Following the Ministry of Finance's repeated announcements
in recent years that it would publish the Israel Tax
Authority's official position with regard to taxation of
virtual currencies (bitcoins and the like), the ITA recently
published a draft circular in this regard ("the
According to the Draft, the ITA's position is that virtual
currencies should be deemed "assets" and not as currency
or foreign currency or even as financial instruments.
The effect of the ITA's interpretation is that exchange-rate
differentials on digital currencies accruing to individuals will be
taxable (as a capital gain) when they redeem the digital currency,
as opposed to exchange-rate differentials on foreign currency,
which are tax-exempt for individuals.
Furthermore, the ITA's position is that, when the nature of
the transaction is a business nature and not a capital nature, the
difference in the virtual currency exchange rate will be subject to
tax as business income
The ITA further states that payments using virtual currencies
will be subject to the same rules as any other asset, including
with regard to withholding tax and reporting rules.
The Draft also addresses, inter alia, the issue of VAT on
virtual currencies and states that it deems them to be goods and,
that being the case, are subject to VAT just like in respect of any
sale of other goods. The ITA's position is that anyone who
engages in mining of virtual currencies in a manner tantamount to a
business should be deemed a dealer for the purposes of the VAT law,
with all that this implies.
The significance of the Draft is that it imposes almost
insurmountable restriction on the use of virtual currencies in
Israel, due to the liabilities and costs involved in using them, as
well as in light of the reporting obligations issued against the
underlying use of bitcoins and similar virtual currencies.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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