Taxation of Digital Currencies - Israeli Draft Law on Digital Currency Taxation - November 10, 2024

In a new proposed law on digital currency taxation published on November 10, 2024, the Tax Authority and the Ministry of Finance are seeking to formalize the tax obligation on digital currencies through legislation and regulate the issue comprehensively. The decision aims to provide regulatory certainty in the field and ensure proper tax collection on crypto profits. The new law also offers clear guidelines on how to determine if a profit from the sale of a digital asset was generated in Israel, reducing the risk of double taxation for foreign investors and encouraging investments in the Israeli high-tech crypto industry.

What are Digital Currencies?

Digital currencies are a broad category of digital assets that allow value transfer through technological means such as blockchain. They include cryptocurrencies like Bitcoin, Ethereum, tokens, and NFTs.

Definition of Digital Currency for Income Tax Purposes

For tax authorities, digital currencies are not considered monetary currencies but rather assets. This distinction creates a difference between profits derived from exchange rate fluctuations of traditional non-taxed currencies and changes in the value of digital currencies, which are defined as capital gains and are taxable.

In this draft law, the Tax Authority clarifies the distinction between the two types of currencies: all unregulated digital currencies will be classified as assets and taxed at the capital gains rate. A digital currency issued by a central bank with monetary authority under the law of a sovereign state will be treated as a currency, and its exchange rate differences will be recognized as foreign currency differences rather than capital gains.

Tax Rate on Profits from Digital Currencies

Profits from digital currencies are taxed at a capital gains rate of 25%, as long as the volume of activity does not constitute a business. If the scale of activity and the expertise of the person conducting it lead to their classification as a business, income tax on personal labor will apply, including income tax brackets and national insurance contributions, or a two-tier taxation system in the case of a corporation.

Who is Required to Pay Tax on Profits from Digital Currencies?

The tax applies to any individual or Israeli entity generating profits from the sale of digital currencies, whether the sale occurred in Israel or abroad. The tax also applies when the profit is generated in Israel, even if the profit earner is not an Israeli resident. The draft law currently addresses the rules for determining whether the profit was earned in Israel or by an Israeli resident. According to the draft, a profit is considered generated in Israel if the seller of the asset was an Israeli resident at the time of the digital asset’s purchase and/or if the digital asset represents a direct or indirect right to property located in Israel and/or represents a right in an Israeli resident company.

The purpose of this draft is to clarify the rules regarding crypto taxation to enforce tax collection and to establish clear criteria for tax entitlement—taxation based on personal factors (the residency test of the asset holder) rather than territorial factors (where the transaction occurred, since digital currency has no physical location). This will encourage foreign investors to invest in crypto and Israeli high-tech companies operating in the crypto space without being exposed to double taxation arising from interpretive ambiguity regarding the location of the transaction and the need for complex legal opinions due to unclear laws.

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