Written in conjunction with Larry Stern
The Israel Tax Authority recently announced that bitcoin and other cryptocurrencies would be taxed as a capital asset, not a currency. Israel had been considering the measure since 2013.
The decision, announced in a circular on Feb. 19, means that cryptocurrencies are subject to capital gains tax for individual investors, and marginal rate taxation for those considered to be running businesses of cryptocurrency trading. Individuals who are mining or trading in cryptocurrencies, will be required to account for VAT (currently 17%), as per any standard business.
This announcement comes as many Israeli banks have attempted to close the accounts of cryptocurrency investors and related businesses. Reasons cited for the closures include the volatility of cryptocurrencies and money laundering concerns.
The Tax Authority also noted in the circular that cryptocurrency transactions must be documented due to the possibility of tax audits in the future.
Earlier this year, the head of the Israel Securities Authority, Shmuel Hauser, decided to ban cryptocurrency firms from trading on the Tel Aviv Stock Exchange. An estimated 30-40 cryptocurrency and blockchain-related startups are currently operating in Israel.
U.S. Tax Implications
United States citizens face additional tax implications for cryptocurrencies. As in Israel, the U.S. treats cryptocurrencies as capital assets, not currency, for tax purposes. As such, general property tax guidelines, such as capital gains, would also apply to cryptocurrency transactions, according to the fair market value of the day of each transaction. Cryptocurrency transactions must be reported in U.S. dollar equivalents, so the IRS guidelines state fair market value for each currency is set by the exchange-traded value of the virtual currency on that day.
For individuals mining or trading in cryptocurrencies, the fair market value of the virtual currency as of the date of receipt is includible in gross income. Payments received or paid using virtual currency are also subject to applicable tax laws for wages, reporting and withholding similar to any other form of property used to make or receive payments.
Investors in cryptocurrencies who have already completed transactions and have not complied with the tax laws may be liable for penalties. Penalty relief may be available for individuals who can demonstrate a reasonable cause for not having complied with the tax code prior to the issuance of guidelines on March 25, 2014.
One question that remains outstanding regarding cryptocurrencies is determining the country in which the asset is deemed to reside. This has implications as to which country has the first right to taxation in the case of dual residents or U.S. citizens residing outside the U.S.
Contact us today if we can assist you with navigating tax issues surrounding cryptocurrencies.