Recently (in May 2019), a judgment was handed down, which the crypto industry had been anticipating (but not the result that was determined in it), pursuant to which a Bitcoin is deemed to be “an asset” and not “a currency”.

The significance of the judgment is that it will make it more difficult for crypto investors to take a position pursuant to which their investment is deemed to be in “a currency” with the increase in value being deemed to be “exchange differences”, which are exempt from tax in Israel (pursuant to the provisions of the Israeli Tax Ordinance, exchange differences are exempt from tax in the hands of an individual). In accordance with the Judgment, a Bitcoin is deemed to be “an asset” and accordingly Part E of the Ordinance will apply to it and it will be taxed as a capital gain, without offsetting the increase in “the currency exchange rate” from the capital gain.
Within the context of the judgment, the Judge ruled out one by one the numerous claims made by the investor, that the Bitcoin should be classified as a “currency”, including the claim that it is “legal tender”, claims that in accordance with accounting principles and from an economic perspective, the Bitcoin should be recognized as “a currency” and alternative claims on the matter of “a security”, which is linked to the price of the Bitcoin.
An interesting claim is the claim of retroactivity – the taxation of gains on Bitcoins that have arisen from the time of their sale in 2013, where a draft position was only published by the Taxes Authority in 2017. This position was also not accepted by the Judge.
The Judge emphasized the physical aspect that “a regular currency” has as compared with the Bitcoin currency, which lack any physical aspect, since it is only recorded digitally, and the fact that a very considerable portion of “the regular currencies” are also effectively registered digitally (most of the “money” that exists in circulation is not cash money but rather is registered digitally in banks), was of no assistance.
We would mention that this judgment does not constitute the most common and problematic case for crypto investors. We have met hundreds of crypto investors in our offices, and for most of them the main problem derives from the fact that they have exchanged one crypto currency with another and as a result of this they have effectively exchanged one “asset” for another “asset” and as a result of this they have generated a capital gain at the time of the increase in the value of the asset that they have exchanged (or “sold”), primarily in the year 2017.

Ancillary results and additional insights
From what was stated by the Judge, which reflects the judicial norm in the tax laws, only real enrichment should be taxes, and taking the digital currencies market into account, it would be appropriate to enable the deferral of the tax until the final meeting with “the money”, and we would like to illustrate this point:
Where a client has executed exchange transactions between crypto currencies, where their value increased very sharply during the course of 2017, it should be interpreted that so long as they have not “cashed out” the “enrichment” into “real money”- it should not be taxed. We are aware of many cases in which the value of the crypto portfolios following the collapse of the value of the currencies in 2018 their value has reached an amount that is even lower than the amount of the tax! We hope that when cases like these are clarified in the Court, the Judge will find the legal and the economic way to rule that these events should not be taxed – but rather this should be done at the time and in accordance with the “cash” value in “real currency”.
In any event and under the assumption that the Tax Authority is aware of the colossal volume of the exchanges that have been performed in the crypto currencies, and with the collapse in the value of the various currencies, in order not to tarnish this large “harmed” population (who without any great joy will submit reports on a gain from the exchanges, whereas in practice they have only realized losses) as criminal, it would be appropriate to make a change in the legislation, which would enable the continuity of the taxation, whilst exempting an exchange from currency to currency from taxation, with taxation only at the end of the day. There is a not inconsiderable public made up of people who hold these currencies and who have been waiting to make a voluntary disclosure process. These people too need such a solution.
In addition, the Court’s determination will enable the recognition of capital losses for all of those people who sold their coins after the fall in the price of the Bitcoin and other crypto currencies.
And finally – since it has been determined that the Bitcoin is not a currency but rather an asset, it is possible that the Law for the Reduction in the Use of Cash (a law that was legislated recently in Israel with the objective of reducing the use of cash, which is not traceable and not identifiable), will specifically not apply to payment and purchase transactions in crypto currencies. The legislator has to take this situation into consideration.