Israel to tax cryptocurrencies as assets not currency

Mr. Nicholas Warren co-authored with Sarah Vassallo | 08 Mar 2018

Israel Cryptocurrencies

As the race among jurisdictions to create a regulatory framework for cryptocurrencies continues to gain traction, the Israeli Tax Authority ("ITA") has announced its plan to tax cryptocurrencies as property rather than currencies. The news comes days after Malta unveiled its plans to set up the Malta Digital Innovation Authority and that the regulator was currently drafting draft bills which would regulate Virtual Currencies. 

In a circular issued on the 12th January, the ITA defined cryptocurrencies as “unit[s] used for barter [that] can be used for investment purposes and which will be considered as “assets” and “will be sold as a ‘sale’ and the proceeds from their sale will be classified as capital income.”

Israel -Cryptocurrencies now subject to capital gains tax. 

The Israeli news outlet Haaretz reports that cryptocurrencies shall be taxed as capital gains, and thus will be subject to 25% capital gains tax in the case of private investors, with a 47% marginal rate for businesses. Investors would need to report on their holdings within 30 days and arrange prepayment of tax.

VAT obligations

The ITA has also clarified that only companies selling cryptocurrencies will be subject to a VAT taxes at the rate of 17%. Private investors will therefore be exempt from any VAT obligations due to the fact that cryptocurrencies are classified as an intangible asset used for investment purposes only. 

Interestingly, the circular also holds that miners will be classified as dealers for VAT purposes. As reported by Cryptovest, a dealer whose receipts are accepted by means of a distributed payment method will pay VAT according to his business activity, regardless of the manner of receipt, so that as a rule, VAT will not be paid. Moreover, a person whose activity in a distributed means of payment reaches a business (from such trade) shall be classified as a financial institution. 

The Applicable Procedures

In an article for Coinspeaker, Julia Sakovich notes that companies transacting in crypto will have to follow certain procedures: 

  • All cryptocurrency transactions should be documented for possible audit. 
  • Taxpayers will need to prepare documents confirming the transaction in the decentralized means of payment, and consequently verify the existence of this transaction and its monetary volume as well as data of the accounts through which the fund were transferred.
  • The seller is required to present evidence of the transaction, attaching the pages of the bank accounts through which the funds were transferred or at least a computer screen capture demonstrating the sale and purchase and the date/time of the operation.
  • The Tel Aviv Stock Exchange indices will not include companies whose value is based on the value of cryptocurrencies. 

Reactions by Authorities, Courts and the Public

The classification of cryptocurrencies as assets rather than currencies has received rather mixed opinions. 

Whilst the Israeli Bitcoin Association considered this as a step towards legitimizing cryptocurrencies as actual property, the Bank of Israel and the Israel Securities Authority still do not recognise cryptocurrencies as currencies. 

Some professionals in the field were critical of this decision and opinionated that the ITA was ignore[ing] economic realities by granting a tax exemption to smaller fiat currencies and not to digital currencies.  

In a landmark ruling, the Supreme Court of Israel issued a temporary court order prohibiting Leumi Bank from restricting the banking services in relation to crypto. A decision described as “precedent-setting,” means that banks in general cannot limit accounts associated with the crypto industry. This followed a decision taken in June 2017, were the district court in Tel Aviv had supported Leumi Bank when the plantiff had sought a court order after being denied service by Leumi. The bank had cited an inability for Bitcoin transactions to follow Israel’s anti-money laundering laws as the reason for service denial.

Our Blockchain, Fintech & RegTech Practice

Malta is currently gearing up legislate not only on virtual currencies, but alo on Technology Service Providers which will have the option to voluntarily apply for certification which will be issued by the Malta Digital Innovation Authority. For a more detailed overview, we invite you to read our publication which delves in detail on the proposed framework

Our lawyers and financial services specialists at Chetcuti Cauchi Advocates welcome the innovations which are revolutionising the financial services sector and seek to provide bespoke solutions to our clients by fusing together traditional legal notions with new technologies. Led by Senior and co-founding Partner Dr Maria Chetcuti Cauchi and Senior Manager Nicholas Warren, our practice strives to assist clients in this burgeoning and evolving sector of law which shall reshape the financial services sector as we know it. If you wish to discuss further how Malta could be an ideal jurisdiction for you to set-up your business which deals in virtual currencies, we invite you to contact us or send an email at fsu@cclex.com.



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