Israel's Bill to Exempt Foreigners from Crypto Tax: A Canadian Perspective

Uncertainty on Israel's Bill to Exempt Foreigners from Crypto Tax

The status of the Israeli bill to provide tax exemptions on the sale of digital currencies to foreigners and to exempt foreigners from Capital Gains taxation on the sale of digital currencies has been met with much uncertainty. This is amidst the immediate demand for government revenue, resulting from the Israeli-Palestinian conflict as a result of the Hamas bloody attack on Israel on October 7, 2003. The purpose of the bill is to position Israel as a destination, for investment in crypto capital. The bill also seeks to further the growth of the Israeli crypto sector.

Many foreigners believe this exemption bill has become law, whereas others remain skeptical. This confusion is not surprising, because Israel has a similar tax exemption for foreigners who become Israeli residents. Such generous tax exemptions are not available in countries like Canada. Many believe that Israel generally has a more favourable tax environment for foreigners.

This article seeks to clarify the above confusions and uncertainties. It contrasts the Israeli and Canadian treatment of crypto, as it concerns foreigners, from both a tax and security perspective.

Did Israel Pass a New Law to Exempt Foreigners from Crypto Tax?

In July of 2023, Israeli lawmakers embarked on an early plenary session, wherein they proposed a bill to provide tax exemption on the sale of digital currencies to non-residents. The bill also proposed an exemption on capital gains taxation for the sale of digital currencies by non-residents. 

The primary aim of the bill is to attract foreign crypto capital into Israel, and to expand the Israeli crypto sector. The bill further proposes favourable taxes for the transfer of digital currencies to employees. This includes a reduction of the tax rate on digital currency options for employees, from 50% to 25%. The bill, which is titled "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," is currently before the finance committee of the Knesset (Israel's national legislative body), awaiting preparation for first reading.

However, amidst the Israeli/Palestinian conflict ("iron swords war") and Israel's immediate need for funds, many wonder if Israel is willing to forgo the urgent taxation of crypto, for an encouragement to invest in the future through exemptions.

Israel's Current Crypto Tax Regime Concerning Foreign Investors

Israel's proposed bill to exempt foreigners from crypto tax is not surprising. This is because Israel already has a policy that exempts new residents from taxation. Israel offers such foreigners a 10-year tax exemption on their income from assets or businesses held outside Israel. This includes crypto assets. The exemption also extends to interests, dividends, royalties and capital gains from such assets. The 10-year period begins when the foreigner first becomes a resident of Israel. Similar exemptions also apply to returning residents who have lived for at least 10 consecutive years outside Israel.

Apart from the above exemptions, Israel currently has a similar taxation regime to Canada with regard to crypto. In Israel, digital currencies are considered as "assets" rather than currency. See Article 88 of the Israeli Income Tax Ordinance. The disposition of crypto assets will be included as capital gains or business income, depending on the factual circumstances. If such disposition, i.e., the sale or exchange of the crypto asset results in Capital gains, the tax rate of 25% is generally levied on the gain. However, If the sale results in a business income, the tax could be up to the Israeli top marginal tax rate of 50%.

Just like Canada, Israel taxes non-residents on their Israeli sources of income and residents on their worldwide income. This includes taxes on their incomes from crypto transactions. Because crypto assets are not legal tender in Israel, when a crypto asset is used commercially to purchase goods and services, such transaction is treated as a barter transaction (an exchange of goods or services), and Value Added Taxes are applicable.

Finally, residents of Israel who have foreign assets worth NIS 1,916,000 or more (equivalent of about $750,000CAD) are expected to report this to the tax authorities, pursuant to regulation 3(a)(6)(b) of the income tax regulations 1988. This includes crypto assets. No exceptions seem to be made as regards the connection of the asset with an active business, as is obtainable in Canada.

 Taxation of Crypto Assets in Canada: Foreigner-affiliated Crypto in View

Canada does not have a similar regime to Israel, which exempts new and returning residents from taxes on their assets and businesses held outside Canada. Therefore, income from digital assets held outside Canada are subject to tax for Canadian new or returning residents. As soon as a person assumes Canadian residence, their worldwide income earned after they became Canadian residents becomes subject to tax. Non-residents who earn income from a Canadian source will also be subject to tax on that income.

In Canada, crypto assets are generally classified as commodities for Canadian tax purposes. If a crypto asset is held as capital property, 50% of the gains realized from their disposition will be subject to capital gains tax. This is a rough equivalent with the Israeli tax rate, which is 25% of the entire gain. However, amendments intended to take retroactive effect from June 25, 2024, will increase the Canadian capital gain tax inclusion rate to 66.67% but exempting individuals up to a threshold of $250,000 CAD. Graduated Rate Estates and Qualified Disability Trusts are also eligible for this threshold exemption under certain circumstances. 

Also, in Canada, if crypto assets are used in a manner that connotes a business activity, the realized income will be taxed as business income. This could have a combined federal and provincial tax rate of about 50%, which is similar to the Israeli rate. Furthermore, crypto assets are not considered legal tender in Canada. When crypto assets are used as currency to purchase goods or services, such transactions are also treated as barter transactions for tax purposes, as is the case in Israel. Canadian Goods and services tax (GST/HST) will also be applicable.

Finally, Crypto assets held by Canadian residents outside Canada are considered foreign property. Where the costs of entire foreign properties belonging to a Canadian resident exceed $100,000 CAD, they must be reported. However, foreign property exclusively engaged in an active business is exempted from this requirement.

Securities Regulation of Crypto in Israel

From a securities perspective, Israel has yet to have an exhaustive regulatory framework for crypto assets. The primary legislation on the subject is the Israeli Securities Law 1984, and the leading regulatory body is the Israeli Securities Authority.

For the purpose of security regulations, the Israeli regime looks to the attributes of the crypto assets to determine if they share attributes similar to securities. Crypto assets are likely to be classified as securities tokens, where the crypto asset enables other rights such as participatory, ownership or profits entitlement rights. Crypto assets will also be classified as securities, where the crypto asset is to be traded on secondary markets. Regulation for securities includes regulation in their offer and sale, especially to the public.

Fund managers, investment advisers, and marketers in Israeli crypto assets are also required to obtain licenses from the Israeli Securities Authority. The consideration for granting such a license includes a review of the applicant's experience level, the risk in the scheme and the potential for money laundering. Licensing examinations are also part of the licensing consideration. Licensees have record-keeping and reporting obligations to the Israeli Securities Authorities. Furthermore, all persons are prohibited from offering security tokens traded on foreign exchanges to non-accredited (unsophisticated) investors, except if certain conditions are met. See Section 49A of the Securities Law 1968.

Israel also mandates providers of financial asset services, including custody and lending services, to obtain a licence from the Capital Market Authority. Pursuant to Israeli Financial Services Law, virtual currency, i.e. cryptocurrency, qualifies as a financial asset. See Article 11(a)(7) of the Law. Therefore, dealers in crypto assets may need to obtain a financial services license.

Furthermore, the Central Bank of Israel has also directed banks to accept cryptocurrency deposits from corporations which have obtained a license from the Capital Markets Authority. Non-bank members of the stock exchange are also allowed to offer cryptocurrency trading and custody services. The Supreme Court of Israel has even held that banks are allowed to carry out digital currency transactions. See Bits of Gold V Gov of the Bank of Israel 7364/22.

Israel mandates Institutional investors to store their crypto assets with custodians. The Israeli Securities Authority further oversees payment services, pursuant to the Israeli Payment Services Law 2019. Crypto-dealing entities which provide payment services and facilities are regulated as a result.

Israel has yet to enforce licensing requirements for foreign Crypto exchanges, and there is no law that prohibits Israeli citizens from exchanging crypto on foreign exchanges. Foreign cryptocurrency trading companies remain accessible in Israel; unlike in Canada, where the websites of unregistered CTPs are banned, and steep penalties imposed.

It is worth noting that Decentralized Autonomous Organizations ("DAOs") are not recognized as legal entities in Israel, even though they are akin to a digital company.

Canadian Securities Regulation of Crypto

CTPs - Cryptocurrency Trading Companies ("crypto exchanges") providing services to Canadians are required to be registered. It is irrelevant whether the CTP is located within or outside Canada. Unregistered CTPs in Canada are expected to file undertakings and abide by certain conditions which address investor-protection concerns, pending when full registration is achieved. Registration requirements help to protect investors through risk management, disclosure and good faith obligations.

Circumstances where security laws will apply are not exhaustive. They are treated on a case-by-case basis. Pursuant to regulations from the Canadian Securities Administrators (CSA) and Canadian Investment Regulatory Organization (CIRO), security laws will apply to crypto assets, where the crypto asset has the nature of a security or a derivative and is traded on a crypto asset trading platform (CTP).

Security laws will also apply where security tokens are traded to the public. CTPs that trade in security tokens, their derivatives and contracts are required to register with CIRO as members and investment dealers. Furthermore, custodian services in crypto are also subject to regulation. Where a CTP provides for a wallet or similar service, wherein user crypto is stored, such is subject to securities legislation.

Banks in Canada do not carry out crypto transactions nor accept crypto deposits like their counterparts in Israel. However, some banks and financial institutions do offer 'crypto for cash' exchange and ATM services, which are run by organizations independent of the bank or financial institutions.

As in Israel, DAOs are not Legal Persons in Canada

Israel has a friendlier crypto environment for foreigners than Canada.

From a tax and securities perspective, Israel seems to be a more accepting regime to foreigners and crypto activity.

The 10-year tax exemption for new and returning residents to Israel, and the greater allowance threshold for reporting of foreign assets (equivalent of $750,000 CAD) are ready policies that favour foreign investments and ownership of foreign assets in Israel, as opposed to Canada. This includes crypto assets.

The Canadian regime has no such exemptions for new and returning residents, and offers a $100,000 CAD allowance limit for asset reporting. A lot of crypto owners hold crypto as an investment and are not involved in foreign crypto businesses. Therefore, the Israeli allowance limit for foreign asset reporting will appeal more to such crypto owners, and is more encompassing than the Canadian active business exemption.

From a securities perspective, Israel has a more receptive regime to digital currency than Canada. In a globally-oriented market like crypto, it is very exclusionary for the Canadian government to require all foreign CTPs to compulsorily register with Canada before they can access Canadians.

This is unlike the Israeli regime, which allows foreign CTPs to remain accessible and offers no prohibition for Israeli citizens who approach foreign CTPs to exchange their crypto assets. The Israeli regime even allows the marketing of foreign crypto securities, as long as the necessary conditions are fulfilled to protect non-accredited (unsophisticated) investors. Furthermore, Israeli banks accept crypto deposits and carry out crypto transactions by compulsion of law, whereas Canadian Banks do not.

Finally, Israel's attitude in seeking to exempt foreigners from crypto tax speaks volumes about the receptiveness of the Israeli government and people to digital currencies. However, the Israeli Iron Swords War seems to be pushing public sentiments toward avoiding tax increases for the general public. As a result, secluded asset types, like crypto, are likely to become easy targets to increased taxes. This will hopefully be a temporary state of affairs.

PRO TAX TIPS: Factors the Court Takes into Consideration in Determining if a Crypto Transaction is a Capital or Business Activity

In Canada, to determine whether income from a crypto asset should be classified as capital or business, the court looks holistically at several factors, i.e. the nature of the property, the frequency of disposition, the length of ownership, the motive at the time of acquisition, work expended on the property, and circumstances surrounding the disposition of the property.

The court is more likely to classify income from a property as capital where: it is a property generally associated as capital property, the property is held for a long period, there is little or no effort to make the property marketable, there are unexpected reasons for its sale, and the taxpayer's intention when acquiring the property was to earn capital income. The opposite of all the forgoing circumstances will likely be indicative of business income.

In Israel, there are similar considerations. They include: the quality of the property, frequency of disposition, duration of holding the property, ripening and improvement of the property, and special circumstances for disposition. These considerations are analogous to their Canadian equivalents.

However, Israel has additional considerations, which include: volume of disposition, existence of an organization, financing of the property disposition, and expertise in the field.    The larger the quantity of the property disposed; the existence of a permanent office for its disposition; the taking of loans to finance the transaction; and proficiency in the field, are all indicative of business income.

All the above classification considerations in Israel and Canada can be interchangeable and complementary for both jurisdictions. This is because the factors are not deemed exhaustive by the jurisprudence of both jurisdictions. If you need help navigating inter-jurisdictional tax practice, our top Canadian tax lawyers are able to help you.

Frequently Asked Questions (FAQs)

What are Crypto Assets?

Crypto assets are digital representations of value whose transactions are validated and secured by cryptographically operated ledgers or similar technology, usually referred to as blockchains. Crypto assets include cryptocurrencies, non-fungible tokens, security and utility tokens.

What are the classification of crypto assets, and their definitions?

It is almost impossible to exhaustively account for all the different variations of crypto assets there are. However, attempts have been made to group them into categories. Crypto assets are usually classified into the following categories:

• Cryptocurrencies: these are crypto assets which are used in a similar manner as currency i.e. as a means of payment. They include bitcoins, altcoins, dash, Ethereum, and TAO.

Stable coins are value-referenced coins. They could derive their value from fiat currency, business pursuits, or even other crypto assets. This accounts for the stability in their value:

• Utility tokens: these are crypto assets that confer upon the user, the right to use a service or product.
• Security tokens: these are tokens used in a similar manner as securities such as debts, shares and others. They grant a right to ownership, membership or other security entitlements.
• Non-fungible tokens (NFTs): These are digital representations for ownership of an asset or the authenticity of the asset or right in the asset. Such an asset could be virtual or physical. Each of the tokens represents a unique asset or right in the asset. NFTs are based on blockchain or similar technology.

Are all Crypto Assets taxed in the same way?

Both in Israel and Canada, crypto assets are taxed based on their attributes. The manner or tax due to a crypto asset will depend on the type of attributes the crypto assets portray. This will also determine the timing for the taxing of the crypto asset.

Disclaimer: This article just provides broad information. It is only up to date as of the posting date. It has not been updated and may be out of date. It does not give legal advice and should not be relied on. Every tax scenario is unique to its circumstances and will differ from the instances described in the article. If you have specific legal questions, you should seek the advice of a Canadian tax lawyer.