Israeli Lawmakers Propose Change to Cryptocurrencies’ Legal Tax Status

With cryptocurrencies becoming more prominent almost by the day, several countries and financial regulators have turned their attention to providing effective regulation. In Israel, some lawmakers have proposed a new regulatory regime that could entirely transform their tax requirements and implications.

Currencies, Not Assets

Earlier this week, local news source Globes reported that four Israeli parliament members had proposed that the country tax cryptocurrencies like fiat currencies. Per the report, the lawmakers – Oded Forer, Yevgeny Soba, Yulia Malinovsky, and Alex Kushnir – had proposed the amendment, essentially meaning that digital assets would be taxed as currencies; not assets. 

One major implication of this proposal is that Bitcoin will no longer be subject to capital gains taxes. The current tax law in Israel dictates that digital assets are subject to a 25 percent tax deduction whenever converted into fiat. For short-term lenders, this rate is 15 percent.

If this new law comes into place, digital assets would be taxed significantly lower. For instance, as of 2019, people who earned less than 75,720 shekels (about $21,800) from cryptocurrencies only got taxed at a 10 percent rate. Further deductions could serve as additional incentives to hold cryptocurrencies. 

The current tax law in the country has been in place since 2018. Per a circular from the Israeli Tax Authority (ITA), the government planned to view cryptocurrencies purely as assets. Along with the 25 percent tax rate for individuals, businesses holding or “investing” cryptocurrencies would have to remit 47 percent of their gains in taxes. 

The law got significant pushback immediately it became mainstream. Speaking with local news source Haaretz, Shahar Strauss, a lawyer at local law firm Ziv Sharon & Company, criticized the tax authority for being out of touch with economic realities. 

“According to the Tax Authority, investing in the esoteric currency of some Pacific island that can’t be used in Israel and many other countries meets the definition of currency and is therefore entitled to a tax exemption, while investing in the digital currency is not,” Strauss explained at the time. 

A draft of the new proposal had similar criticisms for the ITA, explaining that cryptocurrencies would continue to grow on the back of massive adoption from tech and finance firms. Given their revolutionary prospects, the proposal would be better for the government to provide better tax regulations to incentivize investors and users.

Improving Digital Payments 

MK Forer also highlighted that the government needs cryptocurrencies and blockchain to bolster digital payments, particularly with a looming second coronavirus wave.  While Israeli began to ease its lockdown weeks ago, the government is seeing a resurgence in cases.

As a result, the parliament ruled on Thursday that another lockdown should begin in the country. The Jerusalem Post reports that the new lockdown began on Friday, and it was sparked by 7,000 new cases of the virus in 24 hours. Speaking on blockchain and crypto’s potential to improve digital payments, Forer explained: 

“It is possible to promote digital payment options due to the social distance that has been forced on us. When the economic future is unclear, we need to give growth engines a boost.”

While the bill is quite ambitious, it would need some significant support to pass into law.