Israel’s Central District Court has made a ruling in agreement with the country’s tax authority that Bitcoin is an asset, not a currency. As a result of this any profits derived from its sale are liable to capital gains tax.
In what is being pegged as a victory for the local tax authorities, this new interpretation of what a cryptocurrency is, has put an end to debate in the state. According to Judge Shmuel Bornstein, at the moment it is hard to envisage Bitcoin being considered as a currency for tax purposes and therefore should be considered as an asset for the purposes of assessing tax liability. This was the prior interpretation of the Tax Authority which the court then reinforced.
Bornstein also added that he believes there is a possibility Bitcoin could cease to exist and be replaced by another virtual currency. This reasoning however is slightly contradictory as a huge number of fiat currencies have become extinct and gone out of circulation over the years, for example many European currencies that were then replaced by the Euro.
The defendant in the court case is Noam Copel, the founder of blockchain startup DAV which held its ICO one year ago. Prior to this, in 2011, he had purchased a number of Bitcoin before selling them two years later for a profit of over $2.2 million His argument to the tax authorities and the court was that his Bitcoin should be considered as a foreign currency and that any profits should be treated as exchange rate differences. He insisted that these differences were received by an individual, not in the course of a business and therefore should not be subject to tax.
The Israeli Tax Authority however, did not agree. They made the argument that Bitcoin was not in fact a currency and therefore could not be considered as a foreign currency. According to them, BTC is an asset as per their definition and therefore profits should be liable to capital gains tax.
The Judge agreed with the Authority and ordered Copel to pay some $830,000 in tax liabilities as well as $8000 in court fees.
Whilst the court accepted the Tax Authority’s definition of currency- that it must have a physical and concrete manifestation- he judge did state that this was “for now”. He added that this was just for the tax year in which the transaction was conducted and that things were likely to change in the future. But for now, said Bornstein, Copel had failed to demonstrate that Bitcoin met the Bank of Israel definition of a currency or that it could offer a real alternative to coins or notes in any other country.
This attitude towards cryptocurrency is mirrored in a number of other OECD countries including the USA. There, the Internal Revenue Service treats cryptocurrencies as properties where they are therefore subjected to capital gains taxation. This is also the situation in the United Kingdom and Australia.
Former deputy head of the Israel Tax Authority and current specialist in cryptocurrency taxation, Gidi Bar Zakay said in a statement that “Judge Bornstein methodically reviewed the provisions of the law that dealt with, amongst other things, the definition of a currency, and ruled that, given the way the law is currently formulated, Bitcoin cannot be considered a currency. He therefore accepted the Tax Authorities interpretation, as expressed in a 2018 circular.”
He added, “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.”
Copel has not commented on whether he will appeal the decision by a higher court.