Israel - Crypto penetration

intro

Israel is an innovative hub located in the Middle East. Moreover, its economy and tech space are well integrated with the European Union and the United States. Fintech and other innovations have a good background in Israel's startup culture. However, the crypto regulation in this country still needs to be determined in many aspects.

Security level

Israel has a minor danger security level, according to our rating. Jurisdiction has 67.8 points (from 100) for safety level in Numbeo crime rating (1). Homicide level (2) is 1.9 per 100,000 inhabitants a year. Story of firearm-related death (3) 1.38 per 100,000 inhabitants a year.

Crypto Payments

According to the Israel Tax Authority guide, crypto payments are legal in Israel (4).

Furthermore, the ITA’s position is that, when the nature of the transaction is a business nature and not a capital nature, the difference in the virtual currency exchange rate will be subject to tax as business income

Crypto Salaries

Token-based compensation to employees and service providers has been growing in recent years. However, unlike share-based payment via options, according to Israel Tax Authority (ITA) instructions and guidelines, token-based compensation does not meet the scope of section 102 of the Israeli Income Tax Ordinance (ITO) provisions. Namely, section 102 does not apply to this type of compensation.

Legal

The Israeli Securities Authority (ISA) has proposed(5) a series of legislative changes relating to digital assets, inviting comments by February 12. Where a digital asset is a financial investment, it will be treated as a security.

Based on CMS law (6), VASPs in Israel are regulated by the Supervision of Financial Services (Regulated Financial Services) Law, 5776-2016 (the Financial Services Supervision Law) as financial asset services.

The Capital Market, Insurance, and Savings Authority (CMISA) issued(7) an anti-money laundering order specifically addressing cryptocurrencies, which came into effect in November 2021.

The Supervisor of Banks also has published a directive (8) that regulates banks and crypto assets.

In November 2022, the Israel Ministry of Finance published (9) recommendations for regulating digital assets. According to Coindesk (10), the requests called for the creation of new regulatory infrastructure, legislation of licensing powers, and supervision over the issuance of backed digital assets, including stablecoins, and the provision of financial services through them.

Based on Coindesk (11), the Central Bank of Israel has publisher rules for stablecoin regulation, which include a 100% reserve requirement and a ban on algorithmic stablecoins. There is an official document (12) in Hebrew.

Israel is also going to upgrade its crypto regulation to enable DAOs. An official press release(13) about it was published on the government website on September 3, 2023.

The team, headed by the Chief Economist at the Ministry of Finance and the Head of the Corporations and Capital Market Cluster at the Ministry of Justice, will examine and consult on the uses and types of activities carried out by decentralized autonomous organizations (DAO)(14) and the decision-making processes within DAOs.

Currently, there 2 cases of licensed crypto companies in Israel:

Bits of Gold(15)

Hybrid Bridge Holdings(16)

Israeli-based crypto exchange Bits of Gold became the first crypto firm in the country to receive a license from the Capital Markets Authority, according to social media posts (17) from the company. Binance is a popular exchange in Israel but still has no license (18).

According to local consultant Yosi Biton (KPMG) Interview to Chainanalysis (19), banks/brokers and other financial institutions provide crypto brokerage services in Israel.

Details

There was a regulatory arbitrage here in Israel. Banks in Israel were allowed to provide this type of services (crypto brokerage) to their clients as long as Bank of Israel and the banking supervisor is saying it’s okay. They need to pre-approve the service. The Capital Market Authority issued terms and conditions how to be licensed to provide this type of services. And the last piece of the capital market or the financial industry in Israel was the Israeli stock exchange members that provide investments and brokerage services to their clients. They were left aside. So for them to offer this type of services, they had to get the stock exchange in Israel, the Israeli stock exchange approval for doing that.

Another critical topic about crypto regulation in Israel is that the country will exclude foreigners (20) from the Capital Gain Tax on crypto assets. The local parliament approved this initiative.

Taxation

Tax name	Index
PIT tax Min	10
PIT tax Max	50
Corporate tax (CIT)	25
Min Individual CGT (for crypto)	25
Max Individual CGT (for crypto)	25
Wealth tax Min	0
Wealth tax Max	0

PIT

Taxation of individuals is imposed in graduated rates ranging up to 47%. Additionally, a 3% surtax applies on annual taxable income exceeding 698,280 Israeli shekels (ILS), resulting in a 50% maximum income tax rate based on PWC tax summaries(21).

CIT

The corporate tax rate will be 23% in 2023 by PWC tax summaries(22).

CGT

Israel has a 25% flat rate capital gains tax(23) on crypto profits.

Links

1)Crime Index by Country 2023 Mid-Year

2)List of countries by intentional homicide rate

3)List of countries by firearm-related death rate

4 and 23)Barnea. Israel Tax Authority guide. Article

5) Ledger Insights. Israel to classify most digital assets as securities. Article

6)CMS EXPERT GUIDE TO CRYPTO REGULATION IN ISRAEL. Article

7, 8 and 9)The Paypers. Bank of Israel carries on regulation push on crypto. Article