An Israeli court has ruled that bitcoin is an asset, confirming the central bank’s stance. The case involves the country’s tax authority and the founder of a blockchain startup who argues that profits from the sale of cryptocurrency should be tax-free. The court has ruled in favor of the tax authority, endorsing the central bank’s definition of currency.
Latest Court Ruling on Nature of Bitcoin
An Israeli central district court reportedly ruled in favor of the country’s tax authority Monday, recognizing bitcoin as a financial asset and not a currency. Profits on its sale in Israel are therefore subject to capital gains tax.
Judge Shmuel Bornstein simultaneously rejected an appeal by the founder of a blockchain startup who argues that bitcoin should be considered a currency, so the proceeds from its sale should not be subject to taxation. Globes daily financial newspaper reported Tuesday:
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.
Emphasizing that the status of bitcoin is still undefined in the country, the judge stated in his ruling that “it was hard to envisage a result whereby bitcoin would be considered a currency for tax purposes in particular,” the news outlet conveyed, noting that the case could reach the supreme court.
Itay Bracha, managing partner at Israeli law firm Bracha & Co. and the head of the firm’s tax department, shared his thoughts with local daily business newspaper Calcalist. He said: “The ruling is a signal to all those who have yet to report cryptocurrency-related profits or based their actions on differing legal advice … The ruling is unequivocal, and since it is not new legalization but a judicial interpretation, it applies retroactively.”
According to reports, the case involves Noam Copel, founder of blockchain startup DAV. “We’re building a decentralized infrastructure to revolutionize the transportation industry on the blockchain,” the company’s website explains.
Globes reported that Copel bought BTC in 2011 and sold them in 2013 for a profit of approximately NIS 8.27 million (~$2.29 million). Asserting that his profits should not be subject to capital gains tax, he told the court:
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.
However, the Israel Tax Authority disagreed, proclaiming that bitcoin is not a currency under the central bank’s definition, so it cannot be a foreign currency as suggested by Copel. Instead, the agency claims that cryptocurrency falls under the definition of an asset, therefore profits on its sale are subject to capital gains tax. Monday’s court ruling obligates Copel to pay tax of about NIS 3 million, the news outlet estimated.
Central Bank’s Definition of Currency
The court accepted the tax authority’s position that the definition of “currency” should be the one defined by the country’s central bank which does not apply to crypto assets. The agency affirmed that bitcoin is not a currency from both accounting and economic aspects, stating that “its valuation is extremely volatile, any related investments carry high risk, its use is severely limited and restricted mostly to unlawful entities, and it is not used as a benchmark for value,” Calcalist wrote.
Copel, on the other hand, believes that from both aforementioned aspects, “the trust users put in bitcoin and its use as both a payment method and to benchmark value means it should be considered a currency.”
After listening to both sides of the argument, the judge rejected Copel’s appeal and ruled that he “had failed to demonstrate that bitcoin met this definition [of currency], or that it represented a real alternative to coins and notes in any country,” Globes described.
Bittax founder Gidi Bar Zakay, former Deputy Director of the Israel Tax Authority and currently director of the Israeli CPA Association, said that Monday’s ruling was based on current law, elaborating:
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.
He added that when that happens, “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.” He further opined: “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.”
The Israel Tax Authority has long considered cryptocurrency an asset subject to capital gains tax. In December last year, Calcalist reported that the agency had been cracking down on the unreported crypto earnings of hundreds of Israelis, sending notices to those whose activities raised suspicion. “The authority will continue to seek out unreported [crypto] earnings,” said Eran Yaakov, the head of the Israel Tax Authority, in reply to the news outlet’s request for comment. The publication explains:
CRYPTOCURRENCIES ARE NOT DEFINED AS A CURRENCY BUT AS A FINANCIAL ASSET IN ISRAEL. AS SUCH, TRADING IN CRYPTOCURRENCIES IS SUBJECT TO A CAPITAL GAINS TAX OF 25%-30% IN THE COUNTRY.
In July last year, the tax authority reportedly reached an agreement on obtaining information on crypto transactions with Bits of Gold, an Israeli cryptocurrency exchange with about 50,000 users. The exchange will share information about traders who have made transactions of $50,000 or more over a 12-month period. The authority has also approached other platforms for the same purpose.
While Israeli law requires financial institutions to report fraudulent transactions and suspicious activities to the Israel Money Laundering and Terror Financing Prohibition Authority, sharing data with the tax authority is not mandatory. Tomer Niv, Chief Growth Officer at Bits of Gold, clarified that his exchange only transfers “the information we are required by law … in order to protect the privacy of customers on the one hand, and [comply with] the provisions of the law on the other.”
Central Bank’s Position and Global Standards
Nadine Baudot-Trajtenberg, who served as Deputy Governor of the Bank of Israel from March 2014 to the end of February, said in January last year that the central bank had been studying cryptocurrency. However, she revealed that not much had been learned from other countries’ regulations “since no regulator anywhere in the world had issued guidelines to the banking system on how to act in relation to customers’ activity in virtual currencies,” Reuters conveyed. She was further quoted as saying:
THERE IS A REAL DIFFICULTY IN ISSUING SWEEPING GUIDELINES TO THE SYSTEM REGARDING THE PROPER WAY TO ESTIMATE, MANAGE, AND MONITOR THE RISKS INHERENT IN SUCH ACTIVITY … BEYOND THE RISKS TO THE CUSTOMER THERE ARE ALSO COMPLIANCE RISKS TO THE BANK.
In December last year, Israel became a full member of the Financial Action Task Force (FATF), an intergovernmental organization which focuses on developing policies to combat money laundering and terrorism financing. The FATF currently has 36 member jurisdictions and 2 regional organizations, including the European Commission. In February the organization urged its member countries to regulate crypto exchanges like commercial banks, elaborating:
FOR THE PURPOSES OF APPLYING THE FATF RECOMMENDATIONS, COUNTRIES SHOULD CONSIDER VIRTUAL ASSETS AS PROPERTY, PROCEEDS, FUNDS, FUNDS OR OTHER ASSETS, OR OTHER CORRESPONDING VALUE.
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