The Israeli government is considering taxing profits on bitcoin, said an Israeli paper this week.

Business paper Globes reported that the Israel Tax Authority is mulling the prospect, believing that people who make profits from bitcoin owe taxes.

"We cannot ignore this phenomenon which one way or another involves financial transactions and therefore we are examining its importance," an Israel Tax Authority source was quoted as saying.

But a model for taxing profits was unclear, given that the country has not yet recognized bitcoin as an official currency, said Globes.

Jonathan Rouach, CEO at Israeli bitcoin exchange Bits of Gold, agreed. “I think the Israeli Tax Authority is not avant-garde enough to have a company go 100% bitcoin,” he said. “They still need to know what bank account they can levy taxes from, and they won't take them in bitcoin, yet.”

Bits of Gold signed a partnership last month that allowed it to exchange the currency legally in the country. He now says that he is in talks to help shape future regulation.

Ron Gross, Tel Aviv-based founder of cryptocurrency portfolio tracking software BitBlu, argued that bitcoin taxation would be a good thing.

“People and companies who want to follow the correct regulation mostly do not know what that regulation is, and there is nobody today that has provided any official answers to that,” he said. “I see the tax authority’s move to tax bitcoin as legitimizing it.”

Israel’s stance on bitcoin has been patchy. Banks, for example, have been ambivalent about the cryptocurrency, in some cases reportedly limiting or refusing payments. But some industries have embraced it. The Israel Bar Association said last month that bitcoin was on the way to gaining acceptance as a means of payment for lawyers.

“Formal regulatory bodies have mostly ‘pleaded the fifth’, so to speak, regarding bitcoin,” argues Meni Rosenfeld, founder of still-down exchange Bitcoil, and an advocate for the bitcoin community in Israel. “There has hardly been any clear statement or action from them.”

Israel is a vibrant environment for bitcoin activity. Rouach, Gross and Rosenfeld have all been involved in starting an Israeli chapter of the Bitcoin Foundation, and there are also several startups, including Rosenfeld’s. The regional bitcoin meetup group can get up to 160 attendees. Israeli retailers are also starting to accept the cryptocurrency. And other exchanges, such as bit2c.co.il and bitgo.co.il are helping to create market liquidity.

But more is needed, says Gross. “We need at least one commercial bank to let go of its fear of progress, and start innovating in regards to bitcoin. Simply not blocking transactions would be a great start,” he said. “Fidor Bank in Germany decided to partner with the German exchange,” he said, arguing that its stocks subsequently rose. “There is a lot of potential here.”