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I am an Israeli citizen. I've bought BitCoin (let us agree for the sake of discussion it is a currency) using US dollars.

Let's also assume I never convert the bitcoins to any other currency (but instead use them to purchase goods and services directly). Also, let's assume the monetary value of bitcoin rose when compared to ... well, everything else (USD, ILS, Alpaca Socks).

Do I have any obligation to pay taxes on my "earnings"? I mean, if I never convert bitcoin to USD, then at what point in time do taxes come into play?

Does the fact I'm asking about bitcoin and not about Euro or any other foreign currency matter at all?

thepurpleowl
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ripper234
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3 Answers3

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Legally speaking, when you convert that bit-coin onto something else, the Israeli Tax Authority will look into the value of that something else, compare it to the original value of the previous something else you used to buy bit-coins (USD, in your example), and charge you capital gain taxes for the difference.

According to the Israeli law you're supposed to pay taxes when selling (converting the bit-coin to something else), and since you're not using any formal bank or stock broker which will automatically deduct the taxes, you have to pay the taxes yourself. By not doing so you're committing a tax fraud.

The real question you're asking is whether they'll come after you. Well, that depends on the amounts. They might. Pay attention: there's no statute of limitation for tax fraud in Israel. They may come after you in 50 years from now.

Another thing to keep in mind: if you used bit-coins to buy something (services or products of any kind), you probably didn't pay the VAT (מע"מ) - which is another case of tax fraud on your behalf.

PS: I'm not a lawyer or accountant, so get a professional advice, but I have been dealing with the Tax Authority in Israel, so I've got a pretty good idea of what the rules are.

littleadv
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I don't know how taxes work in Israel, but I imagine it is relatively similar to taxes in the US. In the US you need to pay taxes on investment earnings when you sell them or in this case trade them for something of value. The amount that would typically would be taxed on would be the difference between how much you paid for the currency and the value of the item you traded it for.

In theory there shouldn't be any difference in trading bitcoins versus dollars or euros. Reality is that they are rather weird and I don't know what category they would fall into. Are they a currency or a collectors item?

I think this is all rather hypothetical because there is no way for any government to track digital currencies and any taxes paid would be based on the honor system.

I am not an account and the preceding was not tax advice...

stoj
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I guess Bitcoin are not that popular yet and hence there are no specific regulations. If currently it gets debated, it would be treated more like a Pre-Paid card or your Paypal account.
As you have already paid taxes on the $$ you used to buy the Bitcoins there is no tax obligation as long as you keep using it to buy something else.
The other way to look at it is as a commodity. If you have purchased a commodity and it has appreciated in value in future you may be liable to pay tax on the appreciated value. Think of it as a if you bought a house with the $$ and sold it later.

Once more serious trade starts happening, the governments around the world would bring in regulations. Till then there is nothing to worry about.

Dheer
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