Move allows Nordic state to pump up taxes on the popular cryptocurrency (or cryptoinvestment?)

While its backers claim it’s the world's most popular "cryptocurrency", Norwegian officials say the "Bitcoin" is not currency at all.  While they acknowledge the popular form of digital payments has value, they disagree that it should be entitled to the protections that money has with regards to gains in value.
I. The Taxman Cometh
The procedure offers bitcoins some legal protections as a recognized "investment", but also opens them up to new taxes.  Germany, another European Union member state, adopted a similar stance earlier this year.  Canada has also practiced a similar policy, for some time now.
Norway's taxation director, Hans Christian Holte, is quoted by Bloomberg Technology as explaining:

Bitcoins don’t fall under the usual definition of money or currency.  We’ve done some assessments on what’s the right and sound way to handle this in the tax system.
Norway Hans Christian Holte
"The Tax Man": Norwegian tax director Hans Christian Holte [Image Source:]

The bad news for those looking to cash out their Bitcoins in Norway is that the nation has a relatively high capital gains tax.  While investors in the U.S. often grumble about the ~19 percent they have to pay in taxes on investment profits, that's far more fortunate than the 28 percent levy that Norwegian investors incur (Source: Tax Foundation).  Germany is only slightly lower at 25 percent.
While they're no fans of extra taxes, some investors agree that the decision by the governments of Norway and Germany not to recognize Bitcoins as an international currency makes sense, to some extent.
II. Volatility Leads to Skepticism
Much of this skepticism has resulted due to the inflation in value of bitcoins.   Since a June 2011 low of $8 USD/bitcoin (during a bitcoin "Depression" of sorts), the value of Bitcoins has dramatically rebounded increasing in value 125-times to reach $1,000 USD/bitcoin on Nov. 27.  For the year bitcoins have been up as much as 7600 percent in value at their peak; prices have since rebounded, and currently coins are trading at around $860 USD/bitcoin, on the world's largest exchange, Mt. Gox.
Comments Sophocles Sophocleous, a director at Argos Capital Management in Cyprus, comments to Bloomberg Technology:

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.  At the end of the day, I think people want something backing a currency.

The comment overlooks somewhat that bitcoin's mathematics based programmatic backbone automatically increases the value by increasing the difficulty of the cryptographic hashes needed to "mine" a bitcoin, the method by which bitcoin's adopters seed the initial distribution of currency.

Bitcoins can be divided to tiny fractions, unlike the dollar, which has the smallest denomination of 1 penny ($0.01).  This softens the impact of rising mining costs, but as bitcoins have grown in demand, mining has failed to keep the currency trading at constant rates.

Again, that's more or less to be expected. As Bitcoin mining grows harder, and demand grows, the smaller fractions are essentially equivalent in value to what a larger fraction might have been a year ago.  This is obviously a highly volatile scenario, albeit predictably so.

Bitcoin miningBitcoin mining is inherently capped at 21 million BTC, regardless of software precision.
[Image Source: CoinDesk]

Barring some disaster (e.g. the U.S. leading a quest to shut down the bitcoin), a final pool of 20,999,999.9769 BTC will be reached, according to The Bitcoin Wiki, an authoritative resource on the cybercurrency.  Even if precision is increased, the formula guarantees that miners will never be able to generate more than 21 million Bitcoins, essentially the limit of the mathematical generation function.
It's possible the generating algorithms could be changed in future implementations, but that would require universal support and would fundamentally shift the economy.  Thus bitcoins are likely to remain locked at a maximum of 21 million, eventually halting the volatility based on mining and adoption.

Bitcoin transactions
Bitcoin skepticism is partially based on the currency's complexity. [Image Source: Josh Romero, et al.]

The currency does have some true volatility that extends beyond the underlying algorithms.  U.S. crackdowns on bitcoin traders operating as unlicensed exchanges has led to speculation that U.S. politicians may be considering an outright "ban" on bitcoins.  This has in turn made the price of bitcoin much more volatile on Mt. Gox -- the primary exchange where bitcoins are traded for U.S. currency -- than other exchanges, as noted by Coin Desk.

Bitcoin volatility
Some bitcoin volatility has been driven by regulatory fears. [Image Source: Coin Desk]

During Senate testimony, the price of bitcoins fluctuated wildly on a daily basis; this was part of how the $1,000 USD/bitcoin barrier was cracked so quickly.
III. Debate Over "Currency" Status Remains Ongoing
For some, like the Norwegian citizen Kristoffer Koch, who scored 5,000 in bitcoin for roughly $26.60 USD in 2009, and recently cashed out his holdings for NOK5M ($886,000 USD), the decision not to exempt bitcoin from capital gains taxes is a rough one. 
Mr. Koch already used his loot to buy a luxury condo in Toyen, Norway; now he could be on the hook for $248,800 USD in taxes.  As a computer science Ph.D., Mr. Koch probably can withstand that hit, but it will likely come as a bit of a shock.
On the flip side, the decision to make bitcoins an investment means that if you lose money on bitcoins you could write it off as capital losses, which could help to protect the cryptocurrency's backers.

Bitcoin smaller
Bitcoins being deemed an "investment" could offer some protections tax-wise.
[Image Source: Getty Images]

But beyond the questions of taxation and legal protections there's ongoing debate regarding the semantics of what exactly is "currency".

Some academics, think otherwise, while acknowledging that the currency is not as trusted as the physical currencies of industrialized nation.  Comments BI Norwegian Business School Department of Financial Economics Associate Professor Paul Ehling:

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.  These days we do mean that a much larger group of people is willing to exchange goods or services for this currency.

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.  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.

In otherwords, you might not want to line your doomsday shelter with Bitcoins.  But for those comfortable with the uncertainties of bitcoins it's a fun, if risky ride.

Source: Bloomberg

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