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Sweden: Tax Authority Publishes Guidelines for Income Tax on Bitcoin Mining, Suggests Prohibition of Bitcoin Use in Waste and Scrap Metal Transactions

(May 20, 2015) On April 24, 2015, just days before the May 4 tax filing deadline, Sweden’s Tax Authority published guidelines on how to declare income from Bitcoin mining. (Beskattning vid mining av bitcoin och andra virtuella valutor m.m. [Guidelines on the Taxation of Mining of Bitcoins and Other Virtual Currencies] (Apr. 24, 2015), Dnr [Case No]: 131 191846-15/111, Tax Authority website.)

Mining of Bitcoins, or of other virtual currencies, is generally set up so that it can be done from a server; because there are only a limited number of Bitcoins that can be mined, there is a race to mine them before another party does. Successful Bitcoin mining is therefore not guaranteed. (Id.)

Under Swedish tax law there are three main forms of income: income from employment, which includes income from hobby activities; income from economic activity (such as a personal business); and income from capital. (1:8 § INKOMSTSKATTELAG [Tax Code], (Svensk författningssamling [SFS] 1999:1229).) Income is considered to be derived from employment if it is not considered income of the other two types. (Id. 10:1 §.) Economic activity must be carried out “professionally and independently.” (Id. 13:1 §.)

The Tax Authority explained that because of the limited potential for profit in light of the cost of the equipment needed, it is unlikely that income from Bitcoin mining can be considered economic activity, not least because it is not consistent over time for a sufficiently long period as prescribed by the legal provisions characterizing such activity. However, if the person mining the Bitcoins (or other digital currency) “carries out the mining in a professional and cost efficient manner over a longer period with appropriate equipment,” or if “the activity is expected to create a surplus as measured over the full financial calculation period” and “the computing capacity can be expected to generate more than 25 bitcoins a year (or the equivalent value in form of transactional fees or other virtual currency),” it can be considered economic activity. (Guidelines on the Taxation of Mining of Bitcoins and Other Virtual Currencies, supra.)

Income from hobby activities often generate little taxable income.  Also, the costs associated with such activities are deductible for up to five years prior to the year the hobby activity generated a surplus. (Tax Code, 12:37 §.)  Thus, income from the mining of Bitcoins typically will be characterized for tax purposes as income from employment rather than from economic activity.

The Tax Authority guidelines also state that mining of Bitcoins does not require payment of VAT. (Guidelines on the Taxation of Mining of Bitcoins and Other Virtual Currencies, supra.)

Trading in Bitcoins, on the other hand, is taxed as capital gains. (Skatteverkets ställningstaganden, Beskattning av bitcoin och andra s.k. virtuella valutor i inkomstslaget kapital (Apr. 23, 2014), Dnr [Case No]:131 212709 -14/111, Tax Authority website.)

Prohibiting the Use of Bitcoins in Scrap Metal Trade

The Swedish Tax Authority also advocates a prohibition on the use of Bitcoins in the buying and selling of scrap metal. On March 9, 2015, the Tax Authority published its response to a formal consultation being conducted by the government on the prohibition of the use of cash in waste and scrap metal transfers. The police had noted that the main problem with cash is that it is difficult to trace; the Tax Authority argued that certain digital currencies, such as Bitcoin, are equally difficult to trace and therefore their use should also be prohibited in such transactions. (Skatteverkets yttranden: Remiss av SOU 2014:72, Handel med begagnade varor och med skrot – vissa (Mar. 9, 2015), Dnr/målnr/löpnr:131 693400-14/112, Tax Authority website.)