Virtual currencies (cryptographic) are gaining increasing interest among many entities in the global economy, for investment and trading purposes. In addition, in recent years, many start-ups have been established in Israel in the field of blockchain, the technology on which the field of virtual currencies is based, in order to offer advanced technological solutions to various issues.

Notwithstanding, alongside the great technological advances in this field, the manner of taxation has not yet received comprehensive regulation as part of global legislation, especially in Israel.

In 2018, further to the court ruling in favor of the Tax Authority in the Koppel case, in which the court ruled that virtual currency is not a "currency," the Tax Authority issued two professional circulars with a goal of presenting its position regarding the manner of taxation of activity relating to virtual currencies.

In addition, the Israel Tax Authority included in the list of positions required to report Position No. 32/2017 on the taxation of "virtual currencies" and issued a tax decision dealing with the manner of recording receipts received in decentralized tokens.

As part of the publications of the Israel Tax Authority, reference was made to various types of virtual currencies, as follows.

Decentralized tokens

These tokens are a decentralized means of payment such as Bitcoin, Ethereum and other currencies.

These tokens are not issued by a single central party and their value does not represent the value of any goods or services, rather their value is set according to the secondary trade between the network of users of and investors in such tokens.

The Tax Authority referred to decentralized tokens in Circular No. 5/2018 - "Taxation of Activity through Decentralized Means of Payment (referred to as 'virtual currencies' and 'cryptographic currencies'). See more below.

Utility Tokens

Tokens issued by one central entity that represent the right of the purchaser of the said currencies to receive services or assets from the issuing company in the future. For example, a commercial company that issues tokens, the holders of which will be entitled to receive a service or product of the company.

With regard to these currencies and the manner in which they are issued as part of the initial offering of the decentralized electronic means (Initial Coin Offering - ICO), the Israel Tax Authority made reference to them in Circular 7/2018 - Digital Tokens for the Provision of Services and/or Products under Development (Utility Tokens). See more below.

Security Tokens

Tokens issued by one central entity representing a right to an asset or financial right. As part of its circulars, the Israel Tax Authority did not address this type of tokens.