Taxation of Digital Currencies

Decentralized Currencies, Digital Currencies

Decentralized, cryptographic currencies are new currencies that exist on the internet and have no physical form — a means of payment that creates a new payment network. They are also called virtual currencies or digital currencies. These are fully independent currencies whose value is not set by a single central body — a global bank or a state — but whose rates are determined freely and independently by the consumers and traders dealing in them all over the world.

Bitcoin is the first decentralized currency, which started the revolution in 2009. To this day it is the most popular virtual currency. Another popular currency is Ethereum, alongside additional cryptocurrencies such as Litecoin, Dogecoin, Stellar, NEO, EOS, Cardano, Zcash, Ripple and more.

The term crypto comes from the word cryptocurrency — an encrypted currency. It refers to a currency that defines a decentralized system with many users, using a communication protocol and an encrypted cryptographic protocol between the network's participants. Until 2017 no decentralized currency had obtained the status of a legal means of payment in any country, but from April of that year Japan allowed the use of bitcoin as a legitimate means of payment. In 2021 El Salvador became the first country to recognize bitcoin as legal tender — but in January 2025, under an agreement with the International Monetary Fund, it amended the law and made accepting bitcoin voluntary.

Blockchain for Decentralized Currencies

The technology behind these currencies is called a chain of blocks, or blockchain. It is a system of networked computers that manage complex databases. The idea behind blockchain is to create a system for managing transactions and transferring information without a central party managing or mediating between the traders in cryptocurrencies. The blockchain is managed in a decentralized way — by thousands of different computers and users — which prevents it from being hacked by breaking into a single computer on the network. The computers taking part in the crypto network build a digital record of all transfers. At set intervals (in Bitcoin, about every 10 minutes on average; in Ethereum, every 12 seconds) the updated data is written to the "database". A block is a unit of time within the database, and every activity carried out on the network can be placed in a particular block. Every so often a block is sealed and joins the previous blocks, with the previous block encrypted into it — and so the "chain of blocks" is created.

Cryptocurrencies and Taxation in Israel

In light of the steady rise in the use of digital currencies in Israel and around the world, the Tax Authority realized that it had to examine the tax issues arising from trading in them. The huge growth in the number of transactions each year led to steep rises in the rates of the various currencies, and orderly action by the Ministry of Finance was required to align with the global and local market. The tax authorities followed the changes and the large gains in the field and determined that, for Israeli tax law purposes, decentralized currencies are considered an asset.

On 17 January 2018 the Israel Tax Authority published its position on the taxation of activity in decentralized currencies (Income Tax Circular 05/2018). Under this position, "a decentralized means of payment used as a means of barter is not a 'currency' or 'foreign currency' under the Bank of Israel Law and for the purposes of the Income Tax Ordinance". The Tax Authority determined that virtual currencies (its term for decentralized currencies) meet the definition of a non-depreciable asset under section 88 of the Income Tax Ordinance, and are not a "currency". This distinction is very important, because the sale of an asset at a gain is subject to capital-gains tax under Part E of the Income Tax Ordinance. By contrast, exchange-rate differences that an individual receives on foreign currency (not in the course of a business) are exempt from tax under certain conditions (section 9(13) of the Ordinance).

In 2019 the Central-Lod District Court adopted this approach: in the Kopel ruling (Tax Appeal 11503-05-16) it held that bitcoin is an asset and not a currency, so the gain on its sale is subject to capital-gains tax.

A possible exception: for gains from bitcoin only, realized by an individual during the period when bitcoin was legal tender in El Salvador (September 2021 to early 2025), a claim for a tax exemption can be raised.

Read our full article: Bitcoin — the Reporting Obligation and the 2021–2025 Exemption Window →

Accordingly, a wide range of activities in the field have been defined as tax events requiring reporting — such as converting decentralized currencies, mining coins, and payments for services or products. The Tax Authority determined that the gain arising from the rise in a virtual currency's rate, upon a sale or a barter transaction, will be taxed as a capital gain. In Position 91/2021 the Tax Authority clarified that exchanging one virtual currency for another — even without passing through shekels or dollars — is also a taxable realization.

Decentralized Currencies and the Securities Authority

The Israel Securities Authority appointed a committee to examine the regulation of public offerings of decentralized virtual currencies, and in March 2018 it submitted an interim report under which the question whether a coin is a security will be decided according to all the circumstances and characteristics of each case, in light of the purposes of the law:

1. Decentralized currencies will be considered an asset where they are intended to serve as a means of payment, clearing or exchange, or embody a right to a product or service and are bought for consumption.
2. Cryptocurrencies will be considered a security where they confer rights similar to those of traditional securities, such as a share, a bond or a participation unit.

A Decentralized Currency — Capital Gain or Business?

As with any asset, activity in virtual currencies can sometimes be classified as reaching the level of a business, in which case it should be taxed as ordinary income (at marginal rates). The Tax Authority noted that a sale carried out as part of a business activity will be considered business or vocational income and should therefore be taxed as ordinary income — for an individual, at the marginal tax brackets. Under the circular, income from mining coins is also classified as business income. For VAT purposes, the circular provides that a person engaged in trading virtual currencies as a business is classified as a "financial institution", while a miner is classified as a "dealer" (osek).

Business Consideration in Crypto

Under the position of the Israeli tax authorities, every transaction in which the consideration is paid in a decentralized means of payment is to be taxed as a barter transaction. A barter transaction means one party providing a service in return for receiving a service from the other party, without using money in any of its forms — in effect, a transaction without a medium of exchange. But these transactions require tax reporting like any other transaction. They generate income that is ultimately expressed in money, so these amounts must appear on the business's tax invoices. The Tax Authority's document also includes guidance on VAT for these activities.

Salary Paid in Crypto

Where there is demand for salary payments in crypto, there are technology platforms that perform the conversion, so that the employer pays the salary in shekels and the employee receives the consideration in a digital currency. In such a case two points deserve attention: the taxation, and the employee's ability to move the funds into the financial system.

It is important to remember that the salary itself is taxable as employment income, according to its value when received — even if it was paid in a digital currency.

When the employee uses the crypto received — selling coins, paying with them, or converting between currencies — a tax event arises that is subject to capital-gains tax on the difference between the coin's rate at the time of the original deposit and its rate at the time of use.

Another point worth addressing is the employee's ability to move the funds into the financial system. Today there are still many barriers to moving crypto funds into the financial system, and all activity needs to be documented and deposited with regulated entities in order to have a legal path that allows the decentralized currencies into the financial system.

Virtual Currencies and the Reporting Obligation

Buying a digital currency with ordinary (fiat) money is not a tax event, and holding the coin in a wallet or account does not create a tax event either. The taxable event is the realization: a sale, payment with the coin, or exchanging it for another coin.

For every realization at a gain, a report must be filed with the assessing officer within 30 days of the sale, and an advance on the tax must be paid (section 91(d) of the Ordinance) — since there is no bank or other body withholding the tax at source. Given the high trading frequency typical of crypto, this reporting can be cumbersome, so orderly documentation of every transaction — date, quantity, price and wallet — is essential. In addition, there may be an obligation to file an annual return (Form 1301).

Read our full article: Annual Tax Report — Who Must File, Deadlines and What to Attach →

A loss on the sale of a virtual currency is offset against capital gains. A loss not offset in that year carries forward to the following years — but only against capital gains, and provided a return was filed for the year in which the loss arose (section 92).

On the Other Hand

On the other hand, some argue that with virtual currencies the Tax Authority could have chosen a different economic policy, to encourage investment and cooperate with those active in cryptocurrencies. Under this view, bitcoin, Ethereum and the other virtual currencies should be classified as foreign currencies under the Income Tax Ordinance rather than as assets. The Tax Authority could then grant an exemption on the exchange-rate differences enjoyed by an individual investor, similar to the exemption granted on exchange-rate differences in trading ordinary foreign currencies.

Summary

For people buying and selling virtual currencies, keeping track of the Israeli tax implications does not have to be a headache. It is highly recommended to keep historical records of all activity and to get help and advice from professional CPAs. Just know that no matter which digital currency you trade, when the time comes you will have to answer to the relevant tax institutions. As long as you keep orderly records, you should be able to pay and get paid in any digital currency you like. Good luck.

The above article does not constitute a recommendation, professional advice or a legal opinion. If you have any questions, you are welcome to contact us — we will be happy to advise, accompany and represent you before the Israeli tax authorities.

Kind regards,
Hager-Alperowitz & Co. — Certified Public Accountants