Israeli Lawmakers Propose Recognizing Bitcoin as Currency for Tax Purposes

Israeli Lawmakers Propose Treating Bitcoin as Currency, Not Asset for Tax Purposes

Israeli lawmakers have proposed a groundbreaking bill that would reclassify Bitcoin (BTC) and other digital currencies as currency rather than assets for tax purposes. If passed, the legislation would exempt Bitcoin sales and conversions from capital gains tax, marking a significant step forward for crypto adoption and taxation in Israel.

The proposed law, presented in the Israeli parliament (Knesset) on September 22, 2020, by four legislators from the Yisrael Beiteinu political party, reflects growing recognition of cryptocurrencies as a legitimate component of Israel’s high-tech and economic growth sectors.

Why Is Bitcoin Currently Taxed as an Asset in Israel?

Under Israel’s current regulatory framework, Bitcoin is considered an asset rather than a currency. This classification means that any sale or conversion of Bitcoin to fiat currency is subject to capital gains tax, currently set at 25%.

Who Is Affected by the Current Taxation?

1. Short-term Bitcoin Investors: Those who buy and sell Bitcoin for quick profits.
2. BTC Lenders and Bond-Related Traders: Individuals or firms earning revenue through crypto-based financial activities.
3. Average Citizens: Israelis holding or selling small amounts of Bitcoin are also taxed, making everyday transactions costly.

Details of the Proposed Law: Treating Bitcoin as Currency

The bill, titled “Income Tax Ordinance (Taxation of the Sale of Digital Currencies),” was introduced by four members of the Yisrael Beiteinu party:

• MK Oded Forer
• Yevgeny Soba
• Yulia Malinovsky
• Alex Kushnir

The legislation aims to modernize Israel’s tax framework to better accommodate the digital economy and evolving global trends.

Key Provisions of the Bill:

1. Reclassification of Bitcoin: Bitcoin and other digital currencies will be treated as currency rather than assets.
2. Exemption from Capital Gains Tax: Digital currency transactions will no longer attract the current 25% capital gains tax.
3. Support for the High-Tech Sector: The bill highlights the role of digital currencies as a “growth engine” for Israel’s innovative high-tech industry.

According to the bill:

“The regulatory reality in Israel is not adapted to the existing reality in the field. [Digital currencies] will continue to be a growth engine that allows the Israeli high-tech industry to flourish and develop.”

Current Bitcoin Tax Rates in Israel

To understand the significance of the proposed law, let’s examine Israel’s current taxation system for Bitcoin and other digital assets:

Impact on Bitcoin Users

1. High Tax Burden: Bitcoin holders face substantial tax liabilities when converting crypto to fiat or engaging in short-term trades.
2. Limited Everyday Use: The 25% tax discourages people from using Bitcoin for everyday transactions or payments.
3. Innovation Constraints: High taxes can stifle innovation and discourage businesses from integrating blockchain technology into their operations.

The proposed tax exemption would dramatically reduce these burdens, making Bitcoin a more attractive medium for investment, trade, and everyday use.

How Will This Law Benefit Israel’s Crypto Ecosystem?

If passed, the new legislation will unlock several opportunities for Israeli citizens, crypto investors, and the broader economy:

1. Reduced Tax Liability

By treating Bitcoin as a currency, Israeli citizens and businesses would be able to buy, sell, and convert Bitcoin without incurring capital gains tax.

2. Increased Adoption of Bitcoin

Lower taxes will encourage more individuals and businesses to:

• Use Bitcoin for everyday transactions.
• Accept Bitcoin as a payment method for goods and services.

This increased adoption will solidify Bitcoin’s role as a legitimate currency in Israel.

3. Boost to the High-Tech Industry

Israel is known for its vibrant high-tech sector. The new tax policy will:

• Encourage startups to explore blockchain and crypto innovations.
• Attract international blockchain and crypto businesses to set up operations in Israel.

4. Economic Growth

A friendlier tax environment for digital assets could make Israel a global crypto hub, attracting investments and driving economic growth.

5. Alignment with Global Trends

Several countries, including Japan and parts of the European Union, already recognize Bitcoin as a currency. Israel’s move to follow this trend would strengthen its position in the global crypto economy.

Challenges and Considerations

While the proposed bill presents numerous benefits, several challenges need to be addressed:

1. Regulatory Clarity

The legislation must clearly define what constitutes a digital currency to avoid ambiguity and ensure smooth implementation.

2. Concerns Over Tax Revenue

Exempting Bitcoin from capital gains tax may raise concerns about lost revenue for the Israeli government. Policymakers will need to evaluate potential economic gains against any short-term tax losses.

3. Preventing Illicit Activities

Critics often raise concerns about Bitcoin being used for money laundering or other illicit activities. The law must include regulatory safeguards to address these risks.

Global Perspective: Bitcoin’s Status in Other Countries

Israel’s proposed move aligns with global trends where countries are increasingly embracing Bitcoin as a legitimate financial asset.

Countries Recognizing Bitcoin as Currency:

1. Japan: Bitcoin is officially recognized as a legal method of payment.
2. Germany: Bitcoin is classified as private money for tax purposes.
3. Singapore: Bitcoin transactions are exempt from Goods and Services Tax (GST).

By reclassifying Bitcoin, Israel can position itself as a leader in the crypto-friendly regulatory space.

Conclusion: A Major Step for Bitcoin in Israel

The proposed legislation to treat Bitcoin as currency marks a pivotal moment for Israel’s cryptocurrency ecosystem. By exempting Bitcoin from capital gains tax, the law could significantly boost crypto adoption, innovation, and economic growth in the country.

Israel’s lawmakers recognize the transformative potential of digital currencies as a “growth engine” for the high-tech industry. If approved, this forward-thinking policy will not only benefit crypto users and businesses but also position Israel as a global leader in blockchain and digital asset adoption.

As the crypto world watches closely, the passage of this bill could signal a new era for Bitcoin and digital currencies in Israel.

To learn more about the innovative startups shaping the future of the crypto industry, explore our article on latest news, where we delve into the most promising ventures and their potential to disrupt traditional industries.