Uncertainty Surrounding Israeli Bill on Foreigners' Crypto Tax Exemption

The status of the Israeli bill aiming to provide tax exemptions on the sale of digital currencies to foreigners and exempting them from Capital Gains taxation on such sales is shrouded in uncertainty. This comes amid pressing government revenue needs due to the Israeli-Palestinian conflict stemming from the Hamas attack on October 7, 2003. The bill's intention is to position Israel as a hub for crypto investment and to promote growth in the Israeli crypto sector.

Many foreigners assume this exemption bill has become law, while others are skeptical. This confusion is not unexpected, as Israel previously offered similar tax exemptions for foreigners becoming Israeli residents. Such generous incentives are absent in countries like Canada. Many perceive Israel to generally offer a more favorable tax environment for foreigners.

Has Israel Established a New Law Exempting Foreigners from Crypto Tax?

In July 2023, Israeli legislators initiated an early plenary session, proposing a bill to exempt non-residents from tax on the sale of digital currencies. This also includes an exemption from capital gains taxation on these sales.

The main objective of the bill is to draw foreign crypto capital into Israel and expand the Israeli crypto sector. It further proposes advantageous tax conditions for the transfer of digital currencies to employees, such as reducing the tax rate on digital currency options for employees from 50% to 25%. Currently, the bill, titled "Bill to amend the Income Tax Ordinance (tax exemption in the sale of digital currencies to non-residents and in the allocation of digital currencies to employees), Hatshep 'C' 2023", awaits preparation for first reading in the Knesset finance committee (Israel's legislative body).

However, amid the Israeli/Palestinian conflict ("iron swords war") and urgent funding needs, there is concern over Israel's willingness to forego immediate crypto taxation to foster future investment through exemptions.

Current Israeli Crypto Tax Regime for Foreign Investors

The proposed Israeli bill to exempt foreigners from crypto tax is unsurprising, given that Israel already extends tax exemptions to new residents. Israel provides such individuals a 10-year tax exemption on income from assets or businesses outside Israel, including crypto assets. This applies to interest, dividends, royalties, and capital gains from these assets, beginning when the individual first becomes an Israeli resident. Similar exemptions are available to returning residents who have lived at least 10 years consecutively outside Israel.

Apart from these exemptions, Israel follows a tax regime akin to Canada's, concerning crypto. In Israel, digital currencies are viewed as "assets" instead of currency. Per Article 88 of the Israeli Income Tax Ordinance, disposing of crypto assets involves capital gains or business income, based on specific situations. Capital gains are typically taxed at a 25% gain rate, whereas business income could be taxed up to 50% at the top marginal tax rate.

Similar to Canada, Israel taxes non-residents on income from Israeli sources and residents on worldwide income, inclusive of crypto transaction income. As crypto assets aren't considered legal tender in Israel, commercial use to purchase goods or services is treated as a barter transaction, subject to Value Added Taxes.

Finally, Israeli residents with foreign assets totaling NIS 1,916,000 or more (about $750,000 CAD) must report this to tax authorities as per regulation 3(a)(6)(b) of the income tax regulations 1988, including crypto assets. There are no exceptions for business-associated assets, unlike in Canada.

Canada's Taxation of Crypto Assets: Foreigner-affiliated Crypto Focus

Canada lacks a regime comparable to Israel, which offers tax exemptions for new and returning residents on assets and businesses outside Canada. Thus, Canadian newcomers or returnees must pay tax on income from digital assets held outside Canada. Upon acquiring Canadian residency, all worldwide income is taxable. Additionally, non-residents earning income from Canadian sources must pay taxes on that income.

In Canada, crypto assets are generally classified as commodities for tax purposes. If held as capital property, 50% of realized gains will incur capital gains tax, compareable to the Israeli 25% total gain rate. Changes intended retroactively from June 25, 2024, will raise the Canadian capital gain tax inclusion rate to 66.67%, exempting individuals up to a $250,000 CAD threshold. Certain entities like Graduated Rate Estates and Qualified Disability Trusts also qualify for this exemption under particular conditions.

In Canada, if crypto assets are used in a way suggesting business activity, the realized income is classified as business income. This could result in a combined federal and provincial tax rate of around 50%, similar to Israel. Additionally, as crypto assets aren't regarded as legal tender in Canada, their use as currency is treated as barter transactions for tax purposes, as in Israel, and subjected to Goods and Services Tax (GST/HST).

Finally, Canadian residents with crypto assets outside Canada must comply with foreign property reporting requirements if exceeding $100,000 CAD in costs. However, active-business-related foreign property is exempt from this mandate.

Israel's Cryptocurrency Securities Regulation

From a securities perspective, Israel doesn't have a fully developed regulatory framework for crypto assets. The primary legislation is the Israeli Securities Law 1984, with oversight by the Israeli Securities Authority.

In security regulations, Israel examines crypto asset characteristics to determine similarity to securities. Crypto assets may classify as security tokens if they confer participatory, ownership, or profit entitlement rights or are traded in secondary markets. Securities regulation includes oversight on their offer and sale, particularly to the public.

Fund managers, investment advisers, and marketers of Israeli crypto assets must secure licenses from the Israeli Securities Authority. Licensing involves an assessment of applicant experience, involved risks, and the potential for money laundering. Licensing exams are also part of the process. Licensees have reporting obligations to the Authority. Additionally, persons are prohibited from offering foreign exchange-traded security tokens to non-accredited investors without meeting certain conditions, as stated in Section 49A of the Securities Law 1968.

Israel mandates financial asset service providers, including custody and lending, to obtain a license from the Capital Market Authority. According to Israeli Financial Services Law, virtual currency (i.e., cryptocurrency) is considered a financial asset. As per Article 11(a)(7) of the Law, crypto dealers may need a financial services license.

Furthermore, Israeli banks are directed to accept cryptocurrency deposits from licensed corporations under Capital Market Authority regulations. Non-bank stock exchange members can also offer cryptocurrency trading and custody services. The Supreme Court of Israel permits banks to conduct digital currency transactions, per Bits of Gold V Gov of the Bank of Israel 7364/22.

Institutional investors in Israel are required to use custodians for their crypto assets. The Israeli Securities Authority regulates payment services as per the Israeli Payment Services Law 2019. Entities dealing in crypto payments must comply.

No licensing requirements for foreign crypto exchanges are enforced, and Israeli citizens aren't barred from trading crypto on foreign platforms. Unlike Canada, where unregistered CTP websites are banned and incur penalties, foreign crypto trading services remain accessible in Israel.

Of interest, Decentralized Autonomous Organizations ("DAOs") aren't recognized as legal entities in Israel, although they operate like digital companies.

Canada's Securities Regulation of Crypto

CTPs - Cryptocurrency Trading Platforms servicing Canadians must register, regardless of location. CTPs must submit filings and meet investor-protection conditions until full registration, ensuring investor protection via risk management, disclosure, and good faith obligations.

Security law applicability is situation-based, guided by Canadian Securities Administrators (CSA) and Canadian Investment Regulatory Organization (CIRO) regulations. Security laws apply to crypto assets resembling securities or derivatives traded on exchange platforms (CTPs).

Securities laws also apply to public-traded security tokens. CTPs trading in security tokens, derivatives, or contracts must register with CIRO as investment dealers. Custodian services offering user crypto wallet-like functionalities are subject to securities legislation.

Unlike Israeli banks, Canadian banks don't handle crypto transactions or deposits. However, some offer independent 'crypto for cash' exchange and ATM services.

In Canada, as in Israel, DAOs Aren't Legal Persons

Israel offers a friendlier crypto environment for foreigners compared to Canada.

From tax and security perspectives, Israel appears more accommodating to foreigners and crypto activities.

Israel's 10-year tax exemption for new and returning residents, alongside a higher foreign asset reporting threshold (around $750,000 CAD), fosters foreign investment, unlike Canada. This includes crypto assets.

Canada doesn't provide similar exemptions, with a $100,000 CAD allowance for asset reporting. Many crypto holders view their assets as investments rather than business endeavors, making Israel's foreign asset reporting more enticing.

From a securities view, Israel is more receptive to digital currencies than Canada. In global markets like crypto, it's restrictive for Canada to require foreign CTP registration before accessing Canadians.

Unlike Israel, which permits foreign CTP access and has no prohibitions on foreign CTPs serving Israeli citizens, Israel enables foreign crypto security marketing, safeguarding non-accredited investors. Notably, Israeli banks must accept crypto deposits and perform crypto transactions legally, while Canadian banks don't.

Israel's stance to exempt foreigners from crypto tax reflects governmental and societal receptiveness to digital currencies. Yet, the Israeli Iron Swords War shifts public sentiment towards avoiding tax hikes affecting the wider public, possibly increasing crypto-related asset taxes temporarily.

PRO TAX TIPS: Court Factors Distinguishing a Crypto Transaction as Capital or Business Activity

In Canada, determining if crypto asset income is capital or business involves evaluating factors such as property nature, disposition frequency, ownership duration, acquisition intent, property-related efforts, and disposition circumstances.

Income classification as capital is likely when the property is capital by nature, held long-term, with little effort for market readiness, unexpectedly sold, and acquired intending capital income. Opposite indications suggest business income.

Israel considers similar factors: property quality, disposition frequency, holding duration, property development, and sale circumstances. These mirror Canadian considerations.

Israel includes additional factors: disposition volume, organization presence, transaction financing, and field expertise. Extensive property sales, permanent disposition offices, transaction-financing loans, and field proficiency indicate business income.

Classification factors in Israel and Canada can interchangeably complement each jurisdiction, with both treating them as non-exhaustive. For inter-jurisdictional tax guidance, consult our top Canadian tax lawyers.

Frequently Asked Questions (FAQs)

What are Crypto Assets?

Crypto assets are digital representations with transactions authenticated and secured through cryptographic ledgers, or blockchains. They encompass cryptocurrencies, non-fungible tokens, security tokens, and utility tokens.

How Are Crypto Assets Classified and Defined?

While comprehensive classification of crypto asset variations is difficult, categories exist. Crypto assets generally fall into:

• Cryptocurrencies: used as payment means, including bitcoins, altcoins, dash, Ethereum, and TAO.

Stable coins are value-tied coins, deriving stability from fiat currency, business enterprises, or other crypto assets.

• Utility tokens: offer users service or product access rights.
• Security tokens: behave as securities like debts or shares, offering ownership, membership, or other security entitlements.
• Non-fungible tokens (NFTs): digital ownership or authenticity certificates for virtual or physical assets, each representing a unique asset or right, based on blockchain or similar tech.

Are All Crypto Assets Taxed Uniformly?

In both Israel and Canada, crypto assets are taxed based on attributes, affecting tax manner and timing.

Disclaimer: This article provides general information as of its posting date and isn't updated. It doesn't offer legal advice. Tax scenarios are unique and may differ from examples given. For specific legal inquiries, consult a Dallas tax lawyer.