Crypto Regulation in Israel
Cryptocurrencies arrived to Israel in 2012 and by early 2014 gained tremendous popularity. There began to appear ATMs with the bitcoin exchange service, bitcoin-cafe, and, of course, crypto-exchanges. And this all happened during the legal cryptocurrency vacuum. To support the participants of the cryptology, the non-profit organization "Israeli bitcoin-association" was established. It was designed to solve the problems arising in the course of the circulation of the cryptocurrency in the absence of legal regulation.
In February 2014, the Israeli authorities issued a statement in which they warned citizens against using cryptocurrency. In response, the “Israeli bitcoin-association" stated that crypto-exchanges in Israel cooperate with law enforcement agencies and identify their clients in order to reduce the possibility of fraud to a minimum.
Tel Aviv became one of the first cities where bitcoin can be paid in some shops, restaurants, kindergartens and legal agencies in 2015. And not only in Israel, but also in the entire Middle East.
Almost three years later, in January 2017, the IRS published an official circular specifying the procedure and rules for taxing transactions with cryptocurrencies in which cryptocurrencies were classified as property and not recognized as currency or working capital.
In June 2017, the District Court of Tel Aviv ruled against the crypto-exchange Bits of Gold, which filed a lawsuit against Bank Leumi for denial of service. One of the largest financial institutions in Israel explained its decision as a fail to comply with the laws on money laundering. The court took the side of the bank.
In September 2017, the Israeli Securities Commission (ISA) began to investigate the appropriateness of ICO regulation, as well as the compliance of this area with the country's securities legislation.
In November 2017, the Securities Commission of Israel (ISA) said it was not going to ban the market of initial coin offerings (ICO). But the blockchain technology, in its opinion, should be regulated by a separate regulatory and legal framework.
Later, in November 2017, the Ministry of Finance of Israel announced the creation of a working group on the study of digital currencies. It included the heads of major audit firms and professional departments.
In January 2018, the Israeli authorities were going to oblige companies that buy and sell the cryptocurrency to report profits and losses in the same way as they do with any other assets. But there were no laws adopted.
Later, in January 2018, the Bank of Israel announced that it does not consider bitcoin a currency. At the same time, the deputy head of the central bank, Nadine Bado-Trachtenberg, stressed that the cryptocurrency should be regarded as a financial asset.
In February 2018, the tax service of Israel equated the cryptocurrencies to financial assets. From this moment, cryptocurrency investors had to pay a capital gains tax of 25%. These rules dealt with both crypto-exchanges and other companies working with digital assets. From that moment, their activity was subject to a value added tax of 17%.
In March 2018, the Committee for Evaluation and Regulation of the ICO and Securities Management of Israel refused to recognize the bitcoin as a security.
Israel is an active participant in crypto world with lots of crypto enthusiasts who conduct ICOs, open crypto exchanges and taking part in other crypto activities. Today Israel has more than 60 crypto companies encouraged by the government. However, precise crypto regulation has not been established yet. Regulation was supposed to come into power on June 1, 2018 but it was postponed for at least four more months and has not been yet announced.
This government decision about putting off issue of crypto regulation law caused lots of arguments and negative comments from crypto business because they had been looking forward to it. This decision can lead to a slower development of fintech companies and delay of emergence of new blockchain startups.
At the same time, crypto activity is still under control of tax authorities and tax law must be respected by market agents. In accordance with current Israeli law cryptocurrencies are not recognized as a currency or current assets, national tax authority classify them as valuable property. In this way, selling crypto is considered as a property sale and income from their sale is subject to capital gains tax. If such operations are performed on a regular basis and become a basis for business registration, income from them is subject to income tax. Besides, all sales of cryptocurrency are subject to VAT. Transactions that are paid in crypto are considered to be a barter, not a payment.
Nevertheless, Israel remains to be an attractive jurisdiction for crypto business. This country is open to innovations and ready to help fintech startups. There are also some tax exemptions for crypto companies. You can enjoy them if your company invest in R&D at least 7% of income or if you register company in Jerusalem or some other northern areas.