Paying Tax on Bitcoin and Other Cryptocurrencies in the US and Israel

Bitcoin and other cryptocurrencies have been talked about over the past couple of years, however, with a recent explosion in value, people are becoming more curious.

We have some clients who told us a few months ago that they had hundreds of dollars of gains, and then called back more recently to ask what they should do now that their gains have reached thousands and more.

Cryptocurrency is a digital currency that can be earned, mined, or swapped for other more physical money. It is not backed by any physical assets, is not guaranteed by any government or company, and can devalue or appreciate rapidly. The most well-known cryptocurrency is Bitcoin, which was created in 2009, and was the first of its kind.

You, like many, may considering whether you should get into the game, or if you have arrived too late and would only invest in time for the bubble to burst. You may be wondering whether it increases your chance of an audit, hearing about all the scrutiny coming from tax agencies. If those aspects don’t stop you, what you will need to know before you take any steps is the tax treatment of cryptocurrencies by both US and Israel.

Tax implications

Both the US and Israel treat cryptocurrencies the same for income tax purposes. While the Knesset is still tackling how to handle crypto overall, it is clear that at the moment the tax authorities look at it as a financial asset subject to capital gain treatment and not as a currency. The Israeli Individual tax rate would thereby max out at 25 percent (not including surtax known as mas yesef of 3% if applicable).

The US started handling this very issue back in 2014 and issued similar guidelines. This will generally mean that taxpayers will have to pick up income from crypto changes and exchanges earlier than if it were currency related. However, it also means that people can potentially get long-term capital gain treatment capped at 23.8% (including Net Investment Income Tax known as  Obamacare tax of 3.8%) lowering the amount of taxes from the highest marginal rate of 37%.

With the new Trump tax reform changes, this would mean that if you change your Bitcoin for Ripple, or any other type of cryptocurrency, you will have to pick up the gain/loss from the time you first received your Bitcoin and the value when you traded it. No section 1031-like kind of exchanges can be taking place.

Additionally, if you receive Bitcoin in place of salary and then spend it to buy furniture, you would need to pick up the change in value of the coins as gain or loss. Receiving physical money on the other hand is very different. If you receive cash as salary and spend it on furniture, no tax event would be recognized.


Another interesting topic is how US citizens should report these currencies on FBARs (Foreign Bank and Account Reports) and FATCA (Foreign Account Tax Compliance Act) Form 8938. The FBAR is generally required on an annual basis if one has more than $10,000 accumulated in foreign accounts. The form lists all the foreign bank accounts and funds that US people hold overseas. Form 8938 is similar but with higher thresholds. For more on these forms, you can check here.

The reporting area is less clear, and it seems that while holding individual bitcoins may not create an FBAR filing requirement, holding coins in a virtual wallet based in an offshore company, as most do for security reasons, usually creates a filing requirement.

Additionally, even holding individual bitcoin may need to be reported on Form 8938 as a specified foreign financial asset. This is especially the case since the coins are decentralized. Certainly, it should be on the Israeli equivalent which is called a hatzarat hon.

This post was written together with Yaacov Jacob, manager of the Individual & Partnership Department at Philip Stein & Associates.

About the Author
Philip is the founder of Philip Stein & Associates, the largest US accounting firm in Israel, specializing in US taxation of US tax residents living in Israel, and of Israeli individuals and companies doing business in the United States. Offices are in Jerusalem, Ramat Gan and Beit Shemesh. Philip grew up on the South Side of Chicago, and graduated from the University of Illinois, followed by an MBA from the University of Michigan. Philip started his career in the tax department of what today is Ernst & Young. He has lectured at Roosevelt University, Loyal University and Northeastern University, and continued to lecture on international tax issues in Asia, Africa, Europe and North American. He is also a frequent speaker for Nefesh B’Nefesh and has advised the Israeli Treasury, Bituach Leumi and the Knesset on various tax issues affecting US citizens living in Israel. Philip’s love of radio led him to start his podcasts which have attracted tens of thousands of listeners. He continues to be an avid Chicago sports fan as well as a lover of mountain hiking, TRX, and snowshoeing (he likes to keep his feet on the ground!).