Crypto Regulations in Israel: Key Features and Considerations

From 2017 to 2023, Israel's regulatory bodies set up three key committees to explore different facets of cryptocurrency regulation and its incorporation into the nation's financial framework.

The initiative started in August 2017, with the first committee emphasizing a balance between nurturing tech-driven advancements and ensuring investor protection.

Following this, the second committee took on the mandate of crafting and bolstering the nation's digital asset market.

By May 2021, at the behest of the Israel Tax Authority's chairman, a third committee emerged to scrutinize the regulatory stance on investment products and other digital assets.

Through these strategic steps, Israel has laid down an intricate system dedicated to the oversight and taxation of digital assets.

The Israel Securities Authority (ISA) categorizes cryptocurrencies as tradable assets, subjecting them to capital gains tax. Individuals engaged in cryptocurrency trading must disclose their earnings and remit the appropriate taxes. Interestingly, Israel differentiates between blockchain-based cryptocurrencies and digital tokens without their own network.

In January 2021, the ISA determined that all dealings with tokens would be seen as securities transactions. This decision was based on the premise that tokens typically carry an anticipation of increasing in value, a characteristic commonly linked with securities. However, this classification doesn't apply to cryptocurrencies actively traded in the market, which are still considered assets. 

Evidently, the authorities perceive cryptocurrencies as more analogous to traditional currency, interpreting their volatility as a distinct kind of inflation.

The Israeli government views cryptocurrency mining as a commercial venture, subjecting it to the country's corporate taxation rules. Miners are obligated to register their operations as a business and shoulder the relevant tax responsibilities. This regulation was implemented in 2018 and remains active to date.

In Israel, the capital gains tax on cryptocurrency operations varies depending on an individual's income, ranging between 25% and 47%. For singular transactions, the applicable tax rate is a mere 20%. However, when a person engages in two or more profitable operations within a calendar year, it's viewed as a business activity, and thus, the profit becomes subject to a 50%-53% tax rate. The taxable income from such transactions is computed based on the cryptocurrency's market value at the moment of the trade.

Notably, it's not just trading that's taxable: holding digital assets is also considered a taxable event. The ISA mandates individuals to report these types of incomes on their annual tax declarations. Those who store cryptocurrencies in personal wallets or on exchanges must keep track of the asset's price changes for tax reporting purposes. Upon converting digital currencies to the national currency, the difference between the buying and selling prices incurs a 25% tax. During audits, the ISA may require individuals to show proof of their cryptocurrency transactions and any subsequent trades.

Income from cryptocurrency mining is subject to corporate taxes, currently set at 23%. Miners and traders additionally must pay a 17% Value Added Tax (VAT). This VAT is also levied on foreign companies providing digital services in Israel.

It's important to highlight that any losses from trading or depreciation of held assets can be deducted from the taxable income, given the taxpayer can provide the necessary proofs. Additionally, newly arrived immigrants enjoy a year's exemption where they neither need to declare their incomes nor pay taxes on them. This loophole is often leveraged by many Israelis, who channel transactions through newly returned residents.