Uncertainty on the Israeli Bill to Exempt Foreigners from Crypto Tax

The status of the Israeli bill proposing tax exemptions on digital currency sales for foreigners, as well as exempting them from Capital Gains tax on such sales, faces uncertainty. This situation arises amid the urgent need for government revenue due to the Israeli-Palestinian conflict following the Hamas attack on Israel on October 7, 2003. The bill aims to make Israel an investment destination for crypto capital and to bolster the growth of its crypto sector.

Many foreigners mistakenly believe this exemption bill has been enacted, while others remain skeptical. This confusion isn't unexpected, as Israel offers a similar tax exemption to foreigners who gain Israeli residency. Such tax incentives aren't offered in Canada, leading to a perception of Israel as having a more favorable tax environment for foreigners.

Is a New Israeli Law Exempting Foreigners from Crypto Tax in Effect?

In July 2023, Israeli lawmakers proposed a bill aiming to provide tax exemption on the sale of digital currencies by non-residents. This bill also targets exemption from capital gains taxation for these transactions. 

The bill's main goal is to attract foreign crypto investment to Israel and expand the Israeli crypto sector. Moreover, it suggests favorable taxes for employee digital currency transfers, including reducing the tax rate on digital currency options for employees from 50% to 25%. Currently, the "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" awaits a first reading preparation by the Knesset's finance committee.

However, given the Israeli/Palestinian conflict ("iron swords war") and Israel's urgent financial needs, there's skepticism about whether Israel will abandon immediate crypto taxation for future investment encouragement via exemptions.

Current Israeli Crypto Tax Regime for Foreign Investors

The proposed tax exemption for foreigners in Israel isn't surprising, as new residents are already exempt from taxes for a decade on income from assets or businesses outside Israel, including crypto assets. This exemption applies to interests, dividends, royalties, and capital gains from such assets, effective from the foreigner's initial Israeli residency. Similar exemptions exist for returning residents who lived abroad for at least ten consecutive years.

Beyond these exemptions, Israel's crypto taxation mirrors Canada’s. In Israel, digital currencies are deemed "assets," not currency (see Article 88 of the Israeli Income Tax Ordinance). Selling crypto assets results in capital gains or business income, based on circumstances. A 25% tax typically applies to capital gains, while business income could reach the top marginal tax rate of 50%.

Israel and Canada tax non-residents on Israeli and Canadian income sources, respectively, and residents on worldwide income, including from crypto transactions. Crypto’s non-legal tender status in Israel means using it commercially equates to barter transactions, warranting Value Added Tax.

Israeli residents with foreign assets exceeding NIS 1,916,000 (approximately $750,000 CAD) must report to tax authorities, per regulation 3(a)(6)(b) of the Income Tax Regulations 1988. Crypto assets fall under this requirement, with no exception linked to active business involvement, unlike in Canada.

Taxation of Crypto Assets in Canada: The Foreigner Perspective

Canada lacks Israel-like systems exempting new and returning residents from taxation on external assets and businesses. Thus, income from digital assets held outside Canada is taxable for Canadian new or returning residents. Canadian residents' worldwide income is taxed after establishing residency. Non-residents earning Canadian source income will also face taxation.

In Canada, crypto assets are classified as commodities for tax purposes. If they are capital property, 50% of gains from disposition become subject to capital gains tax, roughly equivalent to the Israeli 25% tax on the full gain. However, amendments retroactive to June 25, 2024, increase Canada's capital gain tax inclusion rate to 66.67%, exempting individuals up to a $250,000 CAD threshold. Graduated Rate Estates and Qualified Disability Trusts also qualify for threshold exemptions under certain conditions. 

In Canada, if crypto assets imply business activity, resulting income is business income. This may carry a combined federal and provincial tax rate near 50%, aligning with Israeli rates. Canadian crypto’s non-legal tender status means transactions for goods or services resemble barter deals, necessitating Goods and Services Tax (GST/HST).

Moreover, Canadian-held crypto assets exceeding $100,000 CAD classify as foreign property, requiring reporting unless engaged solely in active businesses.

Securities Regulation of Crypto in Israel

From a securities standpoint, Israel lacks comprehensive crypto asset regulation. The main legislative framework is the Israeli Securities Law 1984, overseen by the Israeli Securities Authority.

Israel examines a crypto asset's characteristics for securities regulations, classifying those allowing rights like participation, ownership, or profit entitlement as securities tokens. Crypto assets traded on secondary markets are also considered securities, invoking offer and sale regulations.

Israeli fund managers, investment advisers, and marketers in crypto assets must procure Israeli Securities Authority licenses. Licensing prerequisites consider experience, scheme risk, and money laundering potential. Licensees are subject to record-keeping and reporting to the Securities Authorities. Unaccredited foreign exchange security token offers face prohibition unless conditions are met, per Securities Law 1968 Section 49A.

Israel mandates financial asset service providers, including those offering custody and lending, to secure licenses from the Capital Market Authority. According to Israeli Financial Services Law, cryptocurrency equates to a financial asset per Article 11(a)(7) of the Law, requiring crypto dealers to obtain financial services licenses.

The Central Bank of Israel instructs banks to accept licensed corporations’ cryptocurrency deposits from the Capital Markets Authority. Non-bank exchange members can provide cryptocurrency trading and custody services. The Israeli Supreme Court endorsed banks facilitating digital currency transactions (see Bits of Gold V Gov of the Bank of Israel 7364/22).

Institutional crypto asset investors in Israel must employ custodians. Under the Israeli Payment Services Law 2019, the Israeli Securities Authority also regulates payment services linked to crypto entities.

Israel hasn’t enforced foreign crypto exchange licensing, and nothing prohibits Israeli citizens from using such exchanges. Foreign cryptocurrency trading remains accessible, unlike Canada, where unregistered CTP websites face bans, and severe penalties occur.

Decentralized Autonomous Organizations ("DAOs") hold no legal entity status in Israel, akin to a digital company.

Canadian Securities Regulation of Crypto

CTPs - Cryptocurrency Trading Companies ("crypto exchanges") servicing Canadians must register, irrespective of their Canadian or foreign base. Canada's unregistered CTPs must file and adhere to certain conditions pending full registration. Registration frameworks protect investors via risk management, disclosure, and good faith mandates.

No exhaustive circumstances exist for security law application; they're assessed case-by-case. According to Canadian Securities Administrators (CSA) and Canadian Investment Regulatory Organization (CIRO), security laws apply to crypto assets akin to securities or derivatives traded on crypto asset trading platforms (CTP).

Security laws also govern public-traded security tokens. CTPs trading security tokens, derivatives, and contracts must join CIRO as members and investment dealers. Crypto custodian services face regulation. CTPs with wallet or similar services storing user crypto comply with securities legislation.

Canadian banks don’t process crypto transactions or accept deposits like Israeli banks. Nevertheless, some banks and financial institutions offer 'crypto for cash' exchange and ATM services operated by independent organizations.

DAOs lack Legal Person Status in Canada, like Israel

Israel's crypto environment is more inviting to foreigners compared to Canada.

From tax and securities standpoints, Israel seems more welcoming to foreigners and crypto activities.

Policies such as the 10-year tax exemption for new and returning residents and the $750,000 CAD equivalent allowance for foreign asset reporting are pro-foreign investment and asset ownership in Israel, unlike Canada, including crypto assets.

Canada offers no exemptions for new and returning residents and maintains a $100,000 CAD asset reporting threshold. Many crypto owners hold it as investment, not involved in foreign businesses. Therefore, Israel’s foreign asset reporting threshold is appealing for such owners, more inclusive than Canada’s active business exemption.

In securities, Israel appears more receptive to digital currency than Canada. In a global market like crypto, Canada’s registration demand for foreign CTPs is exclusionary.

Contrastingly, Israel keeps foreign CTPs accessible and provides no prohibition for Israeli citizens using them. The Israeli regime even markets foreign crypto securities, contingent on investor protection. Moreover, law mandates Israeli banks handle crypto deposits and transactions, unlike Canadian banks.

Israel's effort to exempt foreigners from crypto tax indicates the government and populace's openness to digital currencies. However, the Israeli Iron Swords War seems to foster public avoidance of general tax hikes, potentially targeting isolated asset types like crypto for increased taxes. This is likely a temporary situation.

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

In Canada, courts holistically assess various factors to determine if crypto asset income is capital or business-related: property nature, disposition frequency, ownership duration, acquisition motive, property work, and disposition circumstances.

Courts likely deem income as capital if the asset is inherently capital property, held long-term, involves little marketing effort, accidental sale motivations exist, and acquisition intent was capital income. Opposite scenarios suggest business income.

Israel’s similar considerations involve property quality, disposition frequency, holding duration, property ripening/improvement, and special sale circumstances, paralleling Canadian factors.

However, Israel includes additional factors like disposition volume, organizational presence, property sale financing, and field expertise, suggesting business income.    High disposal quantities, standing transaction offices, financed deals, and field proficiency indicate business income.

These classification factors interchange between Israel and Canada since both jurisdictions' jurisprudence considers them non-exhaustive. For inter-jurisdictional tax guidance, our top Canadian tax lawyers offer assistance.

Frequently Asked Questions (FAQs)

What are Crypto Assets?

Crypto assets are digital value representations validated and secured by cryptographically operated ledgers or similar technologies, often called blockchains. They encompass cryptocurrencies, non-fungible tokens, security and utility tokens.

What are the Classification of Crypto Assets, and their Definitions?

Exhaustively listing crypto asset variations is challenging, yet they're categorized broadly. Crypto assets fall into these categories:

• Cryptocurrencies: these assets function similarly to currency, serving as payment means. Examples include bitcoins, altcoins, dash, Ethereum, and TAO.

Stable coins reference value-based coins from fiat currency, businesses, or other crypto assets, ensuring value stability:

• Utility tokens: these confer user rights to service or product access.
• Security tokens: used like securities, such as debts, shares, etc., offering ownership, membership, or security entitlements.
• Non-fungible tokens (NFTs): digital ownership or authenticity representations of physical or virtual assets. Each token signifies unique asset ownership or rights. NFTs leverage blockchain or similar tech.

Are all Crypto Assets Taxed Similarly?

Both Israel and Canada tax crypto assets based on their characteristics. A crypto asset's tax method or rate depends on its attributes, determining the timing for taxation.

Disclaimer: This article supplies general information, current as of the posting date. It’s not updated, may be outdated, doesn’t provide legal advice, and shouldn’t be relied upon. Each tax scenario is unique and might differ from the article's examples. For specific legal queries, consult a Miami tax lawyer.