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66 The US-Israel Legal Review 2019
ISRAEL: CRYPTOCURRENCIES
native tokens.
Moreover, this new concept opens the gate for
a new era of tokenisation of assets like stocks,
bonds, commodities and fiat-pegged coins (known
as stable coins). This could see traditional financial
systems (such as the stocks and commodities
markets) adopt a tokenised and decentralised form,
which will eventually reduce transaction time and
costs, and the risk of a single-point failure, among
many other benefits.
Another important reason for the ever-growing
interest in virtual currencies is that they appear to
be more resilient than expected. At its lowest point
following the burst of the 2017 crypto-bubble, the
total market cap of all traded virtual currencies
was over USD100 billion, compared toUSD20 billion
at the beginning of 2017, before the bubble. Lastly,
it is the rapidly-progressing state of regulation and
growing adoption of virtual currencies around the
world that will continue to drive their popularity in
the coming years.
With respect to Bitcoin’s popularity, the three
main catalysts are as follows:
Blockchain:
It is the first, functional virtual currency
to utilise the blockchain technology in a fully-
functional and operational manner and to introduce a
real, decentralised “currency”,withnocentral bankor
single entity in control. The ability to globally transfer
something of real-world value to anyone, with the
mere click of a button, with low fees and maximum
security, without the reliance on middlemen (who
tend to raise costs and cause delays, and may present
unnecessary barriers), is of particular appeal in
today’s world of international commerce.
Decentralised:
Unlike the current, centralised
financial systems, which rely on banks, credit
card schemes, electronic wallets, and so forth, and
which are ultimately controlled by central banks
(each with their own interests and objectives),
Bitcoin is fully decentralised. The user owns and
controls their own funds. Notwithstanding the
potential risks pertaining to such a reality, it also
presents various advantages, particularly for the
“unbanked” masses. For example, individuals
residing in areas where the banking system is
lacking or untrustworthy, can now hold their funds
in a secure, independent and easily-accessible
manner. As a growing number of people experience
distrust in the traditional banking system or in
their governments’ ability to secure their funds, the
appeal of Bitcoin (and its peers) is likely to grow.
Inflation:
Low, controlled inflation is another
key factor for the growing interest in Bitcoin.
While Bitcoin has experienced significant value-
fluctuation due to market behaviour, it has
benefitted from a pre-programmed growth-rate
(capped at a maximum of 21 million Bitcoins), a
feature designed to safeguard it from inflation
and ultimately contribute to a valuation truly
determined by demand. This makes Bitcoin
attractive to certain investors as an alternative to
other finite precious goods, such as gold, earning it
the nickname “digital gold”.
3. Howare transactions using virtual currencies
as the medium of exchange taxed in Israel?
The Israeli Tax Authority holds the position that
virtual currency is considered a good or asset for
tax purposes and is not considered legal tender.
A retail transaction paid with virtual currency is
considered a barter deal, in which each party is
selling one asset and buying another at the same
time. The value of such transaction for both parties
is based on the fixed price of the sold product/
service. If no such fixed price exists, the value
will be calculated per the fair value of the virtual
currency at the time of payment.
The main implication of this tax treatment is
that a retailer may be subject to dual tax regimes.
A seller must report his income as if paid in fiat
money, and, if the virtual currency is subsequently
converted to fiat, they may be subject to capital
gains tax (or other applicable tax, as the case may
be) if the value has increased since the virtual
currency was originally accepted. If the value
depreciated, losses may be deducted.
4. Were any adjustments made in Israel’s tax
regime in relation to ICO’s conducted within
Israel?
The Israel Tax Authority (ITA) published several
circulars regarding virtual currencies, providing
extensive guidance on taxation of income generated
from investing, dealing, trading and mining. Also,
a circular published in March 2018 addressed
various tax issues related to the issuance of virtual
currencies (ICOs). Primarily, where a company
raises capital by issuing a utility token, it may be