Kopel v. The Tax Office: Not Every Coin is a Currency
The whole confusion in the Kopel case came to mind because Hebrew has one word both for coin and currency. The ruling in 11503-05-16 Kopel v. The Tax Office Hebrew PDF answers the important question of whether bitcoin should be dealt with as a currency for the purposes of revenue tax or not. In my humble opinion, and even in consideration of my opinion in 2014, the ruling is wrong. But first things first, we'll start by telling what happened that a court needed to rule on this case. If you have yet to land on earth since 2009, Bitcoin is a distributed digital currency based on open source and encryption. It is a way where peers may convey value by digital means and trust the encryption to ensure that (1) whomever made the transaction is indeed the owner of the coins in reference; and (2) any transaction is non-reversible, undeniable and public.
In principium, Bitcoin is a protocol that manages a public ledger to list value transfers. Therefore, Kopel's appeal did not sound frivolous (see the Globes coverage of the issue ). Kopel claimed that he does not owe any revenue taxes as the definition of exchange rate fluctuations defines that gains created due to changes in the exchange rates are not taxable. The Israeli Tax Authority's policy, that wants to enrich the state's revenues and give more public services, was that the exchange rate exemption only applies to a set list of currencies, meaning "foreign currencies" as defined in the Bank of Israel Act. Meaning, the first and foremost question was whether Bitcoin is a currency as defined.
But here everyone failed; the Revenue Tax Ordinance doesn't say "foreign currency" but just "currency" or "coins" (these are the same words in Hebrew). Therefore, while the court decision has hills of discussions on whether bitcoin is a coin and whether it is issued in a series of coins and bills, the correct question was whether bitcoin could be defined under the other definition of rate differences, meaning "any additional sum added to an indenture - but an adjustment to a currency rate, the consumer price index or any other index".
Here starts the genius of the distributed digital currency; de facto, distributed cryptographic currencies are unique by not being debt based. What does it mean? The Bank of Israel Gift Card Scheme, also known as "The New Israeli Shekel", mean an obligation (debt) of the bank of Israel that any person who holds a colored paper could pay the government its debts with these gift cards. Their merchantability is based on the public's trust of the Israeli monetary system. The same for the US Dollar system, that until recently (in historical terms) said "whomever brings me a green paper with a drawing of a dead US president will get its value in gold". Meaning, the bill represented a debt by a state.
In cryptographic currencies, however, and bitcoin being primus inter partem, the bill does not represent debt; it represents trust. Genesis-wise, the debt covenant is incorrect and should be ignored. Meaning, while the original currency represents debt, bitcoin represents a right and therefore is detached from the existing monetary cables (lack of supervision, no ability for negative balance) and allows better trading. The coin doesn't represent debt and therefore no one has to accept it, but whomever does it is a part of a community. It is not a legal tender but a voluntary tender: tendre factum, or "fiat currency" in its other meaning.
From that point onward, the currency doesn't represent a right or duty to receive anything, but the different in its exchange rates includes the same elements of foreign exchange currency differences; meaning, if we want to stay with the arbitrary interpretation of what is a currency by the ordinance, we can accept the ruling as just. But, if we want to fix it, and in the same manner that Israeli courts found that while spam is defined only by conveying a message, then you can bend the law and say that even calling and hanging up just to receive a star-69 call is spam (CA 1589/09 Hayut v. Telran ). The law is a living document, that is what it was meant for.
This is why the court might have been brave enough to say "while these are gains from exchange rate differences, de facto there is no difference between playing the bitcoin game and speculating on the Turkish Lira". But why should he do it? that's the real question.
Is there an incentive to define bitcoin as a currency: more taxes to the public account. What is the incentive to define it as a currency? well, this is more complicated and comes from an interesting definition: if bitcoin rate profits won't be taxes, then more use of bitcoin will come, more people will adapt the technology and more of them could implement the coin's philosophy: detaching from the central monetary system of payments; but that's not the only incentive. Lack of taxation also means more use of the technology by institutions; not that they are afraid of using the technology, but that they are challenged with the tax difficulties. Were they able to develop local currencies with no scare of exchange rate taxes, we would see more currencies that would encourage sharing, create more capital and one more thing: bringing new technologies to Israel in lieu of places where the taxation policies were stricter.
In my humble opinion? a more creative judge might have done this, if he had only understood the goal.