Bitcoin Taxation in Israel: Capital Gain or Business Income

Bitcoin taxation in Israel depends on whether you are an investor or running a business. According to Income Tax Circular 05/2018 dated 17.1.2018, Bitcoin is an "asset" under Section 88 of the Income Tax Ordinance, and profit from its sale constitutes a capital gain. An individual pays up to 25% on the real (inflation-adjusted) gain. When the activity rises to the level of a business, the profit becomes ordinary income taxed at the progressive rates under Section 121, up to 47% before the surtax. The classification is determined by tests established in case law, and no specific number of transactions is decisive.

The Israel Tax Authority determined in its circular that Bitcoin and similar coins are neither "currency" nor "foreign currency." The Bank of Israel Law defines foreign currency as banknotes or coins that are legal tender in a foreign country, and Bitcoin does not qualify. It is therefore an asset, and its sale is taxed under Part E of the Ordinance, just like the sale of a share or any other property.

The tax is calculated on the real gain — that is, the gain remaining after deducting the increase in the Consumer Price Index from the date of purchase to the date of sale. According to the explanatory notes to Form 1399, an individual pays up to 25% on real capital gain accrued from 1.1.2012. The gain is calculated in shekels, even when the coin was bought and sold in dollars.

The Koppel Ruling

The Central District Court adopted this position in Tax Appeal 11503-05-16 Koppel v. Assessing Officer Rehovot, handed down on 19.5.2019. The appellant purchased Bitcoin in 2011 and sold it in 2013 at a profit of NIS 8,278,645. He argued that the profit constituted exchange-rate differences exempt from tax under Section 9(13) of the Ordinance. Judge Shmuel Bornstein dismissed the appeal: Bitcoin is not a currency, and therefore its appreciation is subject to capital gains tax.

When Does the Profit Become Business Income

Section 3.1.4 of the circular provides that a person whose income from virtual currencies "rises to the level of a business" is taxed on ordinary ("peirotic") income: individuals under Section 121 and companies under Section 126. The circular does not define what constitutes a business and refers to the tests established in case law. Income from mining — i.e., coins received in exchange for computing power — is classified under the circular as business income in all cases.

VAT Follows the Same Classification

Under Section 3.2 of the circular, an investor whose activity is not commercial does not pay VAT on the sale of Bitcoin. A person whose activity is commercial registers as a "financial institution" and is taxed under Section 4 of the Value Added Tax Law — through profit tax and payroll tax rather than VAT on each transaction. A miner registers as a regular dealer (osek ragil).

The classification is determined by the totality of your activity. The tests for distinguishing capital gains from ordinary income were enumerated by the Supreme Court in CA 9412/03 Hazan v. Assessing Officer Netanya, handed down on 2.2.2005. The principal tests, as applied to crypto, are as follows:

• Nature of the asset: Was the coin purchased as a long-term investment, or as a commodity that is constantly bought and sold?

• Frequency: The more frequent the transactions and the shorter the holding period for each coin, the closer the activity is to a business.

• Volume: Large amounts relative to your other income strengthen the business characterization.

• Financing: Trading with your own capital indicates investment. Loans and leverage indicate a business.

• Expertise: Professional knowledge in the field — whether your own or that of an advisor acting on your behalf — tilts toward the business side.

• Circumstances: The overarching test, in which any other fact that may affect the overall picture is examined.

The tests are weighed together, and none of them is decisive on its own. In the Hazan case it was also held that the assessing officer has the authority to classify a transaction as ordinary income even if the Land Appreciation Tax director ruled otherwise. Therefore, even after you have reported a capital gain, the assessing officer may re-examine the classification in the assessment.

Numerical Example

For example: an individual whose salary already reaches the top bracket sells Bitcoin at a real gain of NIS 400,000. As a capital gain, the tax is NIS 100,000 at a rate of 25%. If the activity is classified as a business, the entire gain is added to salary income and taxed at 47% — i.e., NIS 188,000 — before the surtax and National Insurance contributions.

What Is Requested in an Audit

Section 3.3 of the circular instructs auditors to request documents that record the trading activity. The list includes: a letter explaining how the coins were purchased and sold, bank account statements through which funds flowed for the purchases and sales, and screenshots of the transactions and the holding periods. These same documents also form the basis for arguing that the activity is an investment, because they show how long each coin was held.

It is advisable to examine the classification before filing your annual tax return. The question typically arises in the following situations:

• You execute dozens of transactions per month, or hold coins for only a few days.

• Your trading is financed by a loan or conducted with leverage on a crypto exchange.

• You work in the field, develop trading tools, or advise others on crypto investments.

• You received Bitcoin as payment for a product or service. Under Section 3.1.5 of the circular, this is a barter transaction, and the income is recorded at the fair market value of the coin in shekels on the date of the transaction.

• You mine coins, in which case the income is business income under the circular.

Those who invest for the long term and sell infrequently can read about the calculation itself, including the surtax and reporting on Form 1399, on the page Taxation of Crypto Profits. A loss from a sale is treated under Section 92, as explained in the article Offsetting Crypto Losses Against Capital Gains.

Classification of crypto activity is handled at the office of Adv. and CPA Shlomi Vaknin, who served for approximately a decade as a national supervisor in the professional division of the VAT department at the Israel Tax Authority.