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Bitcoin (BTC) is a Taxable Asset, Not a Currency; Israeli Court Says

Bitcoin (BTC) is not a currency in the strict sense of the word and therefore falls into the category of a digital asset according to a recent sentence by the Central District Court in Lod, Israel. In this way, the holding of Bitcoins and the profits from operations with cryptocurrencies become taxable.

The decision was taken by Judge Shmuel Bornstein as part of the verdict of a dispute between The Israel Tax Authority and Noam Copel, founder of blockchain startup DAV.

Noam Copel: The man who argues Israel should not tax Bitcoin (BTC)
Noam Copel

Mr. Copel bought Bitcoins (BTC) in 2011 and sold them in 2013, generating a profit of nearly 2.3 million dollars. Copel refused to pay taxes on this profit, arguing that Bitcoin (BTC) should be treated as a foreign currency and 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 argued that Bitcoin is not a currency, much less considered as such by any state, so it could not have that distinction. With that argument the public organism expected the judge to decide that profits from trading are liable to capital gain taxes.

Israel: Bitcoin is Crypto, But It is Not Currency

After reviewing the allegations, Jud Bornstein had to turn to other sources of law to make a fair decision because no legislation expressly lists Bitcoin as an asset or currency. Bornstein gave the reason to the Israeli government arguing that the legal definition of a “currency” according to the Bank of Israel implies that there must be some physical-concrete manifestation (something Bitcoin does not have).

Bornstein, however, does not deny that the evolution of society may soon change
this perception. While the decision may reach the Israeli Supreme Court,
Bornstein’s judgment has provided one of the firsts Israeli legal
interpretations on the nature of Bitcoin.

explained that for there to be a need to change the law, Bitcoin must be used
and accepted as money by people in general (and not by a closed group).

“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.

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Governments Are Taking Wrong Approach to Cryptocurrency Taxation

Cryptocurrency, Taxes–Earlier today EWN reported on a development by several different countries, including Japan, to impose more severe regulations and protocols for catching so-called “cryptocurrency tax evaders.” However, the approach of vilifying the group of investors, particularly in the broader context of this year’s market and the state of crypto regulatory oversight–or lack thereof–is sending the wrong message and will ultimately backfire for the bureaucracies that enact them.

For one, crypto taxation is unnecessarily complex. While traditional media outlets have had a proverbial field day publishing the abysmal rates of cryptocurrency customers actually paying taxes on their investment, a figure which could be less than one percent of the participating population, they fail to take into account the severe complexity of the current tax code. While taxing earnings from individual trades is somewhat part and parcel for the markets of stocks, the trading atmosphere for cryptocurrency, where thousands of trades can be executed by an average user in a single year given the minuscule transaction fees, does not lend itself well to the same penal code.

On Dec. 4, the government of Japan announced a new initiative to enforce crypto taxation, including the development of a system that would specifically track down evading individuals who refuse to pay. While it’s little surprise that a government would attempt to collect on the significant taxes being generated from cryptocurrency appreciation, particularly during 2017’s bull run that saw the currency jump from $1000 to near $20,000, it still sends the message that the majority of crypto traders are criminals as opposed to respected investors.

We have yet to see the impact of a more simplistic tax code in relation to cryptocurrency, and whether it would make an impact on the current unfavorably low rate of actual taxes paid on crypto earnings. On one hand, the community of cryptocurrency has set itself up for such scrutiny, given the decentralized and largely libertarian ethos surrounding the industry. With talk about the “dangers” of fiat and the government who control them, it’s understandable that tax services few their competition as outlaws attempting to evade and operate outside of the established system.

However, pushing crypto investors to jump through endless hoops of the ridiculous tax code, without even the attempt to find a happy intermediary, sends a message that governments are not willing to compromise. The end result has been an investment base that has little interest in complying, more out of paralysis than spite. While few are happy to pay taxes, particularly those gained through savvy investing, the significant deck stacked against most crypto investors is enough to have them bow out all together.

Rather than painting the crypto investment community as cheats, tax evaders and criminals, governments should seek to find a more simplistic means for collecting taxes on crypto gains. The current model, which asks investors to calculate appreciation on individual trades from the thousands of currencies across the market, is not a conducive means for compliance, and fails to take into account the nature of the cryptocurrency industry and the way most traders operate.

In addition, simplifying the tax code for crypto shows a willingness on behalf of governments to take the industry seriously as a digital asset and newly emerging landscape, as opposed to the current discourse which treats crypto investors as second class citizens.  

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