No Longer a "One-Way Street": The Tax Authority Forced to Recognize Losses
For years, the crypto market in Israel operated under an asymmetric and outrageous enforcement policy: when you profited, the state demanded its share (25% capital gains tax); but when you lost, the Israel Tax Authority created enormous obstacles and was in no hurry to recognize losses for tax purposes. A recent landmark ruling changes the rules of the game ahead of the 2025 tax year. The court clearly held that digital currencies are a capital asset in every respect, and therefore – a capital loss arising from the sale of crypto is a deductible loss.
A "Tax Shield" Worth Tens and Hundreds of Thousands of Shekels
For investors holding a diversified investment portfolio, this is news worth a great deal of money. The implication is that losses you accumulated in the crypto market (for example, from coins whose value plummeted or collapsed) are not "money down the drain" but rather a tax asset. You can now use these losses to reduce your tax liability on gains from other sources – such as profits from selling stocks on the exchange, gains from mutual funds, and even capital gains from the sale of real estate (betterment tax) or the sale of a company. The bottom line: less tax to pay the state at year's end.
Key Rulings and New Rules
Cross-Category Offsetting: The recognition allows offsetting crypto losses against any other capital gain (not only against other crypto gains), subject to the offsetting rules under the Income Tax Ordinance (Section 92).
Actual Realization: Offsetting is permitted only for a "realized loss." A decline in value "on paper" does not qualify. You must sell the coin (or convert it) in order to crystallize the loss.
Burden of Proof: This is the main pitfall. For the Tax Authority to honor the offset, you must present a complete and clear "chain of evidence": when the coin was purchased, at what rate, from which account the funds originated, and when it was sold. Without full documentation – the offset will be disallowed.
Loss Carryforward: If you did not utilize the loss in the current year, it may in certain cases be "rolled forward" to subsequent years (carried-forward loss).
Bringing Order to the Chaos Is Worth Money
At Shlomi Vaknin & Co., we identify an opportunity for our clients to clean up their portfolios and reduce tax liabilities, but we caution against complacency. Tax assessors will scrutinize returns that include crypto offsets under a magnifying glass.
Strategic Recommendation:
Portfolio Mapping: Review your digital wallets. Do you hold "dead" coins or significantly depreciated ones? Consider realizing them (selling) before the end of the tax year to generate the offsetting tax event.
Forensic Evidence Collection: Do not rely on screenshots. Download complete Excel reports from the exchanges, and ensure there is a match between bank deposits and purchases.
Professional Reporting: Do not attempt to do this on your own in your annual return. File the return accompanied by a legal opinion or an organized calculation explaining the source of the loss, in order to prevent automatic rejection at the threshold.
