Have you made a capital gain on the sale of crypto-currencies in Israel?
Income tax is waiting for you!
This raises several questions:
- How much tax is paid on the sale of Bitcoin in Israel?
- Is taxation territorial or global?
- Does an Olé Hadash have to pay taxes on the sale of Crypto currencies?
- How do the tax authorities know if a person owns crypto-currencies in Israel?
As with any investment, capital gains on virtual currencies are subject to tax.
What is the tax position in Israel?
But also how do the tax authorities rely on your bank movements to know the existence of your investments?
In this article, we'll take a closer look.
Investments in crypto-currencies are risky. Crypto-asset related investments are risky by nature, readers should do their own research before taking any action and only invest money you can afford to lose. This article does not constitute investment advice.
How does taxation of crypto currencies work in Israel?
First of all, it's important to point out that this is a "sensitive" subject, to say the least.
Ask 3 tax inspectors and you'll get 4 different versions.
We would like to make it clear from the outset that what is written in this article is valid on the date of publication. As the law in this sector often changes, don't hesitate to contact us to keep up to date with the latest tax reforms on crypto currency in Israel.
Bitcoin and virtual currencies are treated as an investment, and as such are subject to capital gains tax.
The tax authorities treat the capital gain as if it were the sale of an asset.
So, if a person has bought and sold a virtual currency at a profit, it will pay capital gains tax.
The current capital gains tax rate in Israel is 25%.
Obviously, the tax is calculated on the profit made at the time of sale.
We can therefore deduct direct expenses & deficits.
The method you choose to account for your capital gain can have a significant tax impact.
Find out more in the rest of this article.
Do you have a question?
Increased trading activity can increase the tax bill... or reduce it significantly!
The Israeli tax authorities can, however, claim that crypto-currency trading can be considered a commercial activity, with personal income tax of up to 50% + social security contributions to be paid to the bitouah leoumi (social security contributions in Israel).
The criteria for defining a trader are numerous, and will be the subject of a separate article.
However, the most important points to bear in mind are :
1. Volume of operations.
2. The customer's level of financial expertise.
3. The level of risk exposure taken by the customer.
4. Frequency of operations.
5. The length of time the customer holds the various "positions".
Someone who trades 20 times a month, i.e. 240 times a year, is likely to be considered as earning an "active" income, and will potentially be taxed at 50% on the income generated by the sale.
An important tip :
It works the other way round too!
A person with significant losses may have an advantage in opting for taxation under the "active" model. This is because losses from active income are deductible against all types of income in the same year.
Don't hesitate to contact us if you're in this position.
Crypto currencies in Israel are "paying" for their reputation.
Bitcoin and virtual currencies have in the past acquired a reputation for flying "under the tax radar". In other words, the funds used to purchase these types of products were not always "official", and allowed large sums of money to pass through without going through the traditional banking system.
However, a significant proportion of those currently involved in the virtual currency craze simply treat it as an investment product, and as such - its sale also requires the payment of capital gains tax.
Selling virtual currencies: When does the tax event occur?
When a person realizes a capital gain on a currency, he or she becomes de facto "capital gains taxable".
On 15/03/2021, you buy 2 Bitcoin, for a total amount of 40,000 $.
You sell one Bitcoin on 10/04/2021, for 35,000 $. You keep the other Bitcoin, waiting for a possible capital gain.
The capital gain is therefore :
40,000 / 2 = 20,000 $ Purchase price.
35,000 = Sales price.
Capital gain = 15,000 $.
Tax amount: 25%.
Total tax payable: 3,750 $.
Please note: capital gains are calculated in shekels. It is therefore advisable for an individual to neutralize the impact that the exchange rate could have on the transaction.
Selling one crypto currency to buy another "immediately".
Sometimes we sell one crypto currency in our portfolio, to buy another. We "convert" it, to use the industry jargon.
In the eyes of the Israeli tax authorities, this operation is taxable, as the change of ownership between currencies involves a "fiscal act".
Find out more in this video:
What expenses are deductible when calculating the capital gain on the sale of crypto-currencies in Israel?
As mentioned above, the following items must be deducted to calculate the amount of your capital gain:
1 - Acquisition costs, excluding exchange rate fluctuations.
Obviously, the purchase value of your crypto-currency is deducted.
But don't forget to deduct the impact (positive or negative) of the exchange rate.
2 - Platform Commission.
Example: The Revolut platform "charges" 1.5% - 2.5% in transaction fees (buy & sell). This commission is deductible.
3 - Indexing.
The calculation of the capital gain on crypto currency in Israel is calculated without the indexation factor. Sometimes you can save several percent depending on inflation.
Don't hesitate to use them, they can save you thousands of shekels.
4 - Professional fees, consultancy and software.
If you have used the services of professionals (investment advisors, lawyers, legal advisors, accountants, tax specialists, trading software subscriptions, etc.), all these costs can be considered as having been used to create added value and can therefore be deducted.
Please note: subscribing to a training course to learn about the "crypto world" may not be recognized as a deductible expense.
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What is the risk of not declaring?
Failure to declare your income is a criminal offence in Israel.
You risk a heavy fine, and if the amount is significant, a prison sentence (suspended or firm depending on the case).
How can taxes tell if you own crypto currencies?
Direct connection to your credit card.
Taxes are connected to your credit card payment system.
As a result, every time you "fund" your "Trade" platform (such as Binance, Kucoin etc...), the tax authorities receive a notification of the amount of the transaction.
Transaction report sent by your bank.
The same applies when you wish to make a transfer from your bank account in Israel to the platform's account. The bank is obliged to submit a report on the transaction to the tax authorities in Israel.
In some cases, your bank will ask you to enclose an ishour nikouye mas - Authorization not to deduct at source - to authorize the transaction. This document can be obtained from the Israeli tax authorities, who will know the amount, date and rate of the transaction.
The bank can "force" you to declare your income.
The bank has "reasonable doubt", and may in some cases ask you for proof of your tax return before letting the money enter your bank account.
The firm will assist you with your declaration.
Does an Ole Hadash have to pay capital gains tax on crypto currencies in Israel?
That's the million-dollar question.
The Israeli tax authorities consider crypto currency to be a "non-tangible" asset. Consequently, it has no physical existence.
In fact, Articles 14 and 97 B do not apply systematically.
In other words, the position of the Israeli tax authorities is to tax capital gains, even for an Olé Hadash.
Except in certain cases, which are impacted by the date of purchase, the location, the source of funds, the active/passive management of the transaction etc...
Are you Olé Hadash?
Don't be in a hurry to sell your crypto-currencies!
Take advice from a tax specialist beforehand, as a simple "trivial" transaction can sometimes jeopardize your entire tax situation (and cancel out your 10-year Aliyah benefits).
What calculation method should I use?
The method you adopt depends on your position and your portfolio.
In order to pay as little tax as possible, we need to choose the tax calculation method -FIFO (first in, first out) or LIFO (last in, first out).
If you made your investments 3 weeks ago, the LIFO method would seem more suitable for reducing the loss / recognizing the deficit.
If you own a Bitcoin bought in 2012, you'd be better off opting for Fifo in this case.
Once you've selected a method, you won't be able to change it.
Take advice from a chartered accountant beforehand to optimize this choice, which can have "far-reaching consequences".
Don't forget to record losses!
If you have recognized a loss, you should know that it can be used to deduct the following items (provided you have filed an annual tax return the year the loss was recognized and every year until the deduction is made):
- Capital gain on another virtual currency.
- Capital gain on a financial product (type: shares, bonds, options).
- In certain cases: real estate capital gains in Israel.
- In other cases: real estate capital gains realized abroad.
- Income from the sale of a business (sale of shares, sale of stores).
In a nutshell:
Crypto currencies in Israel
- Crypto-currencies are taxable as capital gains.
- Capital gains tax in Israel is 25%.
- You can choose the accounting method to define your capital gain.
- Direct expenses and deficit can be deducted.
- Declaration obligation.
- Taxation that may apply to an Olé Hadash.
- Exchange and communication between the bank and tax authorities in Israel.