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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?

  • This a comment because I am not sure, but haven't you already paid your taxes when you earned the money? – MrChrister May 3 '11 at 22:43
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    @MrCrhister - I don't know, I made a payment via paypal to some dude, and got back bitcoin. I don't know if taxes were deducted by any of these parties (I don't think so) – ripper234 May 3 '11 at 23:11
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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.

  • Do you actually mean that whenever we sell anything we need to pay a percentage of what we earn? This seems ridiculous, I mean, for (real) example, I bought some sweets at 1 dollar and sell it to my friend for 1.1 dollars. I don't plan to pay tax for the 0.1 dollars I've earned. Am I committing a tax fraud? – Pacerier Apr 20 '13 at 4:11
  • @Pacerier technically yes. Whether or not someone will come after you for $0.10 untaxed income, is an entirely different question. – littleadv Apr 20 '13 at 5:49
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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...

  • Government can “track” digital currencies the way they “track” cash payments in local or foreign currency, gold or whatever: If you have a shiny new car, a large cash deposit to buy a new house or anything else that draws attention to you and no income/tax returns to match, you might need to account for the discrepancy. I don't know about the US but in many countries it certainly isn't an entirely hypothetical scenario, bitcoin or not. – Relaxed Jan 23 '14 at 9:07
  • On the other hand, if the profits are small and you don't do anything with them, you probably don't risk much but that's already the case with cash or even with a regular bank account. – Relaxed Jan 23 '14 at 9:09
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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.

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