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Navigating Israel’s Crypto Laws: A Guide to Regulations for Investors and Startups
If you are an investor or someone that wants to start a crypto company, make sure you have nerves of steel. Why? Well, as you probably already know, cryptocurrencies and blockchain technology are still not regulated in most of the world. This often means navigating through the regulatory maze without clear definition, which may leave you scratching your head for the next best move. On top of that, crypto is often in the gray zone without any information about whether you are allowed to do certain things. But this is quite normal, especially for innovative technology like Blockchain and cryptocurrencies. How can governments regulate something that they don’t fully understand? Every innovation that happened in this world went through this phase. Maybe not so much on a global scale, but it is still a process that takes time. But this should stop you from investing in or starting your own crypto company. The goal here is to pick a country that has the friendliest views on cryptocurrencies. So, how about Israel? Is Israel a good place to start your crypto journey?
Why Is Crypto Taxed Differently in Israel?
The most important thing you need to understand is the classification of cryptocurrencies in Israel. They treat cryptocurrencies like property, not currency. So, why is this so important? Well, this classification significantly impacts how your crypto profits are being taxed. For example, if you are a private investor, you should pay a 25% capital gains tax on your crypto profits. But for businesses, the rates can climb as high as 47% on a crypto-related income. Just a comparison, in the United States, if you decide to cash your profits before 12 months of holding, you get to pay anywhere from 10-37% on your gains, and if you hold it for more than 12 months, you get to pay anything from 0-20%, which means it is significantly lower, despite the fact that the US is still not a crypto friendly country.
What About VAT?
Well, it depends if you are an individual investor or a business. If you plan to invest in crypto in Israel, there is no VAT. Crypto is seen as an “intangible asset” that can be used only for investment purposes. On the other hand, businesses must pay VAT just because trading or crypto mining is considered a service. Of course, this depends on the type of crypto company you want to open, which means that you must consult with a tax advisor.
● Individual investors: No VAT. Crypto is an “intangible asset” for investment purposes.
● Businesses: Must pay VAT since crypto mining or trading is considered a service.
The high tax rates are just because of how Israel treats cryptocurrencies. So, why would they see it as a “property”? Well, despite the fact that there are big organizations spending billions of dollars on cryptocurrencies, Israel still treats them as property due to their speculative nature.
It is quite weird how the crypto market cap has reached $3 trillion, you can play casino games with crypto on sites like evo.io, pay taxes in the US with crypto, and still be seen as a speculative asset. You can find more information here: https://www.evo.io/casino
How Does Regulation Impact Startups?
Israel, often called the “Startup Nation,” is a hub for blockchain innovation. However, startups must tread carefully under the regulatory lens.
Compliance Checklist for Crypto Startups:
- Licensing: A financial services provider license is mandatory.
- AML/KYC Requirements: Strict anti-money laundering (AML) and know-your-customer (KYC) protocols must be implemented.
- Initial Coin Offerings (ICOs): Treated as securities, ICOs are subject to stringent regulations.
In 2023, Israel introduced the Financial Information Service Law, which tightened the noose on crypto exchanges to curb illicit activities.
How Friendly Is Israel Toward Crypto?
This is a classic “yes and no” situation. While the government has supported blockchain innovation, its cautious stance on cryptocurrencies can deter some players.
The Good:
● Blockchain initiatives: Israel has been experimenting with blockchain technology for public services.
● Digital Shekel: There’s chatter about introducing a state-backed digital currency to reduce cash transactions.
The Challenges:
● Taxation hurdles: High taxes can dissuade investors.
● Stringent laws: The regulatory framework can feel overwhelming for newcomers.
Fun fact: In 2022, over 300 blockchain companies operated in Israel, making it a global hub for innovation despite the red tape.
FAQs: Let’s Answer What You’re Thinking
Do I need to report every crypto transaction to the tax authority?
Yes! Even if you’re trading on international exchanges, profits must be reported.
The Israeli Tax Authority isn’t messing around.
Can Startups Raise Funds Through Icos?
Absolutely, but expect these to be treated like traditional securities. Transparency is key to avoiding regulatory pitfalls.
What Happens If I Don’t Comply With Crypto Laws?
Non-compliance can lead to hefty fines or even criminal charges. Play it safe and make sure you comply with the laws.
How to Stay Ahead as an Investor or Startup
● Get a Tax Advisor: A crypto-savvy accountant can be your best ally.
● Use Secure Wallets: With cybercrimes on the rise, prioritizing security is non-negotiable.
● Keep Updated: Regulations evolve. What’s legal today might not be tomorrow.
Pro Tips for Startups:
● Partner with local legal firms specializing in crypto.
● Build a robust compliance framework early to avoid headaches.
The Future of Crypto in Israel
Israel is cautiously optimistic about crypto. While current regulations prioritize control over freedom, this could shift as blockchain adoption grows globally. As discussions about a digital shekel heat up, the nation may embrace crypto more openly in the years to come.