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Iceland is the place to be on new years eve. A large part of that reason is the spectacular, if uncoordinated fireworks display that is the main feature of the celebrations.
There is more pyromania to enjoy however as bonfires are lit all over the country to burn out the old year. I have found memories of collecting all kinds of wood for a bonfire as a boy but these days these bonfires are usually set up and supervised by the town or the village. Which is a good thing probably. You are welcome to bring your fireworks or flares to the bonfires although you should of course make sure to care care when firing these off. Wearing safety glasses is highly recommended. You can buy those with your fireworks.
The tradition of bonfires goes back to the late eighteenth century. The first recorded bonfire in Iceland´s history was lit by school boys in the 1791 in Reykjavik. The bonfires are lit around 20:30 in the evening so this is something that people enjoy after dinner. Around 22:30 nobody will be around as most people will be glued to their TV sets to watch the annual satire of events of the year. This show is called “Áramótaskaupið” and every year it is a source of great excitement beforehand and controversy after it is aired.
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More on the bonfires at the Reykjavik City web site.
Location of bonfires in Reykjavik – PDF (in Icelandic)
