The Israel Tax Authority has won a court victory on the question of the interpretation that should be given to a deal for the sale of virtual currency such as Bitcoin for the purposes of assessing tax liability. Yesterday, the Central District Court in Lod accepted the Tax Authority’s interpretation, and held that Bitcoin is an asset and not a currency, and that the transaction in question is therefore taxable.
In the ruling, Judge Shmuel Bornstein said that in a situation in which the status of Bitcoin has yet to be defined, and in which, moreover, the there is still the possibility that Bitcoin will cease to exist and will be replaced by another virtual currency, it was hard to envisage a result whereby Bitcoin would be considered a currency for tax purposes in particular.
The appellant in the test case (which may yet reach the Supreme Court) is Noam Copel, founder of blockchain startup DAV, who a year ago made an ICO (initial coin offering). Copel bought Bitcoins in 2011, and sold them in 2013 at a profit of NIS 8.27 million. He argued that Bitcoin should be classified as a foreign currency, and that his profits should be seen as exchange rate differences received by an individual not in the course of a business, and therefore should not be taxed.
The Tax Authority, on the other hand, argued that Bitcoin was not a currency, and therefore could not be a foreign currency. According to the Tax Authority, Bitcoin comes under the definition of an asset, and therefore profits on its sale are liable to capital gains tax.
Judge Bornstein accepted the Tax Authority’s position, which makes the appellant liable to tax of some NIS 3 million. Copel was also ordered to pay costs of NIS 30,000.
Bitcoin, which was first issued in 2009, was traded at very low prices in 2011. In 2013, the price of a Bitcoin was around $100, but since then the price has soared, and today is at about $7,750.
The court accepted the Tax Authority’s argument that the definition of “currency” to be adopted was the one in the Bank of Israel Law, according to which a currency must have some physical-concrete manifestation, and ruled that Copel had failed to demonstrate that Bitcoin met this definition, or that it represented a real alternative to coins and notes in any country.
Judge Bornstein stressed that this ruling was “for now”, but that in the tax year relevant to the appeal Bitcoin could certainly not be considered a currency.
Commenting on yesterday’s ruling, Gidi Bar Zakay CPA, formerly deputy head of the Israel Tax Authority and a specialist in cryptocurrency taxation, said, “Judge Bornstein methodically reviewed the provisions of the law that deal with, among other things, the definition of a currency, and ruled that, given the way the law is currently formulated, Bitcoin cannot be considered a currency, and he therefore accepted the Tax Authority’s interpretation, as expressed in a 2018 circular.
”In my view, what will ultimately determine whether Bitcoin is a currency is the reality test. As soon as its use becomes widespread, the legislature will have to rewrite the law in such a way as to accommodate this, and we shall all benefit from these technological and monetary developments and from the ability of Bitcoin and other cryptocurrencies to serve as efficient, trustworthy, and widely accepted means of payment. In fact, the way to that lies through the regulator. If the enforcement agencies feel comfortable with the coin, and use blockchain analysis tools that make it possible to meet standards of money laundering prevention and tax avoidance prevention in a more reliable and efficient way than is the norm today, the road to it becoming a widespread means of payment will be open.”
Published by Globes, Israel business news – en.globes.co.il – on May 21, 2019
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