Israeli Tax on Bitcoin Transactions 

Bitcoin|Tax Authority|transactions|linkage differentials 

Dr. Avi Nov, Adv. 

April 2014 

The Israeli Tax Authority is contemplating imposing a tax on profits from virtual currencies such as Bitcoin. The Israeli Tax Authority cannot ignore this phenomenon which involves financial transactions. 

The Bitcoin, created in 2009 aims was to break the dependency on government issued currencies and become the preferred global currency. Bitcoin is not recognized as an official currency according to Israeli law, and therefore (1) money laundering laws and other regulations associated with currency service provision cannot be applied to it; and (2) it is difficult to determine the model for taxing profits arising from Bitcoin trading. 

Israeli Taxation of Bitcoins

The Israeli Tax Authority is now considering how to develop a model for collecting tax on transactions based on virtual currencies, such as bitcoins. The Israeli Tax Authority holds the view that an Israeli resident, who earns profits from Bitcoin, either inside Israel or outside Israel, must report those profits and pay the applicable taxes pursuant to the Israeli Income Tax Ordinance. 

It is widely accepted that Bitcoin transactions are liable to Israeli tax like any other transaction. Yet, there are several differences between Bitcoin transactions and other transaction. First, Bitcoin transactions require translation into New Israeli Shekels. Second, since Bitcoin transactions do not operate through the banking system they cannot be monitored and it is difficult to tax them. 

Taxing Exchange Rate differences

The Israeli Tax Authority may in principle tax profit from Bitcoins in the same way as linkage differentials. "linkage differentials" are defined in the Israeli Income Tax Ordinance (New Version) 5721 – 1961 as "any amount added to a debt or to a claimed amount in consequence of linkage to the currency exchange rate, the consumer price index or to some other index, including exchange rate differentials; however, for purposes of tax exemption, any amount added to a debt or to the amount of a claim in consequence of linkage to the currency exchange rate or to the Consumer Price Index – including exchange rate differentials – shall be deemed linkage differentials"; 

However, this may not be the case since section 3(13) of the Israeli Income Tax Ordinance states that in some cases where an individual received income from a rise in foreign exchange rates, he will not be liable to income tax if he meets all 3 conditions exempting him from paying income tax for gains made from a rise in foreign exchange rates. 

The 3 conditions are:

(1) The linkage differentials are not partial linkage differentials; for this purpose: "partial linkage differentials" – as prescribed by the

Minister of Finance with approval by the Knesset Finance


This condition is satisfied, 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.

(2) The individual did not claim the deduction of interest or linkage differentials in respect of the asset;

(3) The linkage differentials are not income under section 2(1) and are not and do not have to be entered in his account books;

Dr. Avi Nov Law Offices, Israeli & international tax law 
*This article is intended for informative purposes only and is in no way to be construed as tax advice or a legal opinion

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