January 1st, 2014
in Op Ed
by Dirk Ehnts, Econoblog101
The supposed currency Bitcoin has been stopped cold in Norway. Bloomberg interviewed Hans Christian Holte, director general of taxation in Norway. Norway follows Germany in taxing capital gains from Bitcoin business:
"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.
The issue in the background is one of sovereignty. The way the Norwegian krone works is that the government imposes a tax liability on Norwegians. This creates demand for the currency. This also allows the Norwegian government to spend because it can get Norwegian kronor for government bonds at the central bank. Not that they would need to. The country exports a lot of oil and gas and should have no problem to acquire foreign money. However, much of it is put into a sovereign wealth fund (Norges Bank Investment Management). The government's balance sheet looks very strange compared to those of non-resource exporting countries:
The public debt to GDP ratio was only about 30 percent in 2012. Coming back to the Bitcoin, one wonders whose liability it is. Does anyone have to accept Bitcoin in return for something? The Norwegian krone will always - well, as long as Norway exists, supposedly - be accepted for tax payments. That creates a strong trust/confidence in the currency. Does Bitcoin have that? Obviously not. Bitcoin works like collector's cards. If people like them and attach first emotional and then real value, their price is positive. The price then depends completely on what Keynes called 'animal spirits'. Perhaps these days investors are emotional because they can't find good assets to hold, and they are 'trigger happy', buying anything that seems to promise a higher yield. This will not last forever, and if push comes to shove nobody will accept Bitcoins. Sovereign governments will not accept tax payments in Bitcoin and through this give power to some currency over which they have no control.
I believe that Bitcoins are on overpriced worthless token, not a currency. That status can be changed, but I can't see what any sovereign country would gain from that.