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updated: 1/22/2014 8:29 AM

Bitcoin turns into art as Sweden rejects creative currency

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Bloomberg News

Bitcoin is making an art critic out of the Swedish taxman.

The largest Nordic economy is set to reject Bitcoin and its competitors as a currency and instead give the software the same tax treatment it would an antique Persian rug or a painting by Andy Warhol.

"Currencies are traditionally tied to a central bank or a geographic area," Olof Wallin, an official at the Swedish Tax Agency who's drafting rules for Bitcoin and the programmers who generate it, said in an interview. The Stockholm-based agency will probably "view Bitcoins as what we call another asset -- just like art or antiques."

Since its 2008 creation, Bitcoin has challenged assumptions of what money is. It's also captured the attention of regulators, who are struggling to keep up as people use the software to pay for everything from university tuition to cups of coffee to senate campaign donations.

Sweden is leaning toward an interpretation of Bitcoin that will allow the nation to charge capital gains taxes on any transactions using the software. The move would place Bitcoin in an asset class that includes antiques, jewelry, stamps and copyrights.

EBA Warning

Across the Nordic region, where stable AAA governments have been at the forefront in tightening bank regulation, authorities are grappling with the concept of Bitcoin. In Norway, the tax department has decided to label it a taxable asset. Finland plans to treat it as a commodity while Danish regulators are drafting a proposal for lawmakers in an effort to protect consumers and businesses from losses.

Sweden's central bank raised concerns in June that Bitcoin and its competitors may pose risks to those using it as a payment method. The European Banking Authority echoed those concerns in December, warning that people using the software do so at their own risk.

This month Sweden's biggest Bitcoin exchange, Kapiton, was reported to the police and the National Board for Consumer Disputes after a number of users alleged their money had disappeared.

Kapiton's founder -- referred to on the website only as Sebastian -- published a statement on Jan. 18 apologizing for "recent problems" and assuring users that no client assets had disappeared. The site is working to match orders with accounts, Sebastian said.

Money Laundering

Financial Markets Minister Peter Norman said this week virtual currencies risk becoming tools for criminal activity such as money laundering and the financing of terrorism.

"If we end up with artificial or virtual currencies, there is a risk that they could slip through the cracks and that would be serious," Norman said in an interview. "I don't think Bitcoins are at that stage today, but if they were to grow into a big virtual currency that's being used a lot, that would result in risks that we don't want."

Globally, Bitcoin has had a mixed reception. China's central bank banned lenders from handling the virtual money while the U.S. Internal Revenue Service hasn't offered guidance beyond saying it's working on the issue and that it has been monitoring digital currencies since 2007.

Bearish Poll

Almost half of international investors are bearish on Bitcoin, with 47 percent of respondents in a Bloomberg Global Poll published today saying they would sell Bitcoin. Some 11 percent of respondents would buy the virtual currency while another 7 percent said they would hold it, with the rest of respondents saying they didn't have an opinion.

Entrepreneurs are looking at using Bitcoin payment technology to undercut the billions in fees reaped by companies such as Visa Inc. and JPMorgan Chase & Co. from the use of credit and debit cards.

The price of Bitcoins soared in November, topping $1,000 for the first time, as speculators anticipated broader use of digital money. The price dropped to $805.1 today on Bitstamp, one of the more active online exchanges where Bitcoins are traded for dollars and other currencies. One Bitcoin cost about $15 a year ago.

Bitcoin, which first appeared the same year Lehman Brothers Holdings Inc. collapsed, was created by a programmer, or a group of programmers, going under the name of Satoshi Nakamoto.

Demanding Answers

There are 21 million possible Bitcoins that can be mined by a peer-to-peer network harnessing computers to complete complicated mathematical calculations. About 12.2 million units are currently in circulation, according to

Swedish tax authorities are also looking into how to treat Bitcoin miners -- programmers who unlock new Bitcoins by using ever-faster computers to solve complex mathematical problems. Wallin said the question is whether they should be taxed as businesses, a classification that would allow them to deduct some equipment from taxes.

The challenge remains tracking a new market whose size and scope can be hard to gauge, even for regulators.

"I don't think there are that many," Wallin said. "But they have been calling us for answers."

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