If your business or you have personally mined, bought or sold virtual currency or crypto art, it's important to be in control of tax laws. In this article, you can read about the most important thing to keep in mind when it comes to cryptocurrency tax reporting.
Very soon, many of us will receive a pre-filled tax return for 2021. For tax purposes, cryptocurrency is considered an asset under the general tax laws. This means that the profits associated with the cryptocurrency transactions constitute taxable income. Likewise, losses will be deductible. It should also be remembered that cryptocurrency is classified as an asset that is subject to property tax.
Basically, you can imagine that reporting your cryptocurrency gains / losses would be quite simple. While tax laws are fairly straightforward in theory, a number of challenges may arise in practice. The following rules apply in principle whether you have invested in person or through a company.
Tip # 1: Remember the starting point - general rules apply, report profit / loss
Cryptocurrency is similar in many ways to regular currency - not least because it is accepted as a means of payment by an increasing number of players in the business sector. Then one could imagine that cryptocurrencies are taxed like regular currency investments. But there is no formal cryptocurrency issuer or regulatory central bank. There are also no official exchange rates - the price of the cryptocurrency is shaped according to rules similar to trading in quoted shares.
These fundamental differences from regular currencies mean that cryptocurrency is considered an asset for tax purposes and is subject to the general rules on income and wealth taxation. Despite the similarities with stocks and stock trading: cryptocurrencies are not considered stocks for tax purposes and are not eligible for the exemption method. In this way, income related to profits becomes taxable. Accordingly, losses are deductible in accordance with the general principles of tax law.
Tip # 2: Track All Your Transactions
Many transactions can take place every day. Each individual transaction must be valued separately and the profit/loss must be calculated on a case-by-case basis. If you sell cryptocurrency for Norwegian krone, profit or loss is the difference between the original price paid and the selling price. If you sell or buy cryptocurrency in a currency other than Norwegian crown, e.g. USD, the currency gain or loss will be included in the total virtual currency income statement.
For example, if you mined Bitcoin yourself, the entry price will correspond to the cost of production and will be recognized as income with market value at the time of mining minus the cost of production.
Please note that when you exchange one cryptocurrency for another, it is also a tax execution where you need to calculate your profit / loss. It can be virtually difficult to keep track of this, but it is absolutely crucial to ensuring proper taxation.
Unlike listed shares, which are reported by VPS, there is no proper reporting system for the exchanges where cryptocurrencies are traded. This means that the taxpayer himself must provide himself with an overview of completed transactions. As with other assets, the taxpayer is responsible for reporting to the tax authorities both transaction gains / losses and assets. It can be very difficult that prices may differ on different exchanges. In such a case, it is natural to take as a starting point the prices of the exchange where the transaction takes place.
Consequently, there are no special reporting or recording systems - YOU as a taxpayer need to see the situation yourself and it is absolutely essential that you have all the paperwork in order.
Tip # 3: Decentralized Finance - Be sure to classify correctly
Cryptocurrency and the use of blockchain technology is an area of rapid development. Consequently, new ways of using technology are constantly emerging, which also have an impact on taxation. An example of this are the so-called decentralized finance, various services and products related to cryptocurrency.
The question is how the various "additional elements" of a cryptocurrency are to be treated for tax purposes. You may have received rewards for wagering as a reward for not selling the cryptocurrency for a certain period of time - such a return should be reported and taxed as pure capital income. But what about the money you initially "locked" into a smart contract before receiving your reward? Should this be considered a loan, a sacrifice or are you still sticking to the same values?
What will be the appropriate tax treatment will need to be considered on a case-by-case basis.
There are also so-called Non-Fungible Tokens ("NFT" for short) in the wind. In short, NFT trading is proof of having the underlying asset. Many people associate NFT with digital art, but the NFT may as well be evidence of something else you own. For reporting purposes, please note that all NFT returns are taxable income. The sale of the NFT is considered for tax purposes as an execution that may result in a taxable profit or a deductible loss. If the NFT is included in private content, the proceeds from the sale will not be taxable. Note that it must be possible to document that the resource is part of the content.
Bitcoin tax. Tip # 4: Remember the wealth tax
In determining taxable assets, the starting point is the values the taxpayer has at the end of the year. Since the virtual currency is considered an asset with economic value, all the virtual currency you have at the end of the year is also included in your taxable assets. When determining the value of assets, the cryptocurrency turnover value at the end of the year should be used. If you have mined bitcoins and they are still intact, their value should be reported as part of the estate. For businesses, the cryptocurrency will also be part of the property.
Generally, the virtual currency is converted into Norwegian kroner as of January 1 of the year following the income year.
Tip # 5: Voluntary revision: Be open-minded - you can revise previous tax returns
Tax authorities recently issued a press release about the big hidden numbers when it comes to cryptocurrency tax reporting. Tax authorities estimate that around 300 Norwegians own large amounts of cryptocurrency. Tens of billions related to cryptocurrency as an investment object have not been properly taxed.
Finally, please remember that the "train" has not left and you can report your previous cryptocurrency investments. If the tax authorities on their own initiative discover that you have not reported and taxed virtual currency correctly, you could risk up to 60% additional tax. If you have income or assets that have not been previously declared to the tax authorities, you can avoid additional tax. You must apply for voluntary compensation (also called tax amnesty) and thus contribute to the clarification and correct taxation. You can change your own older ones on your own initiative tax returns for the last three profitable years.
If the correction goes back a long way, you must contact the tax office. In such cases, the change will be voluntary and the tax authorities will not be able to levy an additional tax.
Source: BDO
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