The Taxman Catches Up with Cryptocurrency in Israel

The Israeli Tax Authority (ITA) released a circular on the 17th of February containing the final details of taxation of cryptocurrency transactions and cryptocurrency mining in the country. This follows the draft that it released one month ago.

The circular deals with distributed means of payment only – ICOs are still under discussion, and a final judgement is pending.

As the authority has represented in the past, it considers cryptocurrency to be property, not currency.

David Moliner, advocate at law firm Nir Porat & Co., said: “With regard to distributed means of payment, such as Bitcoin, the ITA clarifies that such distributed means of payments, when used for the purpose of barter, are not to be considered as “currency” or “foreign currency” as these terms are defined in Israeli banking laws, and therefore cannot be taxed as such.”

Tax will be paid on cryptocurrency as with any other transacted commodity.

Capital gains tax / income tax

The announcement states that capital gains tax will now be paid on all profits from traded cryptocurrency.

Cryptocurrency mining operations, nowadays seldom profitably conducted by individuals, are now considered a business like any other, and will thus be taxed at standard rates of income tax, calculated on a case-by-case basis.

VAT

In terms of VAT, because cryptocurrency is an intangible asset, no VAT will be owed by private investors. However, entities conducting transactions that reach the level of a business – for example in the case of an exchange – could be liable to pay VAT. Moliner explained: “In such a case, you will be classified as a financial institution and applicable VAT rates will be applied on you. Exact rates will depend on the circumstances of each case.”

As businesses, cryptocurrency mining operations must now pay VAT: “In such a case, you will be classified as a practitioner and applicable VAT rates will be applied. Exact rates will depend on the circumstances of each case,” said Moliner.

Finance Magnates spoke with the ITA, which confirmed that these rules are already effective. The spokesperson also confirmed that the subject of ICOs is yet to be finalised, as the subject requires more deliberation.

It will be interested to see the decision made on this subject, as Israeli regulatory authorities have been struggling with how to define the fundraising method, and even considered banning it at one point.