Israel Crypto Tax Update – Introduction
For years, Israel’s regulators and financial system have faced criticism for their lack of clear guidelines on cryptocurrencies.
However, the Israel Tax Authority (ITA) has been taking steps to establish clearer taxation rules for digital currencies, especially in light of rising inflation, interest rates, and the financial strains of ongoing conflicts.
Classification of Digital Currencies
The ITA treats digital currencies as “assets” for tax purposes, meaning that any sale of such currencies triggers a tax event.
Typically, profits from selling digital currencies are classified as capital income and subject to capital gains tax.
However, if the activity involving these currencies is considered a business operation, the income may be taxed at standard income or corporate tax rates.
For VAT purposes, non-business investors in digital currencies are exempt, but those with business-related activities must register as a “financial institution” and pay VAT accordingly.
The ITA has also clarified its stance on various related topics, such as the sale of NFTs, digital token offerings, and how to record receipts in digital currencies for services rendered.
The Challenges – Banking and Tax Compliance
Despite the ITA’s efforts to clarify tax obligations, many digital currency holders face practical challenges, particularly when depositing cryptocurrency profits into Israeli bank accounts.
The Israeli banking system remains wary of accepting funds from digital currencies, largely due to concerns about tracking the source of funds and potential links to money laundering or terrorist financing.
This reluctance has made it difficult for sellers to deposit proceeds and, consequently, pay their taxes, leading to legal challenges in Israeli courts.
ITA’s Makeshift Solution
In response, the ITA introduced a “Temporary Order Procedure for Receiving the Payment of Tax for Profits Generated from the Sale of Digital Currencies” in January 2024.
Initially set for six months, this procedure was extended to December 31, 2024. The Procedure allows taxpayers who have earned profits from digital currencies to report and pay their taxes through a special bank account managed by the Bank of Israel, bypassing the traditional banking system.
To use this Procedure, taxpayers must prove that an Israeli bank refused to accept their cryptocurrency funds or open an account for this purpose.
Reporting Requirements and Process
Taxpayers wishing to use the Procedure must submit a detailed request to the ITA, including a report of their digital currency activities, the taxable income, and the calculated tax.
This request must be accompanied by Form 909, detailing the purchase and sale prices of the digital currencies, income earned, and the tax due.
Additionally, taxpayers must provide information on currency movements, foreign accounts involved, and agree to waive confidentiality, allowing the ITA to share information with anti-money laundering authorities and law enforcement.
The Procedure also requires taxpayers to declare the legal sourcing of funds used to purchase digital currencies and confirm sole ownership of the assets in question.
If the ITA rejects a request, the taxpayer will be notified in writing, with reasons provided for the decision.
Voluntary Disclosure
It is important to note that the Procedure does not exempt taxpayers from disclosing unreported income through the voluntary disclosure process, where applicable.
The ITA is expected to release further guidelines on voluntary disclosure, specifically addressing unreported income from digital currencies.
This evolving framework reflects Israel’s ongoing efforts to adapt its tax system to the realities of digital currencies, providing clearer guidance for taxpayers while addressing the complexities of cryptocurrency transactions within the current regulatory environment.
Israel Crypto Tax Update – Conclusion
Israel’s evolving approach to cryptocurrency taxation underscores the nation’s commitment to adapting its financial regulations to modern realities.
The ITA’s recent initiatives, including the Temporary Order Procedure, provide a clearer framework for taxpayers while addressing the practical challenges posed by digital currencies.
As Israel continues to refine its tax policies, these measures are crucial in ensuring that the regulatory environment keeps pace with the rapid developments in the digital economy, offering both clarity and compliance pathways for those engaged in cryptocurrency transactions.
Final thoughts
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