Taxation of block rewards in Israel depends on the objective and timing of their distribution, as well as on whether they constitute a consideration for an activity carried out by a dealer who engages in virtual currencies as a business or an occupation.
Tax liability arises upon the receipt of virtual currency as payment for goods and services, as well as upon its sale, conversion into local or foreign currency, or the receipt of other virtual currency or another asset as consideration for it. Different tax rates apply to individuals and to corporations depending on whether the income derives from a business or qualifies as a capital gain. Most persons who engage in mining and verification of transactions appear do so as a business and are taxed in accordance with their respective income tax rate. Additionally, while individual investors in virtual currencies are not liable for value-added tax (VAT), those engaging in mining will be classified as dealers and could be subject to VAT.
Though there are no explicit rules governing “airdrops” and “hard forks” as a gift, it appears that their receipt would not constitute a tax event at the time of initial receipt, but rather at time of conversion with a base rate of zero. Taxation of the profit might depend on the nature of the transaction and on whether it was made in the course of the dealer’s business or not.
Israeli government committees have recognized the potential contribution of distributed ledger cryptographic currency technology to the Israeli economy. A 2019 interministerial report recommended the establishment of a regulatory sandbox, to enable a more flexible regulatory environment that would allow the development and growth of fintech companies in Israel, while minimizing risks to the public.
The legal currency in Israel is defined as the New Shekel and does not include virtual currencies. Virtual currencies are also not considered “foreign currency” for the purpose of tax exemption that applies to exchange rate differences. The Bank of Israel (BOI, Israel’s central bank) has been monitoring international developments in central bank digital currency to examine the possibility of issuing a digital Shekel but as of the writing of this report has not done so.
Israel’s existing regulatory approach to cryptoassets created through blockchain appears to depend on their particular classification. Tax liability for transactions involving the issue of distributed ledger cryptographic currency appears to depend on the type of activity involved and on whether it constitutes income from a business or a capital gain.
Government-led committees for examination of the treatment of fintech companies have proposed the establishment of a more flexible regulatory environment that adapts to the use of the new technology.
II. Classification of Cryptoassets
Israel’s Securities Authority (ISA) has identified three types of cryptoassets:
Currency Tokens: used as a means of payment, clearing or barter only, do not confer additional rights (such as a yield or ownership of an additional asset) and are not controlled by a central entity. [They] will not be considered a security.
Utility Tokens: embody a right to a product or service, and are purchased for the purpose of consumption and use only and not for the purpose of investment, will not be considered a security.
Security Tokens: Grant similar rights to securities and will be considered securities.
III. Proposals for Regulatory Reforms
Recognizing the innovative nature of distributed ledger cryptographic currency technology and its potential contribution to the Israeli economy, an ISA report issued in March 2019 recommended the establishment of the following:
- A dedicated disclosure regime for the purchase and sale of cryptocurrencies to the public in terms of prospectus and current reporting under the Securities Law,
- A more flexible regulatory environment that is adapted for companies that use the new technology, and
- A dedicated platform for trading cryptocurrencies that are securities.
A report issued in January 2019 by an interministerial team further addressed the need to adjust the regulatory framework to the special needs of fintech companies. The team was appointed by Israel’s finance minister and included representatives from the Ministry of Finance, the ISA, the BOI, the Tax Authority, and the Anti-Money Laundering and Terrorist Financing Authority, among others.
The report concluded that the absence of a solution tailored to the characteristics of fintech companies might constitute a significant barrier for their operations and business development. The team recommended, therefore, the establishment of a regulatory sandbox, to enable a more flexible regulatory environment that would allow the development and growth of fintech companies in Israel on the one hand, and on the other hand, minimize risks to the public. The proposed regulatory sandbox would provide qualifying companies regulatory relief for a limited period while enabling close supervision and control by the regulator.
IV. Tax Treatment of Block Rewards
In accordance with Circular No. 05/2018 issued by Israel’s Tax Authority on January 17, 2018, virtual currency constitutes an “asset” within its meaning under the Income Tax Ordinance (New Version), 1961.
The tax liability arising from cryptocurrency-related activities depends on their nature. A person may acquire virtual currency by a variety of ways, including by directly purchasing it from another, receiving it in exchange for providing goods and services, mining a new token or verifying transactions via blockchain.
A. Use of Virtual Currency in Exchange for Goods and Services
The transfer of a virtual currency as payment for goods and services constitutes a barter. It may therefore subject the receiver to taxation for two taxable events. The first takes place upon the receipt of virtual currency in consideration for the sale of goods or the provision of a service. The second is in respect of the capital or business income, as relevant, upon the sale of the virtual currency, its conversion into local or foreign currency, or the receipt of an asset or other virtual currency as consideration for it.
B. Trade in Virtual Currency
As noted, virtual currency is recognized by Israel’s Tax Authority as an asset. An income derived from the sale of virtual currency by its owner may qualify as capital gain. The amount received from the trade in excess of the original price, after deduction of inflationary value, will be taxed at a rate of 25% for an individual and 23% for a corporation.
If, however, the income deriving from the sale of virtual currency meets the criteria for “a business” as determined in Israeli case law, it may be subject to a “yielding income tax” (YIT), at a progressive tax rate of 10-50% for an individual, or corporate tax at a rate of 23% for a corporation. 
C. Receipt of Virtual Currency Through Mining and Blockchain Verification
Mining of a new virtual currency is performed by utilizing computer technology for purpose of verifying transactions in the blockchain network. Acceptance of consideration for transaction verification is classified in one of the following two ways:
- Where the consideration is received in the form of virtual currency as part of a business, it will be classified as YIT;
- In a situation where the receipt of consideration in virtual currency is not part of the main business income or constitutes private income, for example, by utilizing an individual’s personal computer at home for mining or verifying transactions, no tax event occurs upon receiving or creating a new virtual currency. Capital gain, however, will accrue at the time of sale or conversion of the new virtual currency to legal tenders such as new shekels or foreign currency.
For example, mining and verifying of transactions in bitcoin require an investment of working time and in computing equipment with extremely high processing capabilities, as well as electricity consumption. Verification or approval of a transaction in virtual currency like bitcoin involve the use of digital computing mechanism for analyzing and processing of the transaction’s components and encryption. The reward received for verification of a transaction depends on the speed of processing. For example, the first person who manages to verify the transaction gets the highest reward. The second gets a lower reward, and so on. The last ones to verify the transaction receive a reward that is minimal and may be lower than related expenses, such as electricity and investment costs in equipment and computing, and may even yield a loss.
D. Value-Added Tax Liability for Transactions that Involve Cryptocurrency
Similar to income tax liability, for the purpose of liability for value-added tax (VAT), virtual currency is viewed as “an asset” and is taxed in accordance with relevant transaction classifications under the Value-Added Tax Law, 5736-1975.
In accordance with Circular No. 05/2018, VAT will apply to income from virtual currencies that derive from a business. Therefore,
[i]ndividual investors in virtual currencies are not liable for VAT, but anyone who engages in mining will be classified as a dealer and could be subject to VAT. Businesses trading in virtual currencies are classified as financial institutions for tax purposes and are exempt from VAT, so VAT on expenses is not deductible and an additional 17% wage and profit tax applies.
E. Tax Treatment of “Airdrops” and “Hard Forks”
An official guidance specifically addressing taxation relating to “airdrops” and “hard forks” has not been identified at this time.
Israeli experts have suggested, however, that the receipt of virtual currency as a gift, such as in the case of “airdrops” or “hard forks,” would constitute a tax event at the time of its conversion and not at the time of its initial receipt. When calculating the taxable profit accrued upon conversion, the base rate of the virtual currency received would be zero, because nothing was paid for it. The applicable type and tax rate appear to be determined under the rules that apply to transactions in virtual currencies that are described above.
Prepared by Ruth Levush
Senior Foreign Legal Specialist
 Tax App. (Center-Lod) 11503-05-16 Kopel v. Rehovot Tax Assessor (Decision by Judge Shmuel Bornstein, rendered May 19, 2019), paras. 41-45, Nevo Legal Database (by subscription), https://perma.cc/C78B-PDCJ (in Hebrew, translations here and below are by author).
 Meir Azenkot, Taxation of Activities in Virtual Currencies (Dec. 10, 2020); Knesset (Israel Parliament) Info. & Res. Ctr. (in Hebrew; document prepared at the request of and saved by author) (hereafter KIRK’s report) § 1 (emphasis in original); based on Committee for the Examination of Regulation of the Issue of Distributed Ledger Cryptographic Currency to the Public, Final Report (March 2019) (ISA report) pp. 35-36, https://perma.cc/7SC4-RTAP (in Hebrew).
 ISA report, supra note 5, p. 3.
 Id. §§ 4.9-5; KIRK’s report § 1.
 Israel Tax Auth., Circular No. 05/2018: Taxation of Activity by Means of Virtual Payment (Known as ‘Virtual Currencies’) (Jan. 17, 2018) (hereafter Circular No. 05/2018), § 3.1, https://perma.cc/NDH8-VFZP (in Hebrew).
 Income Tax Ordinance (New Version), 1961, § 88, Dine Medinat Israel [New Version] No. 6, p. 120, as amended, 1967, as amended; unofficial translation available at Int’l Ctr. for Not-for-Profit Law, https://perma.cc/54QM-EBEQ.
 KIRK’s report § 3.
 Id. § 3.1.
 Income Tax Ordinance § 91.
 Id. §§ 2 (1-2), 121, 126; Circular No. 05/2018 § 4.1.3.
 KIRK’s report, § 3.3.
 Id., n. 17, citing a telephone conversation with Michael Asulin, Head of the Department of Encouragement and Capital Investments, Israel Tax Authority (Nov. 26, 2020).
 See section II.B. of this report.
 KIRK’s report, § 3.3.
 Circular No. 05/2018, § 3.2.3.
Last Updated: 02/05/2021