Is the tax authority coming for your Bitcoin?

Bitcoin and cryptocurrencies have earned a reputation of flying under the radar of law enforcement and regulation. Nevertheless, many of those currently participating in the Bitcoin festivities of recent weeks during which the digital currency more than doubled its previous 2017 all-time high, treat it as an investment, and as such, they are required to pay tax on any profits.

Inga Aizenberg of the Aizenberg, Shinar & Co. law office spoke to Calcalist and helped break down everything any Israeli Bitcoin holder needs to know when it comes to taxes.

"Since 2018 cryptocurrencies have been characterized by the Israel Tax Authority (ITA) as a tradable asset and aren't recognized as a currency by the Bank of Israel," said Aizenberg. "Therefore, the ITA regards the random purchasing and selling of cryptocurrencies as a capital gain, like the sale of an asset. If a person sells a virtual currency at a profit they will pay capital gains tax on it. It is also important to note that the ITA also recognizes any losses the investor may have incurred."

Bitcoin has been on fire over recent weeks. Photo: Shutterstock

How much tax do you pay on the profit?

Since cryptocurrencies are regarded as assets, any profits are taxed by 25%, she explained. "In order to receive returns on expenses and losses, the tax-payer needs to maintain records to prove his claim," said Aizenberg. She added that in certain cases the income from buying and selling cryptocurrencies is defined as a business due to its volume and in that case the tax rate will be higher, up to as much as 53%.

At what stage does the transaction become taxable?

"The taxation occurs following the sale of the cryptocurrency. Capital gains tax is only paid on the profit. Should one cryptocurrency be converted to another, the gap between the amount paid at the original purchase and the amount spent in the conversion will determine the level of the tax. Taxpayers are required to report their profits or losses once a year with a specific form attached to their annual report.”

Is it a criminal offense not to pay taxes on cryptocurrency profits? 

“Misreporting income and profits from the sale of cryptocurrencies is a criminal offense with all that it entails.”

Is taxation territorial or personal?

“Taxation in Israel is personal. Therefore, taxes on income and profits from selling or converting cryptocurrencies are applicable whether the tax-payer is in Israel or an Israeli citizen living abroad."

How can tax authorities know if I have Bitcoin and how much of it I hold?

"Currently the ITA can only know if someone holds cryptocurrencies if they reported it or if the bank reported that it received funds into an account stemming from the sale of cryptocurrencies. It is well known that the ITA has a cyber department which tracks specific people on social networks and keeps a close eye on their activity to ensure they didn’t forget to report their profits."