For now, the Israel Tax Authority’s court victory settles the question of how deals for the sale of cryptocurrencies, such as Bitcoin, should be classified for the purposes of assessing tax liability.
Israeli business news outlet Globes reported that in his ruling, Judge Shmuel Bornstein said that in a situation in which the status of Bitcoin has yet to be defined, and in which 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.
Noam Copel, the appellant in this test case, is the founder of a blockchain startup DAV, who last year conducted an initial coin offering (ICO). Copel, who bought Bitcoins in 2011 and sold them in 2013 at a profit of US$2.29 million, argued that Bitcoin should be classified as a foreign currency. He further argued 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 Israel Tax Authority counter-argued that Bitcoin was not a currency and therefore could not be considered foreign currency. The Tax Authority claimed that Bitcoin comes under the definition of an asset and therefore profits on its sale are liable to capital gains tax.
Judge Bornstein’s ruling makes Copel liable to pay approximately US$830,000 in taxes on his Bitcoin transaction, as well as legal fees of about US$8,000.
The court accepted the Tax Authority’s argument that the definition of “currency” to be adopted should be the one set out in Bank of Israel Law, according to which a currency must have some physical-concrete manifestation. The court ruled that Copel had failed to demonstrate that Bitcoin meets this definition, or that it represented a real alternative to coins and notes in any country, reported Globes.
Commenting on the ruling, Gidi Bar Zakay CPA, former deputy head of the Israel Tax Authority and a specialist in cryptocurrency taxation, said:
“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,” added Zakay.