In accordance with regulations issued in 2016, virtual currency is considered a “financial asset” in Israel, for which the provision of financial services requires a license. As a financial asset, trade in virtual currency is subject to capital gains taxation.
In 2014 the Bank of Israel (Israel’s central bank), together with several regulatory agencies, issued a warning about the dangers associated with the use of virtual currency, including bitcoin. In a statement made by the Bank in January 2018 it clarified that it does not recognize virtual currencies as actual currencies, but rather as a financial asset. Although virtual currencies are not recognized as actual currency by the Bank of Israel, the Israel Tax Authority has proposed that the use of virtual currencies should be considered as a “means of virtual payment” and subject to taxation.
The legitimacy of a bank’s refusal to provide banking services to a company that trades in bitcoin is currently under review by the Israeli Supreme Court. The Court has issued a temporary injunction against the bank’s complete blockage of the company’s activities in the account.
I. Licensing Requirements for Trading in Virtual Currency
The Supervision on Financial Services (Regulated Financial Services) Law 5776-2016 requires persons engaging in providing services involving a “financial asset” to obtain a license issued by the Supervisor on Financial Services Providers appointed in accordance with the Law. The license enumerates conditions and types of activities approved for the licensee. “Virtual currency” is included in the definition of a “financial asset” for which providing services requires a license.
A license will generally be issued to an Israeli citizen or a resident who has reached the age of majority; is legally competent; and has not been declared bankrupt or, in the case of a corporation, has not been required to dissolve. Additional licensing requirements include that the licensee has a minimum specified equity and, for individuals, has not been convicted of an offense that due to its nature makes the licensee unfit to handle financial transactions.
II. Warning Regarding Risks Associated with Trading in Virtual Currency
A statement issued by Bank of Israel and several regulatory agencies on February 19, 2014, warned the public against dealing in virtual currencies. The warning laid out the dangers associated with trading in virtual currencies, including fraud, money laundering, and financing of terrorism, among others.
III. Legal Status and Taxation of Virtual Currency
The Bank of Israel said in a January 2018 statement that “it would not recognize virtual currencies such as bitcoin as actual currency and . . . it was difficult to devise regulations to monitor the risks of such activity to the country’s banks and their clients,” according to Reuters.
Although virtual currencies are not recognized as actual currency by the Bank of Israel, the Israel Tax Authority has proposed that the use of virtual currencies should be considered as a “means of virtual payment” and subject to taxation. Specifically, for the purpose of income tax and value added tax requirements, virtual currency is viewed as “an asset” and is taxed in accordance with relevant transaction classifications under the Income Tax Ordinance (New Version), 1961, and the Value Added Tax Law, 5736-1975. Accordingly,
[u]nlike a regular currency, the Israel Tax Authority will regard an increase in the value of a cryptocurrency as a capital gain rather than an exchange fluctuation, making it subject to capital gains tax. Individual investors will not be liable for value-added tax, but anyone engaging in cryptocurrency mining will be classified as a “dealer” and subject to VAT, according to the circular. Anyone trading as a business will be classified as a “financial institution” for tax purposes, meaning that they will be unable to reclaim VAT on expenses but will be subject to an extra 17 percent “profit tax” applied to financial institutions.
The Israel Tax Authority requires documentation of trade transactions involving virtual currency to enable verification of their existence and scope.
IV. Legitimacy of Refusal to Provide Banking Services to Traders in Bitcoin
On February 25, 2018, the Supreme Court issued a temporary injunction prohibiting a bank from blocking activities in an account held by a company engaging in trade in bitcoin until a decision is made in an appeal over the district court ruling recognizing the legitimacy of permanent authorization for such blockage.
The bank argued that its decision to block the company’s activities had been reached in accordance with the 2014 warning by the Bank of Israel and the regulatory agencies regarding risks associated with the bitcoin trade. It further asserted that the dangers described in the warning had in fact materialized “by the occurrence of several events perceived to be connected to fraud, furtherance of criminal objectives including suspicions for money laundering and financing of terrorism.” The bank alleged that activities exposing the bank to such unlawful acts might harm its reputation and public trust in the bank.
In her decision Justice Anat Baron noted that the review of a request for a temporary injunction for the duration of an appeal requires an evaluation of two cumulative elements: the chances that the appeal will be accepted, and a balancing of the respective inconvenience caused to either party if a temporary injunction is not approved.
According to Justice Baron the reasonableness of a bank’s decision to refuse enabling trade activities in virtual currencies is an issue that has not yet been determined by the Supreme Court. The issue involves a determination regarding the nature of the risk posed by trade in virtual currencies, especially in view of the characteristics of the company’s activities as a company the objective of which is to trade in bitcoin. The risk evaluation must also take into account the steps undertaken by the company to minimize the risk. It similarly must evaluate legal questions regarding the proper balancing between the duty of a bank to provide banking services vis-à-vis its responsibility to prevent prohibited activity such as money laundering or the financing of terrorism. An examination of these questions, Justice Baron concluded, leads to a conclusion that the chances of the appeal cannot be said to be null.
According to Justice Baron a rejection of the request for temporary relief would result in endangering the continued existence of the company. Considering the financial guarantees deposited by the company with the Court, and the bank’s proven ability to prevent unlawful activities, Baron concluded that the temporary injunction should be granted as the bank would be able to obtain a remedy if it incurred damages as a result of the injunction.
To remove any doubt, Baron emphasized that although the injunction prohibited the bank from fully blocking the company’s account activities, it did not affect the bank’s right to examine individual activities in the account, nor did it affect the bank’s ability to take steps to minimize risks it deemed to be associated with the business activities of the company.
Prepared by Ruth Levush
Senior Foreign Law Specialist
 Supervision on Financial Services (Regulated Financial Services) Law 5776-2016, § 12, Sefer Hahukim [Book of Laws, official gazette] 5776 No. 2570 p. 1098, as amended.
 Id. §§ 2 & 12.
 Id. § 11, subsec. 7 (defining “financial asset”).
 Id. § 15.
 Joint Press Release, Bank of Israel et al., Public Announcement Regarding Possible Risks Contained in Virtual Coins Such as Bitcoin (Feb. 19, 2014), http://www.boi.org.il/, archived at https://perma.cc/VQ7Z-GDRQ.
 Steven Scheer, Bitcoin Is an Asset, Not a Currency - Israel’s Central Bank, Reuters (Jan. 8, 2018), https://www.reuters.com/article/uk-bitcoin-israel/bitcoin-is-an-asset-not-a-currency-israels-central-bank-idUSKBN1EX18E, archived at https://perma.cc/3458-ZY58.
 Israel Tax Authority, Taxation of Activity by Means of Virtual Payment (Known as ‘Virtual Currencies’), Israel Tax Authority Circular No. 05/2018 (Jan. 17, 2018), https://taxes.gov.il/incometax/documents/hozrim/hor_ acc%2015.2.18.pdf (in Hebrew), archived at https://perma.cc/SJ48-L77X.
 Id. §§ 3.1–3.2; Income Tax Ordinance (New Version), 1961, 1 Laws of the State of Israel [LSI] (New Version) 1967 & Value Added Tax Law, 5736-1975, 30 LSI 46 (1975/76), both as amended.
 Matthew Kalman, Israel Taxman’s Guidelines Killing Cryptocurrency Boom?, BNA (Feb. 21, 2018), https://www.bna.com/israel-taxmans-guidelines-n57982089034/, archived at https://perma.cc/J8DE-6AJQ.
 Israel Tax Authority Circular No. 05/2018, supra note 7, § 3.3.
 CA 6389/17 Bits of Gold Ltd. v. Bank Leumi LeIsrael Ltd., ¶¶ 3–4, available at the Nevo Legal Database, http://www.nevo.co.il (by subscription, in Hebrew), archived at https://perma.cc/R76Z-2AQX.
 Id. ¶ 4.
 Id. ¶ 11.
 Id. ¶ 12.
 Id. ¶ 13.
 Id. ¶ 14.
Last Updated: 08/16/2019