The Israeli Tax Authority (ITA) recently published a draft clarifying its stance on digital currencies including bitcoin for the first time. Bitcoin.com examines the legality of the draft and its effects on the Israeli Bitcoin community.
Also read: Why South Korean Bitcoin Adoption Could Outpace Most Other Countries This Year
The Draft is Not Yet Law
The draft published by the ITA earlier this month states that digital currencies should be 
considered an ‘asset’ and not a currency. Their sale will therefore be taxed as a sale of property and income from the sale subject to capital gains tax.
However, if the nature of the digital currency transaction is a business one and not a capital one, the difference in the exchange rate will be subject to tax as business income instead of capital gains. The Draft also subjects digital currencies to Value Added Tax (VAT) just like the sale of other goods.
Currently, Israel has no legislation on digital currencies and “the draft will merely be 
commentaries”, according to Adv. Harel Perlmutter, Head of the Tax Department at Barnea & Co., whose office is located in Tel Aviv.
“The draft circular is a declaration of intent” from the ITA and “at this stage there is no draft legislation published”, he told Bitcoin.com. “The next stage will be the final tax circular which is a commentary on the tax law by the ITA”, he explained, adding that:
This circular will become law in one of the following ways: the Israeli parliament will legislate it as a law or the courts may give a judgment in line with the commentaries of the ITA.
Impact on the Israeli Bitcoin Community
The Israeli Bitcoin community has been waiting for the ITA to clarify its stance on the digital currency for quite some time. However, this draft is not quite what some were 
expecting.
“Our perception of this draft is very negative”, Youval Rouach, CEO of Bits of Gold, a Tel Aviv-based bitcoin exchange and merchant service provider told Bitcoin.com. Citing this draft is the first time the government is trying to regulate bitcoin, he said:
This means Bitcoin is considered an asset and not a currency, which means, you have to pay VAT on the full amount you purchase, and you have to prove and declare your profits and pay at least 25% from the profits in tax.
His company helps clients in Europe and Israel buy and sell bitcoin in both U.S. dollars and Israeli shekels as well as offers merchant solutions for accepting bitcoin. “We’ve been cooperating with the Regulator for quite some time now, and have held a state-issued certificate of ‘Currency Service Provider’ since 2013”, Rouach revealed.
However, this new draft means the company would have to start charging VAT for the whole amount of any bitcoin sold. For example, a client wanting to buy $1000 worth of bitcoin will have to shell out $1170, he explained, adding that this draft will incentivize Israelis to buy bitcoin outside of Israel where there is no VAT. This will likely result in “a loss of income for Israeli companies, and thus Israeli tax authorities and the public”, he claims.
A Hindrance to Bitcoin Adoption
While not a law yet, Rouach sees the possibility that “this draft can become a mandatory paper within a month”.
“If this draft becomes a reality, Bitcoin adoption in Israel will be strongly affected”, he cautioned, citing that many people will want to buy bitcoin outside of Israel or in black markets instead of using proper, licensed channels. In addition, he believes that many people who are thinking of buying bitcoin “won’t necessarily go through the trouble of wiring money outside of Israel” so the overall number of bitcoin buyers would probably decrease.
Citing the draft, he noted that “the Bitcoin and Blockchain ecosystem in Israel, one of the best start-up places in the world, is very healthy, with lots of startups here. However, we’re not sure it’ll stay like this if you reject the basics of this technology”.
What do you think will happen to Bitcoin adoption once the draft becomes law in Israel? Let us know in the comments section below.
Images courtesy of Shutterstock, ITA, Barnea & Co, and Bits of Gold
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