International taxation - Taxation of crypto based remuneration to employees and service providers

The crypto industry forms part of the Hi-tech industrial sector, and in this industry too it is generally acceptable to find crypto based remuneration for someone who is connected to a project, similarly to share based remuneration or employees’ stock options. Thus, for example, if a project in the industry includes within its framework the issuance of a cryptographic currency/token, it is very often found that the currencies are granted to the project’s employees, to service providers and to entrepreneurs.

Whereas with employees’ shares or stock options, it is customary to make use of Section 102 of the Israeli Tax Ordinance (taxation profits as capital gains, subject to conditions and to Tax Authorities’ approval), the section does not apply where we are dealing with remuneration in the form of a token. A partial solution can be found in a professional circular, which has been published by the Tax Authority in Israel (the number of which is 7/2018) which deals with the issuance of crypto currencies (ICO), where it is determined that the employee’s income will be chargeable with taxation at the earlier of the time of the exercise of the right that is inherent in the token, or at the time of its sale. The classification of the income is as income from work or a business.

An additional alternative that the Tax Authority permits a company to elect for is the taxation of the employee at the time of the allocation of the tokens to the employees, whereas at the time of the actual sale of the token by the employee, tax will apply in accordance with its status (capital gain or salary income). It should be mentioned that where a company has made such an election, it will have an allowable expense in accordance with the amount of the income that has been determined to be income from salary in the hands of the employee. This is similar to the allowance of an expense under Section 102 for a company that has elected for the “regular income track” rather than the “capital gains track”.

Complex tax questions arise in the field of remuneration of those involved in crypto projects and the following is a description of some of them:

1. How should an entrepreneur who “keeps” cryptocurrency currencies “for himself” be treated? Is this a dividend? And what if there is no company in the project and the activity is performed “independently”? Is it possible to claim that this is the “building of an asset” by the entrepreneurs? Is this business income in the entrepreneurs’ hands?

2. Remuneration in the hands of providers of services for crypto consideration – here in our opinion, the answer is less complicated, which is because it is customary that the consideration, or at least part of it, will be deemed to be business income. The Tax Authority relates to this issue in a tax decision that was issued to our office (the number of which is 209/18): “The manner of the recording of receipts that are received in cryptocurrencies” – the decision deals with service providers where the receipt in their hands is a “cryptocurrency” and it deals with aspects relating to reporting and recording by the service providers.

3. The question of the deduction of tax at source – creates greater complexity in light of the Authority’s position that a cryptographic currency is an “asset”, and where the issue is one of an exchange of assets (“exit” to bitcoin or to any “stable currency” whatsoever, such as USDT for example), the issue is far more complex.

4. Locked-up cryptocurrencies – what are the rules regarding grants that are received in the form of currencies for which a “lock up period” applies? In a case in which an evaluation is required – such evaluation is not simple to perform in light of the lock up period and the tremendous fluctuations in this field. And if we need to “add some spice” to the stew – in the lock up period it is possible to retain the coins or alternatively to deposit them in a yield-bearing instrument – “Staking” etc.

5. The determination of a value for the currency – the circular published by the Tax Authority related to an average value in the 30 trading days after the tax event. We would mention here that there is no always trading in these currencies and therefore the “solution” regarding the determination of the value is not always efficient.

As we can perceive, the field of cryptographic currencies is far more complex than the basic questions – is it a “currency” or an “asset”. The industry is changing and developing at great speed and the Tax Authority cannot relate to every trend in the field. Our firm accompanies crypto entrepreneurs and investors and we have considerable experience in providing consultancy services in this complex and fascinating field.