Israeli court declares ‘cryptocurrency is an asset’ in landmark tax ruling

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A court in Israel has declared virtual currencies to be a type of asset, rather than a type of currency, in a landmark tax case expected to have widespread implications for cryptocurrency investors in the country.

The Central District Court backed the view of the Israel Tax Authority in holding cryptocurrencies to be an asset, which means profits on the sale of cryptocurrency would be liable to capital gains tax, Globes reported.

In particular, the court said that cryptocurrencies like Bitcoin Core (BTC) could not be considered a currency because they lack the fundamental characteristics of a currency, including uncertainty over whether it will continue to exist in future, or whether it will be replaced by other forms of virtual currency.

The case, which might still be appealed to the Supreme Court, is a test case with the named appellant, Noam Copel, founder of blockchain firm DAV. Copel bought BTC in 2011 and sold in 2013, delivering a profit of NIS 8.27 million (US$2.29 million).

Arguing that BTC was in fact just another type of “foreign currency,” he said fluctuations in value should be treated in the same was as exchange rate differences for private individuals. Under current Israeli tax law, this would have exempted the gains from any tax liability.

The ruling sees Copel now on the line for NIS 3 million (US$829,965) in capital gains tax, in addition to a NIS 30,000 (US$8,299) payment towards legal costs.

Meanwhile, the tax authorities argued that Bitcoin and other cryptocurrencies fell short of the definition of a currency as adopted by the Bank of Israel, which requires currencies to have some physical manifestation.

The court agreed that Copel had failed to demonstrate that cryptocurrencies had these, the hallmarks of a currency, and that the Tax Authority was correct in its description of virtual currencies as a type of asset.

Gidi Bar Zakay, former deputy head of the Israel Tax Authority, told the news outlet that ultimately a “reality test” would best classify an asset like cryptocurrency.

“Judge Bornstein methodically reviewed the provisions of the law that deal with, among other things, the definition of a currency, and ruled that, given the way the law is currently formulated, Bitcoin cannot be considered a currency, and he therefore accepted the Tax Authority’s interpretation, as expressed in a 2018 circular,” he explained. “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.”

The ruling means all crypto transactions in Israel could be subject to capital gains tax, with potentially costly implications for those engaged in crypto trading in Israel.