Tax liability for the issue of Initial ICO

The digital currencies, and the taxation related to them

After a long period in which tax authorities around the world did not know how to deal with the whole issue of digital currencies, and the taxation related to them, the Israel Tax Authority published an income tax draft in January 2018 and followed this up this month (July 2018) with a professional circular regulating the issue of digital tokens, services and/or products under development (Utility Tokens) – Circular No. 7/2018 This circular deals with the issuance of ICO and the tax implications that apply to the issuance of these tokens to employees and service providers.

The following background is an excerpt from 7/2018:

The issuance of digital tokens (ICO) is a common way of raising funds for business ventures, with the issue and tracking of transactions usually carried out in a technology called blockchain. This technology enables the existence of business operations in a secure and encrypted manner on the network, while validating the transactions that are carried out and without the need to manage a central entity. The use of technology is channeled to the issuance of cryptographic chips (digital currencies) and can be divided into several types:

The first two types are Bitcoin and Ethereum whose issuance are not carried out by a single entity and their value is determined in transactions between sellers and buyers. (For example, the right to receive future profits) The third type is a token issued through one central entity, which obliges the issuer to provide a service, or a right to future products currently under development for those who hold these tokens. Tokens of the latter type are defined by the Income Tax Authority as “product and service registrations”, and the Authority relates only to them, both in the draft circular at the beginning of the year and in the circular published this month.

Summary of Income Tax Position on ICO – Taxation of Digital Coin Issues:

It appears that the Tax Authority has only begun to base its taxation rules on the allocation of tokens to employees and service providers, and currently allows for a tax route that allows for the postponement of the tax payment until the actual “receiving of the money” through income or allotment of shares to employees. This is similar to the postponement of the tax provided in Section 102 of the Income Tax Ordinance – the company can elect one of the taxation routes for the allotment of shares to employees – i.e. through a trustee, a labor/income route or a capital gains route. However, unlike the capital route referred to in this section, regarding the taxation of the issue of digital currencies, the Authority does not grant a reduction in the tax rate.

Unless the transaction falls into “The Encouragement of Capital Investments Law”, the Company will be required to check its compliance with the conditions prescribed on the basis of its material business activity at the date of actual recognition for tax purposes.

Since this is apparently only the opening shot of the Tax Authority, there is no doubt that additional changes are expected in the near future, therefore, professional guidance in the field of taxation is required for anyone involved in this field.

It should be emphasized that this publication does not constitute a substitute for professional advice.

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