A seller made NIS 8 million (U$ 2 million) on an investment in Bitcoin in 2013, and he was charged with capital gains tax by the Israeli tax assessor. Whilst the tax payer argued that profit from his Bitcoin trades should be tax exempt as a "foreign currency exchange rate differentials' under section 9 of Israel's Income Tax Ordinance, the court rejected this position. "For now", explained the Court "Bitcoin is not a "currency" under (Israeli) law" denying shelter for the Bitcoin gains from tax.
The court decision published on Sunday May 19, is actually the first reference by a court of justice in Israel regarding taxation of crypto currency transactions.
World-wide consensus as to how and whether crypto coins carried by distributed ledger technologies (DLT's) should be taxed has yet to be shaped. Just now, end of 2018, even the OECD established its' own 'Blockchain Policy Centre'. Also the crypto currency investor community in Israel has been wrestling, for a number of years, with questions of a similar nature. In a Circular -first published as a draft by the Israel Tax Authority only in 2017, which became final in 2018 as Circular 5/2018 ("Virtual Currency"), ITA announced it would treat Bitcoin investments as an investment in "assets" and the realization of a Bitcoin gain subject to capital gains tax (currently 25% as opposed to the progressive rates up to 48-50% on income from a business activity or the sale of 'business stock'). The Israel Tax Authority does not view Bitcoin a "currency" for tax purposes. The importance of this distinction lies in the tax exemption of the Income Tax Ordinance on exchange rate differentials of foreign currency. The court followed the position of Israel's Tax Authority and did not give weight to the argument of the tax payer that the 2017 Circular's retroactively invoked a tax that infringes on his right to be able to rely on the law, whilst the position of the tax authorities on Bitcoin only became apparent for the first time in this 2017 draft circular. An interesting detail in this light is that in 2017 the Israel ombudsman and state comptroller criticized the Israel tax authorities for the promotion of Circulars, as pseudo-legislation, in lieu of proper legislative changes through parliamentary channels, absent sufficiently clear legislation.
Israel's Income Tax Ordinance does not define what makes a 'currency'; so as the legal mortar for its views the court used the definition of "foreign currency" in the Law on the Bank of Israel; "bank notes or coins". Even if money is held by the public in the form of a mere electronic record on the computer between the banks, such as is the case with Bitcoin, said the Court, this is not "an expression, directly or indirectly, of a currency, ie a bill or a coin." If a coin cannot be considered a 'currency' under the Law of the Bank of Israel, then for the purpose of the Income Tax Ordinance it can also not. In its decision the Court did explain that the Appellant had not proven why Bitcoin is a real substitute for money or 'currency'. Had he been able to make that case, then regarding his Bitcoin gains he might have claimed the exemption for currency linkage income.
The Court added that it is not inconceivable that "at some point in time, an economic or legal change will occur, which will cause Bitcoin to qualify (in Israel) as 'currency' ........... but the road to that day may be long", still many ledgers, nodes and blocks away.
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