Bitcoin Israel - Q & A

January 20, 2014

Q & A – Bitcoin Israel

Bitcoin is digital virtual currency run by a system based on open source software. No country, company, bank or organization owns or controls Bitcoin.

Digital currency?

Bitcoin is digital currency, and exists solely in the form of digital figures. Each coin has a number identifying it and the user holding it.

So where is my money being held?

In digital files called Bitcoin Wallets, containing sequences of numbers that represent Bitcoins.

What is the real value of a Bitcoin?

As currency, Bitcoin has no real value. However, right now, it is traded at the time of writing this article at 928 USD per Bitcoin, meaning one Bitcoin is worth hundreds of Shekels.

What can I do with it?

You can buy products, but not everywhere, only certain businesses around the world have adopted this currency. To date there is a fairly small number of several thousand stores, hotels, individuals and service providers who accept Bitcoin as payment.

How do I carry out a transaction? Where is it registered?

Since holders of this currency are unknown and anonymous, when transactions are made the details of the currency holders making the transaction do not appear anywhere, only details of the transaction itself – meaning the coins that have switched hands and were transferred from one account to another.

How are Bitcoins made? Who prints them?

Regular currency, like Shekels, is controlled by a central bank that puts it in and takes it out of circulation according to the needs of the market. Bitcoin has no central bank, and new coins go into circulation through "mining", meaning a computerized action carried out through solving complex equations that ultimately create the unique, encrypted code of each Bitcoin. In essence, any computer can "mine" new coins.

Is there a limit to the number of Bitcoins "mined"?

As time goes by, less and less Bitcoins are available for "mining". Between 2008 and 2012, 10.5 million Bitcoins were "mined". Over the next four years, only 5.25 million Bitcoins will be available for "mining", and the number of Bitcoins in circulation can never exceed 21 million.

How do I go about obtaining Bitcoins?

There are a number of ways. Other than "mining", the most common way for consumers to obtain Bitcoins is to exchange "regular" money, such as US Dollars or Israeli Shekels, for Bitcoins in digital foreign exchanges websites, much like buying foreign currency at exchange points or banks. Just like any currency, Bitcoin has an exchange rate with all leading currency in the world that goes up and down according to its demand. Also, if you are interested in trading in Bitcoins, you could sell your car, for instance, and be paid with Bitcoins.

What are the advantages of Bitcoin?

It is a global, anonymous and virtual currency that can be transferred from one account to another with a click at no extra charge. It is also ostensibly resistant to local financial crises. Since it is totally anonymous, it allows spenders to avoid governmental regulation and buy products and services anonymously.

What are the disadvantages of Bitcoin?

Not all Israeli businesses accept it, it is virtual and therefore less tangible than physical currency, and it has yet to be recognized by the Central Bank of Israel, as can be seen from its response below. Other establishments are also wary of accepting it, and its trade is limited because it can be easily used in money laundering.

Is it legal in Israel?

To date no law prohibits using and/or trading in Bitcoin, and it is therefore legal.

Who invented Bitcoin?

Officially, the invention of this currency is attributed to a Japanese software developer called Satoshi Nakamoto, however, in August 2008, The New Yorker and Fast Company acknowledged three engineers – Neal King, Vladimir Oksman and Charles Bry – as the original developers of Bitcoin based on a patent application they had filed which contained encryption technologies similar to those used in Bitcoin, as well as statements similar to those found in the Bitcoin whitepaper. The three have denied their involvement.

What is Bitcoin's legal status in Israel?

As mentioned, Bitcoin does not meet the criteria for currency according to Israeli law, and therefore money laundering laws and other regulations associated with currency service provision cannot be applied to it. Relevant laws may be amended in future.

Will tax be applied to Bitcoin transactions in Israel?

Bitcoin transactions are liable to tax like any other transaction, with several differences. First, Bitcoin transactions, much like other foreign currency transactions, require translation into Shekels. Second, since Bitcoin transactions cannot be monitored and traced effectively and exhaustively, it is difficult to tax them and this leaves a form of dishonest "loophole".

Will sellers be liable to tax if exchange rates go up as a result of Bitcoin being sold in Israel?

Meaning if I buy Bitcoin today at $928, when each US Dollar is worth 3.5 Shekels, and the USD exchange rate goes up, so that when I sell my Bitcoin each Dollar is worth 4 Shekels, will I have to pay income tax on the difference, since, as some tax experts argue, it will be regarded as profit? It is possible that this "profit" will be taxed in the same way as linkage differentials are, however, this is not the case across the board, as section 3(13) to the Income Tax Ordinance (New Version) 5721 – 1961 (hereinafter: the Ordinance) states that in some cases where an individual has received income from such rise in foreign exchange rates, s/he will not be liable to income tax if s/he meets all 3 criteria exempting him/her from paying income tax for gains made from a rise in foreign exchange rates.

The criteria are:

·         If linkage (exchange rate) differentials are not partial linkage (exchange rate) differentials. This criterion is met, since a rise in Bitcoin exchange rates does not constitute partial linkage differential, as defined in the income tax regulations (establishing partial linkage differentials), 5763 – 2003.

·         If the individual has not demanded the deduction of interest expenses or linkage differentials on account of the property.

·         If the linkage differentials do not constitute income under section 2(1) to the Ordinance ("gain or profit from any business or occupation … or from a transaction or commercial venture") and are not registered or are required to be so registered.

Law in Israel – Updates

Class action against FIBI Group

The FIBI Group (the First International Bank of Israel, the Otsar Hahayal Bank and UBANK) has put a new policy in place whereby clients may not transfer funds in order to purchase Bitcoins, and has sent letters to clients demanding that they refrain from doing so. According to Bitcoin Israel, this demand is illegal and several FIBI clients are now taking steps to file a class action suit against the group.

Meeting with MK Tamar Zandberg (Meretz)

On December 29th, 2013 Bitcoin Israel met with MK Zandberg, who expressed interest in helping them solve issues with Bitcoin that are currently vague and obscure. Among the modes of action that were raised during this meeting were official letters to the Central Bank of Israel to receive more information on its position on Bitcoin, and raising awareness to the currency during a session held by one or more Knesset committees.

As part of this article we have asked for responses from the Central Bank of Israel and Bitcoin Israel.

Mr. Ron Gross of Bitcoin Israel said on January 1st, 2014:

"Bitcoin Israel's position is that Bitcoin's legal/tax status should be the same as any other currency.

According to the opinion we obtained from a leading Israeli accounting firm, Bitcoin should be taxed just like any other currency – tax should be paid for income measured in Bitcoin, but capital gains should not be taxed (capital gain from foreign currency is not liable to tax under Israeli law). In addition, there is no law prohibiting the use of or trade in Bitcoin, and therefore it is legal to use it.

Where the authorities stand:

1.    The Central Bank of Israel was asked early this year by various banks and companies to ascertain how Bitcoin may be regulated. It responded that so far it has no opinion on the matter, and does not intend to prohibit banks from using this currency. However, it also has no intention of forcing banks to allow clients to make transactions using Bitcoins. In practice this position is problematic, because banks fear various money laundering issues, even those that are irrelevant to Bitcoin, and as part of their risk-aversive policy avoid this currency and reject any transaction that has a Bitcoin air about it.

2.    The Tax Authority has issued a general statement in the past whereby it intends to tax Bitcoin, but has not given any further details.

3.   We are currently working on obtaining more detailed statements from various official bodies, and a meeting has been held in this vein this week with MK Zandberg."

Mr. Yoav Sofer, Acting Bank of Israel Spokesman, said on January 1st, 2014:

"The Bank of Israel is following global developments in this area, and particularly steps involving policy and regulation, and is looking into the need to regularize electronic, virtual and other such currency in some form or another."

* The above has been stated with no in-depth reference or examination of specific circumstances pertaining to particular cases and its related facts, and therefore shall not serve in future as legal advice or alternative legal advice, nor does it now or shall it ever be regarded as a recommendation to take such or other action or to refrain from doing so. The authors Dave Wolf and Adi Ben-Yair of Hacohen Wolf Law Offices shall not be held accountable for any reliance upon the above statements and the responsibility for anything resulting directly or indirectly from reliance upon them shall be the relying party's alone. The authors can be reached at 02-6222335 or 03-6099979 or by email at info@lawfirmwolf.com.