Uncertainty Surrounding Israel's Proposed Crypto Tax Exemptions for Foreigners

The status of the Israeli bill aimed at providing tax exemptions for foreign individuals on the sale of digital currencies, including Capital Gains tax exemption, is currently surrounded by uncertainty. This arises amidst the pressing need for government revenue due to the ongoing Israeli-Palestinian conflict following the Hamas attack on Israel on October 7, 2003. The bill's intention is to establish Israel as a premier destination for crypto investment and to fuel the growth of its crypto sector.

While many foreigners assume this bill has already been enacted, skepticism still exists. This confusion arises partly because Israel already provides similar tax breaks for foreigners who attain Israeli residency—a generosity not mirrored by countries like Canada. Many consider that Israel broadly offers a more favorable tax environment for foreigners than others do.

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

In July 2023, Israeli lawmakers initiated an early plenary session where they tabled a bill that seeks to grant tax exemptions on the sale of digital currencies for non-residents. This also includes exemptions from capital gains tax on such sales by non-residents. 

The bill principally aims to allure foreign crypto investments into Israel to boost its burgeoning crypto sector. Further, it proposes reduced taxes on digital currency allocations to employees, reducing the tax rate from 50% to 25%. Officially titled "Bill to amend the Income Tax Ordinance (tax exemption on the sale of digital currencies to non-residents and allocation to employees), Hatshep "C" 2023", the bill awaits preparation for its first reading before the finance committee of the Knesset, Israel's national legislative body.

Given the context of the Israeli/Palestinian conflict ("iron swords war") and the country's pressing need for funds, questions arise about Israel's willingness to bypass immediate crypto taxation in favor of future investment incentives through exemptions.

Current Crypto Tax Regime in Israel for Foreign Investors

Israel's proposed exemption bill is not entirely unforeseen due to its existing policy which exempts new residents from certain taxes. Foreigners benefit from a 10-year tax exemption on income accrued from assets or businesses held outside Israel, encompassing crypto assets. Additionally, the 10-year span kicks off upon the individual's residency in Israel. Returning residents, having lived abroad for a decade consecutively, also benefit from similar exemptions.

Besides these exemptions, Israel's taxation system closely resembles Canada's concerning crypto. As outlined in Article 88 of the Israeli Income Tax Ordinance, digital currencies are regarded as "assets" rather than currency. The disposition of crypto assets is categorized either as capital gains or business income based on the circumstances. Sales resulting in Capital gains incur a 25% tax rate, while sales generating business income might face the highest marginal tax rate of 50%.

Much like Canada, Israel imposes taxes on non-residents for their Israeli-sourced income and residents for worldwide income, including income from crypto transactions. As crypto assets are not deemed legal tender in Israel, their commercial use, via a barter-style transaction, incurs Value Added Taxes.

Furthermore, Israeli residents possessing foreign assets worth NIS 1,916,000 or more (roughly $750,000 CAD) must report to taxing authorities under regulation 3(a)(6)(b) of the Income Tax Regulations of 1988. This includes crypto assets, without any exception linked to active business practices, unlike Canada.

 Tax Treatment of Crypto Assets in Canada: Foreign-Affiliated Crypto Considerations

Canada lacks an equivalent regime to Israel's tax-free offer for newcomers and returning residents on externally held assets and businesses. Consequently, Canadian new or returning residents are taxed on income from digital assets held abroad. From the point a person gains Canadian residency, any worldwide income becomes taxable. Additionally, non-residents earning from Canadian sources are subject to taxes on that income.

In Canada, crypto assets are categorized as commodities for tax purposes. If considered capital property, 50% of the realized gains are taxed, aligning roughly with Israel's 25% tax on the total gain. However, amendments intended for retroactive effect from June 25, 2024, will increase Canada's capital gain tax inclusion rate to 66.67%, yet exempting individuals up to $250,000 CAD. Qualified Disability Trusts and Graduated Rate Estates may apply for this exemption under specific conditions. 

Furthermore, should crypto assets in Canada be used in business activities, resulting incomes are taxed as business income, potentially reaching combined federal and provincial tax rates around 50%, similar to Israel. Like Israel, crypto assets aren't legal tender in Canada, thus transactions utilizing crypto as currency (to acquire goods/services) resemble barter transactions and trigger Canadian GST/HST.

Ultimately, for Canadian residents, holding crypto assets outside Canada categorizes them under foreign property. Residents who possess foreign property exceeding $100,000 CAD must report it unless such property is exclusively involved in an active business.

Regulating Crypto Securities in Israel

From a securities standpoint, Israel currently lacks comprehensive regulatory procedures for crypto assets. The principal legislative framework on this matter is the Israeli Securities Law 1984, regulated by the Israeli Securities Authority.

Under Israel's securities regulations, the attributes of the crypto asset determine its classification as a security. Crypto assets enabling participatory, ownership, or profit-rights are considered securities tokens. Regulatory measures cover their offering and sale, particularly to the public.

Entities such as fund managers, investment advisers, and marketers operating with Israeli crypto are required to secure licenses from the Israeli Securities Authority. Considerations for licensing encompass applicant expertise, scheme risk, and potential money laundering issues. Examinations for licensing are part of the process. License holders are obligated to maintain records and report to the Israeli Securities Authority. Moreover, as per Section 49A of the Securities Law 1968, offering security tokens via foreign exchanges to unsophisticated, unaccredited investors is prohibited except under specific conditions.

Israel compels financial asset service providers, including custodial and lending services, to procure a license from the Capital Market Authority. In accordance with the Israeli Financial Services Law, virtual currency qualifies as a financial asset, implying that dealers in crypto may require a financial services license.

Moreover, following directives from the Central Bank of Israel, banks are now obliged to accept cryptocurrency deposits from companies with a Capital Markets Authority license. Cryptocurrency trading and custodial services can be offered by non-bank exchange members. Also, the Supreme Court of Israel has asserted that banks are permitted to execute digital currency transactions, as demonstrated in Bits of Gold V Gov of the Bank of Israel 7364/22.

Institutional investors in Israel must store their crypto assets through custodians, subjected to oversight by the Israeli Securities Authority, pursuant to the Israeli Payment Services Law 2019. Consequently, payment service providers within the crypto sector are regulated.

Currently, Israel does not enforce licensing requirements for foreign Crypto exchanges, nor restricts Israeli citizens from utilizing foreign exchanges for crypto trading. Foreign cryptocurrency exchanges remain accessible within Israel, unlike Canada where unregistered CTP website access is banned, incurring severe penalties.

Notably, Decentralized Autonomous Organizations ("DAOs") are not acknowledged as legal entities in Israel, despite functioning similarly to digital companies.

Canadian Crypto Securities Regulations

CTPs - Cryptocurrency Trading Companies ("crypto exchanges") offering services to Canadians must obtain registration, regardless of their domestic or international location. Until fully registered, Canada's unregistered CTPs are expected to comply with stipulations addressing investor protection issues. These registration obligations ensure investor protection through risk management, transparency, and honest undertaking.

Security law applications are not comprehensively defined but are assessed individually. According to Canadian Securities Administrators (CSA) and Canadian Investment Regulatory Organization (CIRO) directives, security laws apply to crypto assets sharing characteristics of securities or derivatives traded on a crypto asset trading platform (CTP).

They also apply where security tokens are publicly traded. CIRO registration is mandated for CTPs dealing with security tokens, their derivatives, and agreements. Likewise, custodian services involving crypto come under regulatory scrutiny. If a CTP provides wallet services for storing users' crypto, securities legislation is triggered.

In Canada, banks do not engage in crypto transactions or accept crypto deposits as Israeli banks do. However, external entities offer 'crypto for cash' exchange and ATM services, dissociated from banks and financial institutions.

Like Israel, Canada Does Not Recognize DAOs as Legal Entities

Israel presents a more conducive crypto environment for foreigners compared to Canada.

From both tax and securities standpoints, Israel appears more welcoming to foreign individuals and crypto activities.

Israel's 10-year tax exemption for new and returning residents and the greater foreign asset reporting threshold (equivalent to $750,000 CAD) foster foreign ownership and investments within Israel, including crypto. This contrasts with Canada where similar exemptions for new and returning residents don't exist, and the reporting threshold is set at $100,000 CAD. Many crypto holding individuals aren't involved in foreign businesses, making Israel's reporting exemption more appealing and inclusive than Canada's active business exemption.

Securities-wise, Israel is seemingly more accepting of digital currency than Canada. With crypto's international marketplace, Canada's requirement for all foreign CTP registrations to access Canadians is quite exclusive.

Conversely, Israel allows foreign CTP access and imposes no prohibition for Israeli citizens to exchange crypto assets on foreign platforms. Furthermore, Israeli legislation endorses the marketing of foreign crypto securities, conditional on safeguarding unsophisticated investors. Moreover, Israeli banks legally accept crypto deposits and transactions, unlike those in Canada.

Israel's initiative to exempt foreigners from crypto tax reflects its government's and people's positive attitude towards digital currencies. Nonetheless, the Iron Swords War in Israel tends to sway public opinion against general tax hikes, but certain asset categories like crypto remain susceptible to potential tax increases. Hopefully, this situation will be temporary.

PRO TAX TIPS: Court Considerations for Classifying Crypto Transactions as Capital or Business Activities

In Canada, determining whether income from a crypto asset qualifies as capital or business depends on several factors: the property's nature, disposition frequency, ownership duration, acquisition purpose, property enhancement work, and circumstance of disposition.

The court likely categorizes income as capital for property typically viewed as capital, held long-term, with minimal effort to market, sold due to unforeseen reasons, and intended capital income upon acquisition. Conversely, opposing conditions suggest business income.

Israel's considerations are similar, including factors like property quality, disposition frequency, holding duration, ripening, and improvement. Additional factors include disposition volume, organization presence, transaction financing, and field expertise, reflecting business income likelihood.

These classification criteria in both Israel and Canada can interchangeably complement each other, given that neither jurisdiction views them as exhaustive. If navigating cross-border tax practices seems challenging, our leading Canadian tax attorneys are ready to assist you.

Frequently Asked Questions (FAQs)

What are Crypto Assets?

Crypto assets represent digital value held on cryptographic ledgers or similar blockchain technology ensuring transaction validity and security. They encompass cryptocurrencies, non-fungible tokens, and both security and utility tokens.

Classifications and Definitions of Crypto Assets?

Encompassing all crypto asset variations is challenging, yet they are generally categorized into these groups:

• Cryptocurrencies: Used as payment means similarly to currency. Include bitcoins, altcoins, dash, Ethereum, and TAO.

Stable coins retain value consistency and derive worth from fiat currency, business ventures, or other crypto assets:

• Utility tokens: Grant access to utilize a service or product.
• Security tokens: Function as securities such as debt, shares, offering ownership, membership, or other security rights.
• Non-fungible tokens (NFTs): Digital ownership affirmations of a tangible or intangible asset. These tokens endorse unique property or rights in assets, supported by blockchain.

Are all Crypto Assets Taxed Similarly?

In both Israel and Canada, crypto asset taxation depends on their characteristics. The applicable tax regime and schedule rely upon the specific features of the crypto assets.

Disclaimer: This article provides general information only and reflects understanding as of the publication date. It may be outdated and should not be construed as legal advice. Tax situations are uniquely variable. For specific legal inquiries, consult a Miami tax attorney here.