On February 19, 2018, the Israel Tax Authority (“ITA”) stated in a circular to tax professionals that cryptocurrencies, such as bitcoin, are property under Israeli tax law. This view brings the Israeli tax law very much in line with the IRS position in the United States.
Cryptocurrency is Property under Israeli Tax Law and Subject to Israeli Taxation
After years of vacillation, the ITA took the hard stance and stated that virtual currencies should be treated as intangible assets. This is a position very similar to the IRS in the United States, which declared in March of 2014 that it will consider and tax cryptocurrencies as property.
The ITA position leads to the logical conclusion that any income generated by these assets (including from the sale of cryptocurrencies) will be subject to Israeli taxation. The exact level of taxation will depend on whether a taxpayer is engaged in a business activity.
Cryptocurrency as a Non-Business Property under Israeli Tax Law
If a taxpayer’s activities do not rise to the level where a taxpayer would be considered as carrying on a business, he will not be subject to the Value Added Tax (“VAT”). This individual, however, will still have to pay the Capital Gains Tax (“CGT”) on any gains from the sale of bitcoins and other cryptocurrencies. The current CGT rate in Israel for individuals is 25%.
On the other hand, it appears that capital losses incurred by investors in crytocurrencies (a topic of special relevance today in light of the recent huge drop in the value of bitcoins) can be used to offset any capital gains. Furthermore, these losses can be carried forward to future tax years.
Cryptocurrency as a Business Property under Israeli Tax Law
It gets a lot worse for businesses. First of all, the “mining” of virtual currencies (this is process of solving algorithms to create a new unit of a virtual currency) will be generally subject to 17% VAT. The VAT is imposed only on the mining itself; it appears that the trades thereafter will not be subject to VAT.
Second, any taxpayer engaged in the business of trading virtual currencies will be classified as a financial institution for the VAT purposes.
Finally, businesses that conduct transactions with virtual currencies should report them on their business tax returns. Any capital gains generated by cryptocurrencies will generally require businesses to pay the CGT up to the maximum rate of 47%.
ITA Circular on Cryptocurrencies as Property Under Israeli Tax Law Can Be Challenged in Court
It should be kept in mind that the circular issued by the ITA represents only the ITA’s position on cryptocurrencies as property under Israeli tax law. This circular is not the final law and it can be challenged in courts.
Contact Sherayzen Law Office for Help with US Tax Planning and Tax Compliance Concerning Ownership of Cryptocurrencies
If you are a US taxpayer who owns or deals with cryptocurrencies, you may have a significant exposure to US taxation. If you would like to find out more about US taxation of cryptocurrencies, contact Sherayzen Law Office to schedule a confidential consultation.