On Cryptocurrency, Taxes, and how a Fictitious Nicaraguan Currency Rises in Israel

On Cryptocurrency, Taxes, and how a Fictitious Nicaraguan Currency Rises in Israel

Doron Afik, Esq.
July 13, 2019

Walking in Tel Aviv I saw on the pavement a sign in Hebrew and English noting that a motorcycle using the pedestrian zebra crossing is subject to a fined of ₪ 250. The sign was in Hebrew and English – the Hebrew using the currency mark but in English, as the letter combination is used, for some reason, in various places in Israel, the currency was written as: NIS. So, who determines what constitutes a legal currency and what does this term mean? And, while the Nicaraguan and Israeli flag look somewhat similar, how did the Nicaraguan currency take over Israel, even though it does not exist?

In recent years we have witnessed a relatively new phenomenon of the creations of virtual currencies. Naturally, these currencies raise legal questions about their validity, as well as questions of taxation. In a case discussed in the Israeli Central District Court in May 2019, a person who purchased Bitcoin and sold it two years later at a profit of ILS 8 million was required by the Tax Authority to pay capital gain tax. The person contended that he wouldn’t be paying a tax had there been a Dollar-Shekel exchange rate change and a USD amount held in his account would be worth more in ILS. In order to make its holding the Court was required to decide a more basic question: what is a currency?

Bitcoin, as the Court held, like other cryptocurrency coins, is a digital unit registered and managed using a Distributed Ledger Technology (DLT). Unlike conventional State-issued coins, this is a recording technology that is not dependent on one central recoding system, is based on blockchain technology, and is secured by cryptography. While many places receive Bitcoin, or other virtual currencies, as a means of payment, this does not make it the official currency of any country and no central bank intervenes in trade to prevent fluctuations in currency value. Accordingly, as Bitcoin does not meet the definition of Israeli law for "foreign currency" and although at some stage Bitcoin may become a "currency", Bitcoin is not recognized in Israel as "foreign currency" and will be taxed as an asset when sold.

And what about the Nicaraguan coin? Nicaragua and Israel share a slightly similar flag, but not a central bank or currency.

In 1978, the International Organization for Standardization (ISO) first published an official standard on how currencies are written worldwide – the ISO 4217. The standard is intended to prevent misunderstandings about the identity of the currency in question. Therefore, it states that a currency will be marked by three letters - the first two letters are the international code of the country and the last letter is the currency code (hence GBP only for the British currency and not UKP, although many prefer the term “The United Kingdom on the term “Great Britain"). Until 1980, Israel used the Israeli Lira (or “Pound”) and its mark was ILP, but in February 1980, the Lira was replaced by the Israeli Shekel (ILR). At the beginning of 1986 the Shekel was replaced by the New Shekel and its code was changed to ILS. So why not to use the letters NIS (for New Israeli Shekel) instead? Perhaps because the letters NI are the Nicaraguan country code and perhaps simply because there is no reason to create confusion, especially in international transactions, between the Israeli Shekel (ILS) and the Nicaraguan córdoba oro (NIO).