The Israel Tax Authority (ITA) issued an announcement on March 6 saying that non-fungible tokens (NFTs) are considered taxable assets, not exempt personal possessions. This was based on an earlier tax circular dealing with crypto (virtual) currencies such as bitcoins (Circular 05/2018). Let’s review both cryptocurrencies and NFTs.
The problems
Cryptocurrencies aren’t issued by governments (fiat currency), they are “mined” by private sector parties using computers powered by a lot of electricity. So governments feel out-maneuvered. Furthermore, due to lack of transparency on some online platforms, cryptocurrencies are allegedly sometimes used to facilitate crime and tax evasion.
According to Wikipedia and others, an NFT is a unit of data stored on a blockchain, a form of digital ledger that can be sold and traded. Types of NFT data units may be associated with digital files such as photos, videos or audio. Because each token is uniquely identifiable, NFTs differ from blockchain cryptocurrencies, such as bitcoins.
Banks in Israel are reluctant to accept bitcoins and unlikely to accept NFTs.
Are virtual currencies really currencies?
According to ITA Tax Circular 05/2018, foreign-exchange differences arising from changes in currency-exchange rates may be exempt from Israeli tax under various sections in the Israeli tax law if certain conditions are met. The word “currency” isn’t defined in the tax law, but it is defined in the Bank of Israel Law 2010 as the New Israeli Shekel. And “foreign currency” is defined in the same law as “bank notes or coins that are legal tender in a foreign country.”
Cryptocurrencies – income and capital gains tax treatment
Given the above, the ITA contends that distributed means of payments (=virtual or cryptocurrencies) do not count as “currency” or “foreign currency.” Therefore, the ITA claims that various exemptions for currency gains apparently do not apply to cryptocurrency gains.
Instead, the ITA says that cryptocurrencies, whether tangible or intangible, are taxable capital assets (ITO Section 88). Accordingly, the ITA contends:
• A sale of a cryptocurrency is generally subject to Israeli capital gains tax (up to 33%).
• If the activity amounts to a business, based on case law criteria (business organization, expertise, frequency, etc), income tax is applicable (up to 50%).
• In particular, mining of cryptocurrencies (i.e. minting them) is a business activity.
• The tax treatment for barter transactions applies;
Anyone selling an asset or service in consideration for a cryptocurrency is taxable twice: 1) on the profit from the asset or service, and 2) on any subsequent increase in value when selling the cryptocurrency.
Cryptocurrencies – VAT treatment
The ITA circular says that VAT (17% generally) applies to transactions from business activities such as mining cryptocurrencies.
But the ITA circular claims that business sales of cryptocurrencies are activities of a financial institution like a bank or insurance company. These may in principle be subject to 17% wage and profit tax in lieu of VAT. If so, the purchaser cannot recover such tax as input VAT. In practice, this does not always happen.
NFT tax treatment
The recent ITA announcement of March 6 relates to “Taxation of Digital Assets” of the non-fungible token (NFT) type.
The ITA reminds us that a taxable “asset” is defined (ITO Sec. 88 as above) as “any property, real estate or chattels... except chattels held by an individual for personal use.”
So if an individual sells chattels (tangible personal possessions) such as jewelry or furniture used for non-business purposes, the sale is generally not liable to capital gains tax.
However, the ITA says that since an NFT is a right to hold an intangible asset (even if it is a picture or virtual image), it isn’t a right to hold chattels for personal use. Therefore, the ITA says NFT sales are taxable.
Comments
The ITA wants tax, but the legislation needs further clarification.
As for cryptocurrencies, the argument that cryptocurrencies aren’t legal tender is wearing thin, as several countries are moving towards digital currencies. And most money is held electronically, not as tangible banknotes and coins.
As for NFTs, many people dispute the ITA’s argument that they aren’t personal chattels for personal use. The underlying asset may be a picture or other item for personal use. The blockchain technology used helps demonstrate historical ownership rights to capital assets just like the land registry (Tabu) and the company’s registry.
Anyone holding cryptocurrencies or NFTs should obtain professional advice.
As always, consult experienced tax advisers in each country at an early stage in specific cases. leon@h2cat.com. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd.