The Israel Tax Authority, Israel’s version of the IRS, has issued a circular detailing its position on Bitcoin and other virtual currencies.
Effectively, the Tax Authority divided its opinion into two parts, with varying treatment to those who buy Bitcoin or other virtual currencies as an investment, versus those who trade actively or offer brokerage services in order to make a living or run a business.
However, both sides of the coin (no pun intended) are based on the same conclusion of the Tax Authority, at least as far as it is concerned – Bitcoin is an asset, and not a currency.
Therefore, a person who holds a digital currency in order to create a capital gain (and does not engage in it as a ‘business’) will be exempt from paying VAT, but will be liable for capital gains tax, which in Israel today is at 25% for most taxpayers.
However businesses (or individuals) which ‘engage’ in Bitcoin for business purposes will have more complicated treatment, and will have to pay a value added tax (VAT) of 17%, on top of the capital gains tax.
The Authority also requires that all virtual currency transactions be documented for possible audit.
Apparently, even those defined as a business and whose activity is the mining of digital currencies will be classified as a dealer for VAT purposes.
The Authority noted that in order to be able to present relevant evidence in the case of an audit, the taxpayer must demand documents documenting the trade in the decentralized means of payment, and verify the existence of the transaction and its monetary volume, such as through which accounts the fund were transferred to purchase.
In addition, the seller must attach the pages of the bank accounts through which the purchase and sale funds were transferred, and/or a computer screen capture showing the sale and purchase of the money supply and the date/time it was held by the seller.
The Israel Bitcoin Association came out in favour of the Tax Authority’s move – mainly because it formally ‘recognizes’ Bitcoin and other digital currencies as actual things. The country’s other two main financial regulatory bodies, the Bank of Israel and the Israel Securities Authority, have been reluctant to do so.
Manny Rosenfeld, Chairman of the Israeli Bitcoin Association, commented on the changes (translated from the original Hebrew, as appears in Israel new site Ynet):
The digital currency revolution is here to stay. In the past year we have been working hard with the Tax Authority to adapt the draft circular that was published to the reality on the ground and to allow digital coins – a huge growth engine of Israeli high-tech – to develop and blossom. We are pleased that the Tax Authority has made several amendments to the circular in accordance with the positions we presented.
We are calling on the Bank of Israel and the legislator to complete the work and to recognize Bitcoin as a currency like all other currencies so that we can place Israel in a position, as the Start-up Nation, at the forefront of global technology.