Israel Tax Authority to close cryptocurrency loopholes

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Following criticism by the State Comptroller, legislation is being prepared to define digital assets according to the Income Tax Ordinance, on which capital gains tax will apply.

The Israel Tax Authority and the Ministry of Finance economics division have distributed draft legislation defining cryptocurrency and other digital assets according to the Income Tax Ordinance, and on which capital gains tax will apply to profits.

The Tax Authority's position on taxation of cryptocurrencies was initially published as a memorandum in 2017 and from the beginning of 2018, proposing that investors in digital currencies be subject to a capital gains tax of 25%, as long as their activity did not become a business. If it was a business, the trader should be charged a two-stage tax as a company or a marginal tax according to the individual tax rates.

The publication of the Tax Authority's position was received with divided opinions, since many still consider cryptocurrencies as a currency that is exempt from tax due to an increase in the exchange rate. At the same time, the position resulted in many investors who traded in digital currencies declaring profits and paying tax on them. Since 2018, the Tax Authority defines digital currencies as assets. However, the Ministry of Finance and Tax Authority believe that anchoring this definition in legislation will provide more certainty for those engaged in digital and cryptocurrency activities

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In addition, the draft law sets the rules when profit produced by a digital asset will be considered profit generated in Israel. This is crucial for deciding where the tax on cryptocurrency profits will be paid since according to the Income Tax Ordinance, capital gain is taxable, if it was produced by an Israeli resident or if it was produced in Israel, by an Israeli resident or a foreign resident.

According the draft law, a capital gain generated from the sale of a digital asset will be considered a profit generated in Israel, if the seller of the asset was a resident of Israel at the time of the purchase of the digital asset. Also, if the digital asset reflects a right, directly or indirectly, to property located in Israel, or to a person resident in Israel, the seller will be liable for capital gains tax for the profit from its sale.

Publication of the draft law follows the State Comptroller's report last week which slammed the Israel Tax Authority for not acting effectively to reach the billions of shekels concealed in the cryptocurrency market, with the state missing out on collecting an estimated NIS 3 billion in taxes. State Comptroller, Matanyahu Englman blamed the Tax Authority, which had not taken most of the necessary steps to improve the ability to collect taxes, at a time when Israel's debt burden is increasing due to the war and security needs. The State Comptroller stressed the need to examine how to realize full taxation of the cryptocurrency market, before the government raises the tax burden on the public.

Published by Globes, Israel business news - en.globes.co.il - on November 11, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.

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