Israel Cryptocurrency Laws Regulation of Digital Currencies: Cryptocurrency, Bitcoins, Blockchain Technology
Israel’s Supervision on Financial Services (Regulated Financial Services) Law 5776-2016 requires persons engaging in providing services involving “financial assets” to obtain a license from the Supervisor of Financial Services. The definition of “financial assets” includes “virtual currency.” A license will generally be issued to an Israeli citizen or a resident who has reached the age of majority, is legally competent, and has not been declared bankrupt or, in the case of a corporation, is not required to dissolve. Additional licensing requirements include that the licensee has a minimum specified amount of equity and, if an individual, has not been convicted of an offense that due to its nature makes the licensee unfit to handle financial transactions.
A statement issued by Bank of Israel and several regulatory agencies on February 19, 2014, warned the public against dealing in virtual currencies. The warning laid out the dangers associated with trading in virtual currencies, including fraud, money laundering, and financing of terrorism, among others. In addition, the Bank of Israel said in a January 2018 statement that “it would not recognize virtual currencies such as bitcoin as actual currency and . . . it was difficult to devise regulations to monitor the risks of such activity to the country’s banks and their clients,” according to Reuters.
Although virtual currencies are not recognized as actual currency by the Bank of Israel, the Israel Tax Authority has proposed that the use of virtual currencies should be considered as a “means of virtual payment” and subject to taxation. Specifically, for the purpose of income tax and value added tax requirements, virtual currency is viewed as “an asset” and is taxed in accordance with relevant transaction classifications under the Income Tax Ordinance (New Version), 1961, and the Value Added Tax Law, 5736-1975. Accordingly,
[u]nlike a regular currency, the Israel Tax Authority will regard an increase in the value of a cryptocurrency as a capital gain rather than an exchange fluctuation, making it subject to capital gains tax. Individual investors will not be liable for value-added tax, but anyone engaging in cryptocurrency mining will be classified as a “dealer” and subject to VAT, according to the circular. Anyone trading as a business will be classified as a “financial institution” for tax purposes, meaning that they will be unable to reclaim VAT on expenses but will be subject to an extra 17 percent “profit tax” applied to financial institutions.
The Israel Tax Authority requires documentation of trade transactions involving virtual currency to enable verification of their existence and scope.
In January of 2021, the ISA announced that the issuance of cryptotokens would be held as securities rather than assets. This holding was determined in part by the stated expectation that the token’s value will increase, a common characteristic with securities investments. This holding has not been extended to traded cryptocurrencies, which remain classified as assets. To note, the biggest difference between the tokens and currencies is that cryptocurrencies have their own blockchains, whereas crypto tokens are built on an existing blockchain.
P.S. Insights on Cryptocurrency Legal Issues
Most jurisdictions and authorities have yet to enact laws governing cryptocurrencies, meaning that, for most countries, the legality of crypto mining remains unclear.
Under the Financial Crimes Enforcement Network (FinCEN), crypto miners are considered money transmitters, so they may be subject to the laws that govern that activity. In Israel, for instance, crypto mining is treated as a business and is subject to corporate income tax. In India and elsewhere, regulatory uncertainty persists, although Canada and the United States are relatively friendly to crypto mining.
However, apart from jurisdictions that have specifically banned cryptocurrency-related activities, very few countries prohibit crypto mining.
Our Freeman Law Cryptocurrency Law Resource page provides a summary of the legal status of cryptocurrency for each country across the globe with statutory or regulatory provisions governing cryptocurrency. The globe below provides links to country-by-country summaries: