Israeli Tax Authority Reviews Cryptocurrency Stablecoin Profit Taxation Amid Currency Fluctuations
The Israeli Tax Authority has begun examining whether stablecoins pegged to the US dollar should be taxed like regular cryptocurrencies or treated differently for tax purposes. Currently, there is no change in the law, but this review could affect how profits are calculated in the future.
Unlike Bitcoin, whose value can fluctuate sharply in both dollars and local currency, stablecoins are designed to maintain a fixed value against the dollar. For example, if investors bought stablecoins worth $100,000 when the dollar was 3.5 shekels, their holding was worth 350,000 shekels. If they later sold the stablecoins still valued at $100,000 but the shekel-dollar exchange rate rose to 3.8, their shekel value would increase to 380,000 shekels. Although they made no dollar profit, they gained 30,000 shekels due to currency fluctuations. The tax authority is now considering whether this shekel gain should be taxed as cryptocurrency profit or treated as a foreign exchange difference.
Additional issues discussed in a recent panel include the classification of income from staking and validation activities. Regular staking income is treated as taxable income under the Income Tax Ordinance, while validation, which involves running software to verify transactions, might be considered a business activity. The use of automated bots to exploit market volatility may also be classified similarly.
Tax and legal experts note that as the crypto world evolves, it becomes harder to apply a single definition to all activities. The key question is not just whether an asset is digital currency but how it is used and the nature of the surrounding activity. The tax laws must adapt to this rapidly changing reality.
At this stage, the examination with the tax authority and Bank of Israel is preliminary. If the approach matures, it could mark a shift from viewing all crypto assets uniformly to differentiating them based on their actual economic role for tax purposes.
