During the past few years, there has been a dispute between the Israeli Tax Authorities ("ITA") and the taxpayers regarding the recognition of losses derived from depreciation in the exchange rate. This issue arises when a taxpayer (mainly individuals and trusts) invests in securities, which are traded in a foreign currency (other than New Israeli Shekels), and there is a depreciation in the exchange rate of the foreign currency against the New Israeli Shekel at the time of realization of such securities. The main question in issue is whether the loss sustained from the depreciation in the exchange rate can be deducted against other capital gains of the taxpayer.

This question is extremely important and indeed often crucial for many taxpayers (mainly individuals and trusts) since, in recent years, a number of foreign currencies depreciated against the NIS and as a result, Israeli taxpayers sustained significant losses from currency exchange rates.

On September 12, 2016 the Supreme Court ruled, in the Moses case, that such losses cannot be offset against other capital gains of the taxpayer. However, on the other hand, it can be inferred from the decision that the Supreme Court permits the offset of a loss from exchange rate, against the same security (in essence, an "internal offset").

The reason for the Supreme Court's decision is the determination that a gain which is derived from an appreciation in the exchange rate is exempt from tax. Accordingly, in order to create symmetry between the treatment of losses and the treatment of gains, the loss arising from the exchange rate cannot be offset.

The Supreme Court's decision can be understood by the following example -

A share is purchased for US$100, when the exchange rate on the purchase date is 1:4 (i.e. the purchase price is NIS400). The share is later sold for US$100, when the exchange rate is 1:3 (i.e. the sale price in NIS is NIS 300). Although the difference between the purchase price and sale price in USD is nil ($100-$100), calculating the capital gain in New Israeli Shekels will result in a capital loss of NIS100 (i.e. NIS300-NIS400). However, this loss arises solely from the depreciation of the US$ against the NIS and the Supreme Court ruled (the Moses case) that such loss cannot be offset against the taxpayer’s other capital gains.

In the same example, let us assume that the security was purchased for US$100 when the exchange rate is 1:4 (i.e. NIS400) and was sold for US$133.33 when the exchange rate is 1:3 (i.e. NIS 400). In this case, in US$ terms, the taxpayer had a gain of US$33.33 (133.33-100), but in NIS terms, there is no gain (NIS400-400). The reason is that the US$ gain was "internally" offset by the loss from the exchange rate. In this case, it can be inferred that the Supreme Court confirmed the "internal offset" and determined that in the above example the taxpayer should not recognized any gain.

The implications of the above judgment are crucial for many individuals and trustees and its consequences should be examined with respect to each specific case. Accordingly, we encourage the readers to seek for a specific advice regarding the above decision.