Draft Circular On Taxation Of Activities Using Virtual Currencies

Author:Barnea & Co
Profession:Barnea & Co

Following the Ministry of Finance's repeated announcements in recent years that it would publish the Israel Tax Authority's official position with regard to taxation of virtual currencies (bitcoins and the like), the ITA recently published a draft circular in this regard ("the Draft").

According to the Draft, the ITA's position is that virtual currencies should be deemed "assets" and not as currency or foreign currency or even as financial instruments.

The effect of the ITA's interpretation is that exchange-rate differentials on digital currencies accruing to individuals will be taxable (as a capital gain) when they redeem the digital currency, as opposed to exchange-rate differentials on foreign currency, which are tax-exempt for individuals.

Furthermore, the ITA's position is that, when the nature of the transaction is a business nature and not a capital nature, the difference in the virtual currency exchange rate will be subject to tax as business income

The ITA further states that payments using virtual currencies will be subject to the same rules as any other asset, including with regard to withholding tax and reporting rules.

The Draft also...

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