Yesterday, the Israeli Tax Authority issued a draft guideline for issuance of utility tokens. The full text is in Hebrew and available here. But in summary, the guidelines are welcoming and inviting for token issuers to come to Israel, offering tax incentives for tokens.

In brief, what are tokens? During the last year or so, the rise of bitcoin and blockchain technology led companies to raise funds by issuing cryptographic assets (meaning, digitally signed) which represent a future right for utilizing a service. For example, if I have a file hosting service, one token may be equivalent for a future right to host 1TB for 1 Year (see here). A similar method could be used to purchase digital goods, such as collectible cards (see here) or for future leasing of offices (see here). Lastly, it could be used as a payment method in a future mobile platform and cellphone.

This method of raising funds, known as an “Initial Coin Offering” (similar to the IPO, ICO) or “Speculative Currency Allotment Method”, was an easy way for companies to raise funds without loosing equity in their Company. Last year, Bancor, an Israeli Startup, raised over 150 million US$ in just a few hours by people purchasing tokens which represent a future right to use their services.

Many people pondered whether these ICOs are regulated as securities, which may require material protections. The US Securities and Exchange Commission issued a few statements describing when an ICO is actually an investment agreement, and should be regulated in the same form that publicly traded companies are regulated, or on celebrity endorsement of ICOs, and the potential of investor fraud.

However, the Israeli Tax Authority thinks otherwise, under the current draft, which is yet to be finalized, Utility Tokens, meaning tokens which represent a future right to receive goods or services from their issuer, shall be taxed in the same way gift cards are taxed: as income tax by the issuer. This means, on one hand, that in your 500M$ ICO the Israeli Government is entitled to put its claws on your hefty pile of gold, but it also means that you receive regulatory certainty that such tokens will not be deemed as securities if they fall under this definition.

Up to here there’s nothing new. However, the last statement in the draft guideline is what actually matters. The Israeli Tax Authority also states that the gains from the token generating event may be deemed as revenue under the Capital Investment Incentive Act, which means that blockchain companies who raise material funds may be entitled for tax benefits or governmental grants, and that their investors may also enjoy benefits (benefits may differ depending on the situation).

This, of course, only applies to utility tokens which are provided and deemed by their issuer, and not for decentralized coins, tokens or other methods.