Israel proposed new bill to reduce crypto taxes on foreign
residents
Israel’s parliament has approved the initial reading of a
draft bill proposing an exemption for foreign residents from
cryptocurrency taxes, a significant move to attract foreign
investment in digital assets. The bill, which received unanimous
support from all ruling coalition parties on June 5, 2023, excludes
expatriates from paying taxes on capital gains from the sale of
cryptocurrencies. The bill, introduced by Knesset member Dan Ilouz,
aligns crypto bonuses with stock options, reducing the current 50%
tax rate to 25%, delighting numerous crypto investors. The primary
aim of the bill, as stated in the explanatory note, is to position
Israel as an attractive destination for crypto investment and
foster growth in the crypto sector.
The bill proposes not to treat crypto as a security in
Israel
This bill aims to broaden the country’s regulatory oversight
on cryptocurrencies and showcases Israel’s embrace and
endorsement of digital assets. Moreover, this move aligns the
Israel Finance Minister’s stance with the UK Prime Minister and
European lawmakers, all showing support for cryptocurrency.
However, the bill proposes that digital currency should not be
considered a “security,” a departure from the earlier
draft that caused concerns within various industries in the
country.
Canada tightens its tax regulations on crypto
Global Crypto Regulations Around the world, countries are
contemplating cryptocurrency regulations, with many drafting or
close to implementing relevant bills. Europe is expected to apply
its draft by 2024, and in the US, Republicans are working on a
similar draft nearing presentation.
Canada, on the other hand, decided to tighten its regulations on
cryptocurrency. Following the announcement of a deadline by
Canadian securities regulators in February 2023, unregistered
cryptocurrency trading companies in Canada were given a 30-day
window to commit to a pre-registration undertaking. These new
regulations, inspired by the recent increase in U.S. regulatory
measures, mandate companies to segregate customer asset classes and
prohibit them from offering margin or leverage to users.
The journey towards tighter regulations began in 2019 when
Canadian regulators initially proposed a comprehensive framework
for cryptocurrency platforms. A subsequent notice in 2021 from
securities regulators and the Investment Industry Regulatory
Organization of Canada provided further clarity on how securities
law applies to these businesses. As a result of the new
requirements, some companies (such as Binance) have decided to exit
the Canadian market, while others have started the registration
process.
How is crypto taxed in Canada
In contrast to the new Israeli proposals, trading
cryptocurrencies and cryptocurrency tax in Canada is governed by
the same tax laws that apply to shares or commodities such as gold.
In some cases, when you make gains from selling Bitcoin and
Altcoins, these gains are treated as capital gains and subject to
taxation. However, if your activities suggest that you are
conducting a business through cryptocurrency trading, the gains
realized are fully taxable as business income, with combined
federal and provincial tax rates in excess of 50% in some
provinces. Canadian tax law distinguishes between income from
capital and income from business or property, and this
determination depends on the specific facts of your situation and
typically requires a detailed tax analysis by an experienced Canadian crypto lawyer.
Regarding foreign reporting requirements, Canadian taxpayers
must file Form T1135 with the Canada Revenue Agency
(CRA) if they own specified foreign property with a total value exceeding
$100,000. In a technical interpretation from April 2015, the CRA
stated that Bitcoin and other cryptocurrencies, including Dash and
Ether, fall under the category of “funds or intangible
property.”
If these cryptocurrencies are situated, deposited, or held
outside of Canada and are not exclusively used for carrying on an
active business, they will be considered specified foreign property
for the purposes of the Income Tax Act. Therefore, if a Canadian
taxpayer possesses cryptocurrency on a foreign exchange costing
$100,000 or more, or if his cryptocurrency investment is less than
$100,000 but he already own other specified foreign property
costing more than $100,000, he must report his cryptocurrency
holdings to the CRA using Form T1135.
Failure to file Form T1135 as required by the Canadian Tax Act
results in an automatic penalty of $2,500 for each annual failure
to file, and significant penalties and criminal prosecution may be
possible for severe cases of non-compliance. A top Canadian crypto
tax lawyer can advise you on your Form T1135 crypto tax filing requirements.
Pro tax tips – file a voluntary disclosure application if you
have unreported crypto income
For taxpayers who have unreported crypto income, they should
retain a knowledgeable Canadian crypto tax lawyer to file a voluntary disclosure application to avoid
potential penalties and possibly receive partial interest relief.
However, the CRA is not obligated to accept any voluntary
disclosure application and has the discretion to determine whether
to accept to reject an application. Therefore, it is highly
recommended to consult with an experienced Canadian crypto tax
lawyer to maximize your chance for your application to be
accepted.
FAQ:
What’s the legal test to determine whether crypto
gains should be considered as business income vs capital
gains?
The test to determine whether particular income is classified as
business or capital income was developed in the leading case
Happy Valley Farms Ltd. v. Her Majesty the Queen. The test
contains six elements. None of these elements are determinative on
their own and must be considered together with the overall conduct
and circumstances of the taxpayer. The six factors are as
follows:
- The nature of the property sold: Certain types of property are
more likely to result in capital income or business income. For
example, shares generally result in capital income, though business
income can be earned from selling shares as well. Other property,
like certain real estate, are neutral. Generally, property which
gives the owner a return that is either financial or personal
enjoyment simply by owning the property will give rise to capital
income upon its sale. - The length of period of ownership: shorter periods of ownership
suggest business income is being earned. Nevertheless, the courts
have considered whether shorter periods of ownership are
appropriate given the circumstances and thus not indicative of
business income. - The frequency or number of similar transactions by the
taxpayer: A taxpayer who has a pattern of making similar sales or
makes several similar sales around the same date is generally
conducting business. - Work expended on or in connection with the property realized:
Those conducting business are typically actively looking to sell
their property and will expend work to make the property marketable
or find purchasers. This factor can often be analyzed by comparing
the taxpayer’s activities to those of a person conducting
business with the same property. - The circumstances that were responsible for the sale of the
property: Reasons for the sale of property which are unexpected at
the time of purchase, such as job loss, are indicative of capital
income. - Motive: The taxpayer’s intention, to conduct business or
earn capital income, at the time of acquiring the property.
What are the conditions of a voluntary disclosure
application?
A voluntary disclosure application must meet the following
conditions to be valid. The application must:
- Be voluntary,
- Be complete,
- Involve the application or potential application of a
penalty, - Include information that is at least 1 year past due, and
- Include payment of the estimated tax owing.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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