Following a recent and scathing State Comptroller report that criticized the Israel Tax Authority's lagging response to the burgeoning digital asset market, the government is taking decisive steps to close the crypto-taxation gap. The Ministry of Finance, in collaboration with the Tax Authority, has introduced draft legislation aimed at formally defining digital assets within Israel’s Income Tax Ordinance. This pivotal move will bring cryptocurrency and digital assets firmly under the scope of Israel’s tax laws, particularly capital gains tax, potentially unlocking billions of shekels in revenue for a state balancing economic demands amid pressing national security concerns.
Taxing Digital Assets: A Long-Overdue Step
The Tax Authority first declared its intent to tax cryptocurrency in 2017, proposing that digital asset investors be subject to a 25% capital gains tax, as long as their activity didn’t cross into the realm of business. Professional traders, however, would face the standard two-tier corporate tax, or alternatively, a marginal tax rate based on individual income brackets. The draft legislation now clarifies these intentions, mandating that the sale of digital assets generates capital gains tax, with specific stipulations to address residency and asset location.
קביעה זו עולה בקנה אחד עם עמדת רשות המסים כפי שפורסמה לציבור עוד בשנת 2017 ואושרה על ידי בית המשפט, אולם עיגונה בחקיקה יקנה יתר ודאות לעוסקים בפעילות בנכסים דיגיטליים בכלל ומטבעות קריפטוגרפים בפרט. >>
— משרד האוצר (@Israel_MOF) November 10, 2024
This action comes amid longstanding debates over whether cryptocurrencies should be classified as tax-exempt currencies. Proponents of cryptocurrency have argued that due to the fluctuating exchange rate, gains in value should not be treated as taxable capital. Despite this, the Tax Authority has defined digital currencies as assets since 2018, leading many investors to comply and report their profits. However, this voluntary compliance hasn’t brought in the level of revenue officials now believe possible through clearer legislative definitions.
Clarifying Crypto Residency for Tax Purposes
The draft law sets critical benchmarks for identifying where crypto gains are generated and where they are taxable. Under the new rules, a capital gain from the sale of digital assets will be taxable in Israel if the seller was an Israeli resident at the time of purchase. This means even Israeli expats holding digital assets could be required to pay capital gains tax on those assets if they are tied to Israeli property or interests.
This clarification is especially significant given the borderless nature of cryptocurrency transactions. In a digital world where assets can be traded globally in seconds, the proposed legislation ensures that Israel does not lose out on potential tax revenue from its residents’ activities.
Crypto Profits: Israel's Hidden Gold
— Randolph Scott (@RandolphSc74516) November 7, 2024
From 2018 to '22, just a fraction told, Five hundred crypto trades, where thousands should unfold. Tax Authority waits, in shadows deep, As billions in revenue silently seep.
Two hundred thousand trades, the minimum to see, Yet Israel's…
Responding to a Critical Report
The push for legislative clarity follows the State Comptroller’s damning report, which revealed that the state is missing out on billions of shekels in crypto tax revenue due to the Tax Authority’s slow response. Comptroller Matanyahu Englman openly chastised the Tax Authority for its failure to close the loopholes in cryptocurrency taxation, claiming an estimated NIS 3 billion was lost due to uncollected taxes. With Israel's debt mounting from defense expenditures and the cost of national security, the Comptroller urged a thorough examination of the crypto market to generate revenue before increasing taxes on Israel's general public.
Englman’s report has catalyzed a sense of urgency among legislators and tax officials alike. By ensuring that digital assets are legally recognized within the Income Tax Ordinance, the government aims to create an enforceable framework that leaves no room for ambiguity and captures untapped revenue.
A Move Toward Greater Financial Transparency
This legislation underscores a shift towards stricter financial oversight and transparency in Israel's expanding digital economy. With billions in taxable profits circulating through the crypto market, the state is making a firm statement that digital assets will not remain an unregulated frontier. Anchoring cryptocurrency in tax law is expected to provide greater security and predictability to investors, while also ensuring that the state reaps the benefits of its citizens’ financial activities.
Out of 200K Israeli crypto holders, only 500 (0.25%) report their holdings to the tax authorities
— Tal Shmuel Harel (@TalHarelTal) November 5, 2024
name a better example of a bad policy. i dare you. pic.twitter.com/XmyitIv7lt
Looking Forward
The draft law, currently awaiting review and debate in the Knesset, represents a decisive stance by the Israeli government to close the taxation gap on digital assets. If approved, the legislation will bring Israel in line with other countries that are rapidly implementing tax structures for the digital economy. Moreover, it signals to crypto investors and digital asset holders that the state will pursue full tax compliance, even in this decentralized financial landscape.
By stepping up and defining digital assets for tax purposes, Israel is setting the stage to harness the economic potential of the crypto market—helping to offset national expenses while protecting its citizens from future tax hikes. For now, all eyes are on the Knesset as it reviews the legislation that could shape the future of Israel's approach to digital finance.
