Authored by: Boaz Feinberg, Roy Keidar, and Meir Greenwald
On November 10, 2024, the Israeli Tax Authority (the “Tax Authority”) and the Chief Economist Division at the Ministry of Finance of Israel published a bill which proposes to bring into law the traditional positions of the Tax Authority regarding the taxation of digital assets in Israel. While several of the Tax Authority positions contained in the bill (such as the determination that digital currency is an asset and is not “foreign currency”) have already received legal approval from the Israeli District Court, other issues have remained the subject of dispute between tax assessors and taxpayers. This is why a new bill is needed to affirm the Tax Authority’s position through formal legislation.
The main points of the proposed legislation are:
1. Digital Currency is an Asset, not a “Foreign Currency”
The proposed bill seeks to set a precise definition of the term “Foreign Currency” to include only banknotes or coins, including digital coins, issued by a state body with monetary authority. Currently, the term “Foreign Currency” is defined in the Bank of Israel Law[1], as “Banknotes or coins that are legal tender in a foreign country and are not legal tender in Israel”. Several taxpayers have sought to take advantage of this definition in order to define digital currency as foreign currency, since there are a number of countries where digital currencies are defined as legal tender. This would benefit them, since there is no taxation on passive foreign currency appreciation for individual taxpayers. The proposed legislation seeks to classify digital currencies as assets, in a way that ensures that the profits from its sales are taxable. If the proposed bill is passed, the term “Digital Asset” will be broadly defined as “a digital representation of value or rights, which can be transferred and stored digitally, using distributed ledger technology”.
2. Capital Gain for Sales of Digital Currencies
Another issue that the proposed bill seeks to clarify concerns the location in which the capital gains are generated in the event that digital currencies are sold. Currently, the provisions of the Income Tax Ordinance impose a tax liability on an Israeli resident with regard to capital gains from the sale of assets, whether generated in Israel or not. For non-Israeli tax residents, tax liability applies to such profits only if the capital gain was generated in Israel. In addition, new immigrants or returning residents are entitled to an exemption from capital gains tax on a sale of assets taking place outside of Israel, for a period of 10 years from the date they became Israeli residents.
In general, the determination of whether the capital gain was generated in Israel is based on the location of the property, or whether the asset is a right to an asset located in Israel. The proposed bill states that the place of generation of a digital currency will be determined on the basis of its owner’s residency at the time of purchase, or where the digital currency reflects a right to property or inventory located in Israel, or if the digital currency reflects a right in a corporation or partnership that is registered in Israel.
If the proposed bill is approved, new immigrants or senior returning residents who purchase digital currencies after moving to Israel will be taxed on the sale of these assets, even though they are entitled to the same 10-year tax exemption regarding capital gains on assets located outside Israel. The amendment in the proposal clarifies the Tax Authority’s position on the matter, namely that capital gains generated by the sale of digital assets by Israeli residents, whether they are new immigrants or senior returning residents, would be subject to capital gain tax.
[1] Bank of Israel Law, 5770-2010, S.H. 2237, 5770 (March 24, 2010), p. 452.
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