Israel Seeks Tax on Bitcoin, Virtual Currency Transactions

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By Jenny David

Transactions conducted in bitcoin, litecoin and other virtual currencies would be subject to Israeli capital gains, income and sales tax under the terms of a recent draft decision of the Israel Tax Authority.

The document represents Israel’s first legal recognition of virtual currency use. If finalized in its current form, however, practitioners say the policy could spell a “death blow” for bitcoin trading. The draft “imposes almost insurmountable restrictions on the use of virtual currencies in Israel, due to the liabilities and costs involved, " Harel Perlmutter, head of tax at Tel Aviv-Based Barnea & Co. Law, told Bloomberg BNA in a Jan. 22 telephone interview.

The ITA decision must still undergo a public hearing and legislative process before taking effect. But, three years in the making, few changes to the draft are expected, a Tax Authority official told Bloomberg BNA Jan. 23.

Asset, Not Currency

The ITA said it would classify virtual currency as an “asset” under Israel’s Tax Ordinance, whether used for barter or investment, rather than as a “currency” or “foreign currency.”

Revenue from its sale would thus be considered capital income for individuals and companies alike, subject to Israel’s 25 percent capital gains tax. Although not recognized by the Bank of Israel, had the ITA recognized bitcoin as a currency, individuals would not have been taxed on the exchange-rate differentials inherent in its trade.

Standard linkage and earnings will be tax exempt for individuals, the circular said.

Business Income

When the transaction is of a “business nature,” the difference in the virtual currency exchange rate will also be subject to tax as business income, the ITA held.

“Should a person’s income from virtual currencies reach a commercial level, as established in case law,” that income will be considered “productive” for purposes of income tax, it also stated.

“To clarify, all income of an entity selling and marketing virtual currencies will be considered productive” for tax purposes, it continued.

Moreover, even though not considered a currency, transactions in virtual currencies are still goods, according to the circular, and as such will be subject to value added tax insofar as they are commercial in nature, or conducted through a virtual currency trading business.

The existence of “mining” activities—in which a virtual coin is created electronically, or a computerized system for trade in virtual currencies—can indicate the existence of a virtual currency business, it added.

The document also details means of payment and applicable clauses of Israel’s tax code by type of transaction and trader, and subjects all profits from the sale of virtual currencies to the same rules as any other asset, including reporting requirements and withholding taxes.

Hammer To The Head

“On the one hand, the authority is caressing the community” by recognizing bitcoin, said “The True Economy” blogger Eran Hildesheim.

“On the other, it is hitting it with a 10-kilogram hammer because it wants to apply every possible tax to Bitcoin activity,” he said. “It could be a death blow to the community,” he added.

“I understand the tax loss hurts the authority, but it could have reached a different decision. This will dissolve the profits for individual trading in Bitcoin,” Perlmutter said.

He also questioned how enforcement would be achieved. “Virtual currencies are traded through electronic wallets, which are much harder to monitor than the banks. Enforcement will be a big problem,” he said.

A lack of clear definitions poses another problem, Hildesheim said. “What amounts to activity of a business nature? Is it one transaction, 10, a hundred? Every interpretation can determine the fate of a Bitcoin trader in Israel, and send them to the black market,” he said.

His advice? “Sit on the fence until this becomes clear and only then decide whether to get into the market or not.”

To contact the reporter on this story: Jenny David in Jerusalem at correspondents@bna.com@bna.com

To contact the editor responsible for this story: Penny Sukhraj at psukhraj@bna.com

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