The Israeli court has ruled that bitcoin is an asset and not a currency, and thus subject to capital gains tax (CGT). Therefore it is in feud over tax payment.
The bitcoin founder, Noam Copel of DAV.Network, bought bitcoins in 2011 and sold them in 2013 at a profit of 8.27 million Israeli new shekels ($2.29 million). He argued in the court that the profit from selling the bitcoin should not be taxed as bitcoin should be treated as a foreign currency. Under the Israeli tax law, gains from currency exchange are not subject to tax.
In contrast, the Tax Authority, on the other hand, argued that bitcoin is not a currency but an asset, and therefore profits should be liable to CGT.
The district court accepted the position of the tax authorities and ruled that gains from the sale of Bitcoin should be considered capital gains. The district court decided that, currently, Bitcoin cannot be considered a "currency" due to these following reasons:
The court has sided with the Israeli government’s position that bitcoin and other cryptocurrencies are considered property for tax purposes. In February 2018, the Tax Authority issued a notice, saying that profits from cryptocurrencies will be subject to CGT at rates from 20–25 percent.
Due to the capital gain tax, the use of bitcoin as a payment instrument would be difficult as the bitcoin users need to recognize a gain or loss of equal to their current bitcoin value over its cost basis. In addition, even though not explicitly mentioned in the decision, the exchange of virtual currencies (e.g. sales of bitcoin and purchase of ether) creates a tax event. Consequently, this situation also makes trading in virtual currencies very difficult.
Recently, the tax authorities increased the enforcement against individuals and corporations trading in virtual currencies by imposing a special reporting obligation on individuals who trade in virtual currencies.
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