Uncertainty on Israel's Bill to Exempt Foreigners from Crypto Tax

The status of the Israeli bill aimed at granting tax exemptions on the sale of digital currencies to foreigners and exempting them from Capital Gains taxation has sparked significant uncertainty. This occurs amidst the immediate demand for government revenue due to the Israeli-Palestinian conflict following the Hamas attack on Israel on October 7, 2003. The bill's intent is to establish Israel as a prime destination for crypto capital investment and to foster the expansion of the Israeli crypto sector.

Many foreigners have assumed this exemption bill is now law, while others remain doubtful. Such confusion isn't unexpected, given Israel's existing tax exemption policy for foreigners becoming Israeli residents. Such generous exemptions aren't prevalent in countries like Canada. Many perceive Israel as a more tax-friendly environment for foreigners.

Did Israel Pass a New Law to Exempt Foreigners from Crypto Tax?

In July of 2023, Israeli lawmakers initiated an early plenary session, where they proposed a bill to introduce tax exemptions on the sale of digital currencies to non-residents. Additionally, the bill suggested an exemption on capital gains taxation for non-residents selling digital currencies. 

The bill's main objective is to draw foreign crypto investment to Israel and enhance its crypto sector. It also proposes favorable tax rates for digital currency transfers to employees, reducing the tax rate on digital currency options for employees from 50% to 25%. 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", the bill is currently before the finance committee of the Knesset, awaiting preparation for its first reading.

However, in the context of the Israeli/Palestinian conflict ("iron swords war") and Israel's urgent financial needs, many question whether Israel will forsake immediate crypto taxation to promote future investments with these exemptions.

Israel's Current Crypto Tax Regime Concerning Foreign Investors

Israel's initiative to exempt foreigners from crypto tax isn't unexpected, given its existing policy exempting new residents from taxation. Israel offers such individuals a 10-year tax exemption on income from assets or businesses outside its borders, including crypto assets. This exemption also includes interest, dividends, royalties, and capital gains from such assets. The exemption period commences when the foreigner first gains Israeli residency. Similar exemptions apply to returning residents who lived outside of Israel for ten consecutive years.

Besides these exemptions, Israel's crypto taxation regime closely mirrors Canada's. Digital currencies in Israel are considered "assets" rather than currency, as outlined in Article 88 of the Israeli Income Tax Ordinance. The outcome of crypto asset disposition, i.e., sale or exchange, dictates if they are treated as capital gains or business income. If the transaction results in capital gains, a 25% tax rate is typically imposed. Conversely, if deemed business income, the tax might reach Israel's top marginal rate of 50%.

Like Canada, Israel taxes non-residents on their Israeli-sourced income and residents on their worldwide income, which includes earnings from crypto transactions. Since crypto assets are not legal tender in Israel, commercial transactions using them classify as barter transactions, and Value Added Taxes apply.

Lastly, Israel mandates that residents with foreign assets tallying NIS 1,916,000 or more (approximately $750,000 CAD) report them to tax authorities, in line with regulation 3(a)(6)(b) of the income tax regulations 1988. This applies to crypto assets as well, with no exceptions for assets linked with active businesses, unlike in Canada.

 Taxation of Crypto Assets in Canada: Foreigner-affiliated Crypto in View

Canada lacks a regime akin to Israel, which exempts new and returning residents from taxes on their non-Canadian assets and businesses. Thus, income from digital assets outside Canada is taxable for new or returning Canadian residents. Once someone assumes Canadian residency, their worldwide income earned post-residency becomes subject to taxation. Non-residents earning Canada-sourced income are also liable for tax on it.

In Canada, crypto assets are primarily regarded as commodities for tax purposes. If classified as capital property, 50% of the gains from their sale is liable to capital gains tax, paralleling Israel's 25% tax on overall gains. Retroactively effective June 25, 2024, Canada's capital gain tax rate will rise to 66.67%, exempting individuals below a $250,000 CAD threshold. This exemption will also apply to Graduated Rate Estates and Qualified Disability Trusts under specific conditions. 

If crypto assets are employed in a manner aligned with business activities, their realized income is taxed as business income in Canada. This might entail a combined federal and provincial tax rate nearing 50%, similar to Israel's rate. Also, like in Israel, crypto assets in Canada aren't legal tender. Any crypto-as-currency transactions for goods or services equate to barter transactions for tax purposes, with applicable Goods and Services Tax (GST/HST) in Canada.

Crypto assets held by Canadian residents outside Canada qualify as foreign property. Canadian residents must report any foreign properties exceeding $100,000 CAD. However, properties used exclusively in active businesses are not subject to this reporting requirement.

Securities Regulation of Crypto in Israel

Securities-wise, Israel lacks a comprehensive regulatory framework for crypto assets. The core legislation is the Israeli Securities Law 1984, with the Israeli Securities Authority serving as the chief regulatory entity.

Israel's securities regulations assess crypto asset attributes to determine if they share characteristics with securities. Crypto assets resembling securities tokens facilitate rights such as participatory, ownership, or profit entitlements. Crypto assets traded on secondary markets also classify as securities. Securities regulation includes rules on their public sale and offer.

Israeli asset fund managers, advisers, and marketers must secure licenses from the Israeli Securities Authority. License considerations encompass the applicant's experience, scheme risk, and potential for money laundering. Licensing examinations are part of the criteria. Licensees also have record-keeping and reporting duties to the Israeli Securities Authorities. Additionally, all offerings of foreign exchange-traded securities tokens to non-accredited (unsophisticated) investors are prohibited unless specific conditions are met, as outlined 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. Under the Israeli Financial Services Law, virtual currency, i.e., cryptocurrency, qualifies as a financial asset. See Article 11(a)(7) of the Law. Crypto asset dealers might therefore need a financial services license.

Moreover, Israel's Central Bank has instructed banks to accept crypto deposits from licensed corporations authorized by the Capital Markets Authority. Non-bank exchange members may also provide cryptocurrency trading and custody services. A Supreme Court ruling also permitted banks to execute digital currency transactions see Bits of Gold V Gov of the Bank of Israel 7364/22.

Institutional investors in Israel must secure their crypto assets with custodians. Additionally, the Israeli Securities Authority oversees payment services under the Israeli Payment Services Law 2019. Entities dealing in crypto and offering payment services are subject to regulation.

Israel hasn't enforced licensing requirements for foreign crypto exchanges, and there are no legal barriers for Israelis accessing such platforms. Foreign cryptocurrency trading platforms are still accessible in Israel, contrary to Canada's stance, where unregistered CTP sites are barred, facing heavy penalties.

Importantly, Decentralized Autonomous Organizations (DAOs) in Israel are not recognized as legal entities, even though they share similarities with digital companies.

Canadian Securities Regulation of Crypto

Cryptocurrency Trading Platforms (CTPs) in Canada offering services to Canadians must register, regardless of their location. Unregistered CTPs are required to file undertakings and comply with certain investor-protection measures pending full registration. Registration aims to safeguard investors through risk management, disclosure, and honest practices.

Securities law applicability varies by situation, addressed individually. Under Canadian Securities Administrators (CSA) and Canadian Investment Regulatory Organization (CIRO) regulations, crypto assets with security or derivative qualities and traded on CTPs are subject to securities laws.

Securities laws apply if security tokens are publicly traded. CTPs dealing with security tokens, their derivatives, and contracts should register with CIRO as members and investment dealers. Moreover, custodian services for crypto are regulated. If a CTP provides wallet services for user crypto storage, securities legislation applies.

Unlike Israel, Canadian banks refrain from processing crypto transactions or accepting crypto deposits. However, some offer crypto-to-cash exchanges and ATM services, operated by independent organizations.

As in Israel, DAOs are not Legal Persons in Canada

Israel offers a more favorable crypto environment for foreigners compared to Canada.

From the taxation and securities viewpoint, Israel appears more favorable towards foreign investors and crypto activities.

Israel's 10-year tax exemption for new and returning residents, along with a higher foreign asset reporting threshold (equivalent to $750,000 CAD), supports foreign investments and ownership in Israel, including crypto assets, unlike Canada.

Canada lacks such exemptions for new and returning residents, offering a $100,000 CAD limit for asset reporting. Many crypto holders view their assets as investments, not part of foreign businesses. Israel's ample asset reporting limit appeals more to crypto investors and is broader than Canada's active business exemption.

Securities-wise, Israel's regime on digital currencies is more accommodating than Canada's. Canada mandates all foreign CTPs to register before serving Canadians, contrasting Israel's accessible approach.

Israel allows foreign CTP access and imposes no limitations on citizens accessing external exchanges. Israel even endorses the promotion of foreign crypto securities, provided non-accredited (unsophisticated) investor protections are enforced. Further, Israeli banks accept crypto deposits and conduct transactions under legal obligation, unlike Canadian banks.

Israel's approach to exempting foreigners from crypto tax signifies its welcoming stance toward digital currency, though public sentiment due to the Israeli Iron Swords War suggests an aversion to general tax hikes. Consequently, secluded asset types like crypto are potentially prone to increased taxes, which is anticipated to be a temporary phase.

PRO TAX TIPS: Factors the Court Takes into Consideration in Determining if a Crypto Transaction is a Capital or Business Activity

In Canada, courts holistically assess multiple factors to determine whether income from a crypto asset is capital or business-related: property nature, transaction frequency, ownership duration, acquisition motive, labor on the property, and transaction circumstances.

Income is typically classified as capital if it involves property generally linked to capital assets, held for extended periods, requiring minimal market effort, involves unexpected sales, and aligns with a capital income generation intention at acquisition. Conversely, opposite circumstances indicate business income.

Israeli considerations mirror Canada's. Factors include property quality, transaction frequency, duration, ripening and improvement, and special disposition circumstances. These approximations have Canadian counterparts.

However, Israel adds other factors: transaction volume, organizational presence, financing, and expertise. Larger dispositions, permanent sales offices, transaction-financing loans, and proficiency suggest business income.

Such cross-jurisdictional tax considerations in Canada and Israel are interchangeable and complementary. Both jurisdictions' jurisprudence doesn't deem them exhaustive. If navigating inter-jurisdictional tax issues, our top Canadian tax lawyers can assist.

Frequently Asked Questions (FAQs)

What are Crypto Assets?

Crypto assets are digital value representations validated and secured by cryptographically powered ledgers or related technologies, commonly known as blockchains. This category includes cryptocurrencies, non-fungible tokens, security, and utility tokens.

What are the classification of crypto assets, and their definitions?

Although it's challenging to categorize every crypto asset variant, grouping attempts classify them as follows:

• Cryptocurrencies: used similarly to currency, i.e., means of payment. Includes bitcoins, altcoins, dash, Ethereum, and TAO.

Stable coins are value-referenced coins deriving worth from fiat currency, business endeavors, or other crypto assets, offering stability:

• Utility tokens: confer user rights for service or product usage.
• Security tokens: resemble securities like debts, shares, etc., granting ownership, membership, or related entitlements.
• Non-fungible tokens (NFTs): represent ownership or authenticity of an asset or asset right. The asset may be virtual or physical, with each token unique, based on blockchain or similar technology.

Are all Crypto Assets taxed in the same way?

Both Israel and Canada tax crypto assets based on their traits. Tax due is contingent on the crypto asset's nature, influencing the timing of taxation.

Disclaimer: This article provides general information, accurate as of posting. It may not be updated. It doesn't serve as legal advice and shouldn't be relied upon as such. Tax scenarios are unique and can differ from those illustrated. For specific legal inquiries, consult a Crypto Tax Accountant Miami tax lawyer.