies such as Ethereum, IOTA, Litecoin, Stellar, Dogecoin, etc.
There is no formal issuer of a virtual currency, and there are no official currency rates. The price is solely determined by the supply and demand of the users. Similar virtual currencies can be bought and sold in various arenas on the internet. Some businesses also accept virtual currency as payment for the purchase of goods or services. In other words, “virtual currencies” share many similarities with conventional currencies. For tax purposes, virtual currency is not considered an ordinary currency because it is not issued or guaranteed by a national central bank. Virtual currency is an asset and falls under the general rules for income and asset taxation.
What is Bitcoin?
As previously mentioned, Bitcoin is a type of virtual currency originating online and is an unregulated, digital currency/means of payment that, unlike traditional money, is not issued or guaranteed by a national central bank.
Bitcoin uses “peer-to-peer” technology to send and verify transactions online. The use of cryptography ensures that no one can falsify payments or use their Bitcoins more than once. Simply put, cryptography is the process of coding information in such a way that only authorised parties can read it.
Bitcoin is linked to an address. An address is an account number that can be used to accept payments and also verify purchases/sales. All historical Bitcoin transactions are available on blockchain.
Basically, Bitcoin is a data file that can be transferred to another person. This makes it possible to exchange values over the internet and to be used as a means of payment for those who wish to receive this as payment for goods and services. Bitcoins can also be “exchanged” into other currencies and therefore have a resource value for the owner.
Issue of new Bitcoin
The issue of new Bitcoin is regulated in the Bitcoin design and occurs through a process called mining. New Bitcoin is mined by solving advanced data algorithms that verify the Bitcoin transactions. Miners who verify transactions are rewarded with new Bitcoins and a small transaction fee.
Bitcoin is designed with an absolute limit of 21 million Bitcoins, which can be divided into smaller units called “Satoshi”. A Bitcoin can be divided into 100,000,000 Satoshi, each of which is freely exchanged. As of March 2018, ca. 15.1 million Bitcoin have been generated and are in circulation. It is estimated that the virtual currency Bitcoin will have “issued” all 21 million Bitcoin by the year 2140.
Tax liability upon realisation of Bitcoin and other virtual currencies and capital assets for private individuals
Realisation of Bitcoin and other virtual currencies - capital income
The realisation of Bitcoin may result in a gain or eventual loss.
Capital gains from the realisation of a non-business capital asset are taxable under section 5-1 of the Taxation Act. Similarly, losses from the realisation of a capital asset are deductible under section 6-2 of the Taxation Act. Special provisions for the realisation of capital assets are found in section 9. A realisation loss is deductible to the same extent as a gain is taxable under the provisions in this section; see section 9-4, subsection 1.
These main rules apply to the realisation of Bitcoin, whether the Bitcoin is purchased or mined.
Gain or loss is calculated by the difference between the input value and the exit value. The exit value will be the amount the taxpayer receives for the realised Bitcoin after transaction costs are deducted. The input value will be the cost price - what the object has cost the seller, including transaction costs. This applies both when the seller has purchased the object or produced (mined) it.
If the Bitcoin has increased in value as a result of a change in the exchange rate in which the Bitcoin is settled (e.g. USD) during the ownership period, this is regarded as an overall gain increase. There is no separate gain/loss calculation for the exchange effect because the gain/loss calculation follows the so-called merger principle. The merger principle is explained in more detail in the guide Skatte-ABC under the topic “Valutagevinst/-tap” (in Norwegian only).
If you sell a virtual currency and receive settlement in another virtual currency, taxable realisation is considered to have occurred. Gain/loss is calculated by determining the value of the virtual currency in Norwegian kroner at the time of the transaction.
If you have multiple units within the same virtual currency, e.g. multiple Satoshi/Bitcoins, you have to decide yourself which units are actually sold, and the gain/loss calculation will depend upon your initial input value of the units sold. There is no requirement that the unit that is purchased first must be sold first (the FIFO-principle (first in, first out) that applies for shares, among other things, does not apply here).
The gain on the sale of Bitcoin and other virtual currencies is taxable income and should be reported under item 3.1.12 “Gain from other financial products" of the tax return. The loss on the sale of Bitcoin and other virtual currencies is tax deductible and should be reported under item 3.3.13 “Loss on other financial products" of the tax return.
Asset taxation of Bitcoin and other virtual currencies
Taxable gross capital/wealth is considered to be all capital objects with a sale value that the taxpayer owns at the end of the income year. This includes Bitcoin and other “virtual currency”. In general, this applies regardless of where in the world the assets are located. You can read more about capital assets/wealth in the guide Skatte-ABC (in Norwegian only).
Within the context of the Taxation Act, Bitcoin is an asset and taxable capital/wealth. The value is determined by the sale value in Norwegian kroner on 1 January the year following the income year; see section 4–1 of the Taxation Act. The sale value should be reported under item 4.1.10 “Tax value of other securities" of the tax return. To find the correct market value, you can use, for example, the closing rate from the market place where Bitcoin is traded, and the official rates for USD/NOK from Norges Bank (Central bank of Norway).
You can find a practical example below that illustrates how you as taxpayer should treat the purchase, sale and holding of Bitcoin on your tax return.
You purchase 10 Bitcoins on 10 January 2017 at a rate of NOK 100,000 per Bitcoin. You sell 5 Bitcoins at a price of NOK 150,000 per Bitcoin on 19 December 2017. You are left with 5 Bitcoins at the end of the year. Rate per 1 January 2018 is NOK 117,000.
To calculate the value of assets and debt, use the rate on 1 January of the year following the income year.
The following amount must then be included in your tax return:
Sale price 5 Bitcoins at NOK 150,000 each will be NOK 750,000
- input price 5 Bitcoins at NOK 100,000 each will be NOK 500,000
= Gain NOK 250,000
The gain of NOK 250,000 is reported under item 3.1.13 “Gain from other financial products" of the tax return.
As of 1 January 2018, you are left with 5 Bitcoins (10 - 5) with a value of NOK 117,000 (rate on 1 January 2018). The value of your Bitcoins will now be 5 x NOK 117,000 = NOK 585,000.
The value of your Bitcoins on 1 January 2018, which is NOK 585,000, is reported under item 4.1.10 “Tax value of other securities" of your tax return.
If you have owned, realised or mined Bitcoin or other virtual currency, you must report this in your tax return
Holding, purchase or sale of Bitcoin or other virtual currencies is not reported automatically to the Tax Administration. You are responsible for reporting eventual holdings and gains/losses of Bitcoin or other virtual currencies.
- If you have mined Bitcoins during the income year, these must be recognised as income at market value at the time of production (in Norwegian kroner). Mining profits must be reported as taxable income under item 3.1.12 “Other income" of the tax return.
- If you own, have mined or purchased Bitcoin during the income year and you're in possession of these at the end of the income year, the value of these must be reported as capital under item 4.1.10 “Tax value of other securities" of your tax return.
Documentation that must be retained for the verification of reported information in the tax return
- Transaction log/ documentation of realised Bitcoins from brokers/exchange agents with Bitcoin addresses.
- Documentation showing the date when the sold Bitcoins are acquired, mined or purchased, including Bitcoin addresses for these and the input value.
- Mining log - overview of number of mined Bitcoins and their realisation date (pay-out address).
You do not need to send us any documentation, but you must be able to present documentation if we ask for it.
Tax and value-added tax (VAT) liability concerning realisation, mining, trading and transferring Bitcoin and other virtual currencies for enterprises
Assessment of business activity
Taxable income is considered to be any benefit acquired through work, capital or activity; see section 5–1, subsection 1 of the Taxation Act. Benefits acquired through business activity include benefits gained from the sale of goods or services. Bitcoin is defined as an asset and the activity of purchasing and selling Bitcoin can be considered business activity. Furthermore, Bitcoin mining (verifying Bitcoin transactions) is considered a business when this activity is of a certain scope.
The exchange of Bitcoin will fall under the exemption from the VAT Act for financial services found in section 3-6 of the VAT Act (Value Added Tax Act). Read more about the VAT treatment below.
In order for an activity to be considered a business enterprise, four conditions must be fulfilled. The activity must
1. be designed to have a certain duration
2. have a certain scope
3. be likely to generate a profit, and
4. be carried out at the taxpayer's expense and risk
All four conditions must be met in order for an activity to be considered a business enterprise. The conditions are described in detail in the guide Skatte-ABC under the topic “Virksomhet - allment” (in Norwegian only).
Trading virtual currency
Generally, sporadic trading in virtual currencies will not be considered to constitute a business activity. If trading occurs routinely and a significant number of transactions are completed, the trading could be considered a business activity.
If you carry out transactions on behalf of another and are paid for this (brokering) and any other support services (reporting, calculation of gains/losses, etc.), the business activity requirement is fulfilled faster than if you only carried out trading for your own account and risk.
Bitcoin mining (verifying transactions)
A number of parties are engaged in mining Bitcoin. This means that they verify transactions that occur in the underlying blockchain. Bitcoin mining requires high-powered computers and software that can contribute to the verification process. Mining can differ significantly in scope, and it can be considered a business activity if the business activity conditions are met.
Generally, Bitcoin mining using your private laptop is not considered a taxable business activity.
If you make larger investments in computer equipment in order to mine, this factor may indicate that business activity is taking place. If you invest in one or more mining rigs and use them to carry out administrative activities daily or regularly, the business activity requirement will normally be considered to be met. The decisive factor for deciding if the business activity requirement for mining is met is that the activity related to the follow-up of mining is carried out on a regular basis and is of a certain scope. Sporadic follow-up will normally not fulfil the activity requirement. If you outsource the operations and system follow-up to others, their activity will be considered in the business activity assessment.
If you only establish the mining rig and it does not require further administrative follow-up, this will seldom fulfil the business activity requirement.
If the mining you perform is considered a business activity, the value of the Bitcoin received through mining must be recognised as income at market value in Norwegian kroner at the time it is received. An inventory principle is not used.
Effects of meeting the business activity requirement:
If you operate an enterprise trading in virtual currency or mining Bitcoin (or other virtual currency), income in Bitcoin and realised gains on the sale of virtual currency must be recognised as income on an ongoing basis. Similar conditions apply for recognising deductions on an ongoing basis for expenses related to the business and for realised losses on the sale of virtual currency. Income and expenses must always be converted to their value in Norwegian kroner.
Changes in the value of holdings of virtual currency owned by the enterprise are taxable as capital income upon realisation. Gains are taxable income and losses are tax deductible for the enterprise. The input value of mined Bitcoin is the same value that is realised as income - that is the market value of Bitcoin in Norwegian kroner at the time the Bitcoin is received.
If you purchase operating assets in order to operate an enterprise, the general rules for deductions for operating assets in an enterprise must be followed for the purchased operating assets. Primarily, this means that ongoing costs (e.g. electricity, rent, salary, etc.) are deducted on an ongoing basis. Investments in operating assets costing less than NOK 15,000 can be deducted on an ongoing basis, while operating assets costing NOK 15,000 or more must be capitalised and depreciated on a declining-balance basis following the rules in section 14–40 and onwards of the Taxation Act.
When you operate an enterprise, the accumulated net profit/loss for the enterprise is liable for tax.
If you operate an enterprise, this means you're operating a sole proprietorship, unless you have chosen to organise the enterprise in another organisational form. This means that you have a duty to register the enterprise in the Register of Business Enterprises (Foretaksregister).
Value-added tax (VAT) treatment - virtual currencies
Assessment of business activity
VAT is calculated on the sale of goods and services from enterprises. Generally, the conditions for assessing a business enterprise are similar to the conditions for assessing business activities for tax purposes. We refer you to the four conditions listed under the assessment of business activities for tax purposes above.
If the enterprise supplies goods or services that are liable to VAT, and supply exceeds the registration limit of NOK 50,000 within a 12-month period, the enterprise must register in the Value Added Tax Register and calculate VAT on the sale. If the service is exempt from VAT and the enterprise does not supply other goods or services that are VATable, the enterprise must not be registered in the Value Added Tax Register. More information can be found here.
The use of virtual currency as a means of payment and the exchange of virtual currency services will often be subject to the exemption from the VAT Act for financial services found in Section 3-6 of the Value Added Tax Act. In that case, VAT must not be calculated on the amount paid for the exchange services. This applies if it is accepted by the parties in a transaction as an alternative means of payment and has no purpose other than to be used as a means of payment.
VAT is not to be calculated if the virtual currency is considered as an alternative means of payment. This is stated in the EU Court judgement in case C-264/14 (Hedquist), which the Ministry of Finance has stated in a ruling dated 6 February 2017 is to be used as a basis for deciding similar exemptions in Norwegian VAT Act (Value Added Tax Act). The Directorate assumes that this must also apply to other types of virtual currencies if the aforementioned pre-conditions are fulfilled. The Ministry of Finance’s ruling is found here (in Norwegian only) (https://www.regjeringen.no/no/aktuelt/bitcoin-er-unntatt-fra-merverdiavgift/id2538128/). This is also discussed in the VAT handbook under chapter 3-6.
The exchange of virtual currencies such as Bitcoin may be subject to the exemption from the VAT Act for financial services found in Section 3-6 of the Value Added Tax Act, if the type of virtual currency in question is accepted by the parties in a transaction as an alternative means of payment and has no purpose other than to be used as a means of payment. See the explanation above. Therefore, VAT must not be calculated on the amount paid for the exchange services.
If the owner of virtual currency regards this as an investment, this does not change the VAT assessment of the currency as a means of payment. Here we refer you to the requirement that there can be no purpose other than the use as a means of payment. The same will apply to the assessment of the remuneration that is charged when exchanging virtual currency. This means the same VAT treatment as for traditional currency, which can serve both as a method of payment and an investment object without affecting the VAT treatment when exchanging currency or using currency as a means of payment.
Value-added tax (VAT) and mining (verifying transactions)
An enterprise that only sells computing power to others for the mining of virtual currency must calculate value added tax (VAT). In the binding advance ruling of 6 February 2018, the Directorate assessed that an enterprise that had such a function, and which delivered computing power to another enterprise engaged in mining, supplied a service liable for VAT. The ruling does not take a definitive position on whether mining of virtual currency can be subject to the exemption from the VAT Act for financial services. The ruling is explained in more detail in the VAT handbook chapter 3-6.
In a joint letter of 17 April 2018, the Directorate of Taxes accepts that mining Bitcoins, among other things, is a service that is subject to the exemption from the VAT Act for financial services found in section 3-6 of the Value Added Tax Act. Therefore, an enterprise that only sells computing power to others for the mining of virtual currency must calculate value added tax. In the binding advance ruling of 6 February 2018, the Directorate assessed that an enterprise that had such a function, and which delivered computing power to another enterprise engaged in mining, supplied a service liable for VAT. The ruling is discussed in VAT handbook chapter 3-6.
A brief mention of ICOs (Initial Coin Offerings)
The term ICO or Initial Coin Offering describes the situation when, for example, a start-up company raises financing by issuing so-called “tokens” to investors. Because ICOs differ radically and vary greatly, each ICO must be assessed on a case-by-case basis to determine the tax and value added tax (VAT) liability.
With regards to VAT and ICOs, an individual assessment must be made of whether there is a supply of goods or services and if so, what has been supplied, including whether or not it can be considered a financial service.
Previous statements on virtual currencies
The Directorate of Taxes has issued a principal statement of 11 November 2013 on the Use of Bitcoins – tax and value added tax liability consequences. In the statement, the Directorate has assumed that Bitcoin is an asset for tax and value added tax purposes, and the general rules for tax and value added tax apply.
In a letter to the Directorate of Taxes on 6 February 2017, the Ministry of Finance has further discussed the EU Court judgement of 22 October 2015 in case C-264/14 concerning the exemption from value added tax for virtual currencies.
In a question from the Storting, the Ministry of Finance on 20 December 2017 has answered the question concerning virtual currencies.