The Israel Tax Authority (ITA) recently announced that Bitcoins and cryptocurrencies, in general, would be treated and taxed as property and not as an asset. On February 19th, the ITA through a professional circular declared, “Bitcoin is an asset and not a currency.”

The above mentioned circular read,

“For purposes of income tax….. a person whose activity as aforesaid does not reach a business is only entitled to capital gains tax and the person whose activity in the field reaches a business (trade in a distributed method of payment and Such a measure), tax will be paid for any business activity.” 

Israel is going forward with a two-pronged approach when it comes to taxing cryptocurrencies. The tax slab is going to be divided into two categories. The first one includes people who hold these virtual currencies in order to gain profits, i.e, create a capital gain and the second one includes businesses (or individuals) which ‘engage’ in Bitcoin for ‘business’ purposes.

The people in the first category will be liable to pay a capital gains tax, which currently is at 25% in Israel. The people in the second category will have to pay 17% as value added tax (VAT) in addition to the 25% as capital gains tax. Hence, a businessman engaging in cryptocurrencies to carry out business activities could potentially have to pay 42% as taxes.

Chairman of the Israeli Bitcoin Association, Manny Rosenfeld commented,

“The digital currency revolution is here to stay……. Tax Authority has made several amendments to the circular in accordance with the positions we presented.”

David Lewinson, a cryptocurrency trader from Israel commented,

“This decision by the government has both pros and cons. The pros being that this decision shows that cryptocurrencies are legitimate currencies and will instill confidence in the investors and the cons being that such a high rate will result in lower number of blockchain startups and will possibly result in locals shifting to other countries with friendlier tax laws to start their business.”

Gwen Wayne, an accountant from the US says,

“Profit from Bitcoin and other altcoins should be taxed just as profit from other trades is. How is it any different? At the end of the day, capital gains is taxable and so is cryptocurrencies.”

An interview with a couple of business owners in Tel Aviv and Jerusalem have had mixed reactions where everyone is happy about the acceptance of cryptocurrencies in Israel but unhappy with the 42% tax bracket on cryptocurrencies. Sources from within the ITA say they would like to discourage the use of cryptocurrencies but would not want to ban it considering the adoption and use cases in various industries.

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