Capital Market: How to Increase Profits in a Simple Way

Taxation on securities gains is called capital gains taxation, and its rate currently stands, in 2021, at 25%. Profits from investments / trading in virtual currencies are also considered capital gains and therefore the tax rate is the same - 25%.

However, for any increase in the value of shares or bonds on a realized stock exchange (the investor sold the financial asset in exchange for money - shekels and dollars), 25% tax must be automatically deducted. This is called "withholding tax", That you pay it yourself at the end of the year as part of your tax return.

If you invest through the bank, the banks deduct the tax from your current account at the time the securities are cleared (usually 2-3 business days).

On the other hand, Israeli brokers such as IBI, Meitav Dash, Excellence and others usually pay the tax on your behalf, and debit your account once a month.

What are the disadvantages of withholding tax?

Let's do a simple math test.

Suppose you are an excellent investor and you know how to consistently earn a return of 10% every time you invest in the capital market.

Round A
A fund investment of NIS 100,000, and after a while the investment increased by 10%, which means that the total portfolio is worth NIS 110,000. You have now realized the investment.

100,000 NIS is the fund

10,000 NIS is the profit.

Now withholding tax regulations originally require your broker to pay out of your account a 25% tax on profits, i.e .: NIS 2,500 has been deducted from your portfolio of securities, and is now left with NIS 107,500.

Round B
You reinvested the increased fund of NIS 107,500, and after a while the investment increased by 10%, which means that the total portfolio is currently worth NIS 118,250. You have now realized the investment.

107,500 are the fund

10,750 are the profit.

Now again it is necessary to make a withholding tax from your account of 25% on the profits, i.e .:

NIS 2,687.5 has been deducted from your portfolio, leaving you with 115,562.5.

That is, after two rounds of investment of 10% return each, and withholding tax on each round of investment, the end result is that you received a "yield" (compound interest) of only 15.5625%, which is NIS 15,562.5 in the case of a fund of NIS 100,000.

Now the investment year is over, but you have no tax to pay because you have already paid it during the year. The total tax you paid is NIS 5,187.5

We will now take a case without withholding tax.

Round A
You invest a fund of 100,000 NIS.

You make a return of 10% and the total portfolio increases to NIS 110,000. You realize the investment.

Round B
There is no withholding tax, so you reinvest all of the 110,000 NIS.

Now you have made a return of 10% again, so the total portfolio has increased to ... 121,000 NIS.

Now the investment year is over, and you have tax to pay. The gross profits are NIS 21,000, the tax to be paid is NIS 5,250, which means NIS 62.5 more tax than in the original tax deduction method. But there is more tax because there is more profit. The "yield yield" (compound interest) reached 15.75%, which is NIS 15,750 in the case of a principal of NIS 100,000. That is, NIS 187.5 more profit than in the withholding tax method.

Is the conclusion actually that when there is no tax deduction at source the state earns more tax, and you earn more shekels?

The answer is unequivocal: yes.

But there are a few parameters to consider:
- Assume you know how to consistently achieve a return of 10% in each investment round. If your return was 30% or 100%, the profits accordingly.

- We assumed that your fund is only NIS 100,000. If your fund was NIS 50,000,000, the profits would be accordingly.

- We assumed that you only invested in two rounds a year. If you were investing and earning, then reinvesting the profit and earning, then reinvesting the new profit and earning, and so on in 4-5 rounds a year, the profits would be accordingly.

-Finally, we calculated the numbers for just one year. Imagine that the remaining profit was invested again from year to year.

If so, it remains only to ask the simple question - why do withholding tax regulations exist in the first place if they reduce the investor's profit potential, and reduce the potential for public fund revenue from investor profits?

I do not have the answer, but I guess the legislature wants to generate a regular flow to the state coffers, instead of getting more at the end of the year.

I will now reveal to you the legal, legitimate and simple way to be exempt from withholding tax, and keep your portfolio of securities from becoming a cash flow source for the state coffers.

The way is - a foreign broker.

What does a foreign broker mean?

We talked earlier about Israeli brokers - all the banks, in addition to Ivyi, Meitav Des, Excellence and other investment houses.

In addition to Israeli brokers, there are also American brokers. I personally do not know everyone, but only Emeritrade, Interactive Broker and Robin Hood.

American brokers do not have tax deduction regulations originally from Israelis, so when realizing profits from securities through them there is no tax deduction. In fact there is no tax payment through them at all.

It is even possible to transfer an existing portfolio of securities from an Israeli broker (including a bank) to an American broker, without the need to exercise the securities before the transfer.

At the end of the year the American broker issues a tax return which is submitted to the tax authority, the tax is paid at once, and everyone is happy and kind-hearted. The state earns more and you earn more.

* A word about the taxation of virtual currencies, such as Bitcoin and Atherium: Even the taxation of profits on virtual currencies is actually done without tax deduction at source and therefore the payment is also only with the submission of an annual tax return.

** The above should not be construed as tax or legal advice, and professional advice should be sought.