The Israel Tax Authority published Income Tax Circular No. 10/2025 this morning (Nov 27, 2025) regarding the offsetting of capital losses. This is a comprehensive document that consolidates, updates, and clarifies the Authority's position regarding the implementation of Section 92 of the Ordinance, in light of legislative changes and case law in recent years (with emphasis on the Moses and Yehoshua Halevi precedents).
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The circular sets clear boundaries: it closes tax planning loopholes (mainly for returning residents), sharpens the calculation method for foreign currency securities, but also leaves some flexibility for the taxpayer in determining the order of offsetting.
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Below is an analysis of the circular's main points and the operational implications for taxpayers and representatives.
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Summary of Key Determinations

• Nominal Loss Only: Capital loss for tax purposes is measured in nominal (Shekel) values only. Inflationary erosion has no significance in the loss, and there is no indexation of carried-forward losses.
• Order of Offsetting: In the absence of regulations by the Minister of Finance (which have not yet been enacted), the taxpayer is entitled to choose the order of offsetting losses, subject to the provisions of the Ordinance (e.g., priority for offsetting foreign losses against foreign profits).
• Neutralizing the Forex Component (Moses Precedent): When calculating a loss from securities in foreign currency, the "negative inflationary amount" (currency depreciation) must be neutralized. The loss allowed for offsetting is the real loss only.
• Returning Residents and New Immigrants: A capital loss from the sale of an asset outside Israel cannot be offset against taxable profits if it was created during the exemption period (10 years).
• No Carry Back: Capital losses cannot be offset against profits generated in previous tax years.
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1. Fundamental Principles in Measuring Loss

The circular clarifies that the starting point is Section 88 of the Ordinance. A capital loss is the amount by which the balance of the original price exceeds the consideration.

• Lack of Indexation: Unlike capital gains (where there is a distinction between real gain and inflationary gain which is exempt/taxed at 10%), capital loss is always measured in nominal values. Even a loss carried forward to future years (under Section 92(b)) is carried forward at its nominal value ("Shekel for Shekel").
• Timing of Recognition: The loss is recognized in the tax year in which the sale took place. However, the Assessing Officer may disallow the loss if the sale was carried out artificially for the purpose of improper tax reduction (Section 86).
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2. Current Capital Loss (Section 92(a))

A loss created in the current tax year can be offset against:

• Capital Gain or Land Appreciation: Any capital gain (including from securities) and any land appreciation (in Israel or abroad).
• Interest and Dividends (in certain cases): If the loss stems from securities, it can also be offset against interest or dividend income paid on that same security, or on other securities (provided that the tax rate applicable to them does not exceed 25%).
• Important Note: Capital losses cannot be offset against interest from a bank deposit or savings plan, as these are not defined as "securities."
• Order of Offsetting: The circular states that the loss should be offset first against real capital gain (at a 1:1 ratio), and only the balance against a taxable inflationary amount (at a ratio of 1 to 3.5).
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3. Carried Forward Capital Loss (Section 92(b))

A loss that could not be offset in the year of its creation will be carried forward to subsequent years.

• Offset Limitation: A carried-forward loss can be offset only against capital gain or land appreciation.
• Difference from Current Loss: A carried-forward capital loss cannot be offset against interest or dividend income (unless it is a "security" in that year, Section 92(a)(4) – a point requiring specific attention).
• Reporting Requirement: A condition for carrying forward the loss is the filing of an annual report for the year the loss was created and for the year of the offset.
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4. Special Issues and Innovations

A. Implementation of the "Moses Precedent" – Foreign Currency Securities
The circular dedicates a detailed appendix to the implementation of the judgment in the Moses case (CA 3555/15). The issue concerns a situation where a nominal Shekel loss is created in the sale of a foreign security, stemming partly or wholly from a decrease in the currency exchange rate.

• The Rule: The currency depreciation component ("negative inflationary amount") must be neutralized.
• The Implication: A loss stemming solely from exchange rate erosion cannot be offset. Offsetting is allowed only for the decline in the value of the security itself (the real loss). The circular presents calculation formulas for situations of increase/decrease in security value vs. increase/decrease in exchange rate.
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B. Returning Residents and New Immigrants
The circular closes a common "loophole." Section 14 of the Ordinance grants a tax exemption on foreign income for 10 years ("the Benefit Period").

• The Determination: A capital loss created from the sale of an asset abroad during the exemption period is a "dead loss." It cannot be offset against taxable profits (in Israel or abroad), because had a profit been created – it would have been tax-exempt (the Principle of Symmetry).
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C. Offsetting Against Exempt Profit ("Yehoshua Halevi Precedent")
The circular adopts the case law and determines that there is no obligation to offset a capital loss against a tax-exempt capital gain (e.g., profit from an exempt study fund or exempt inflationary gain). The taxpayer is entitled to "skip" the exempt profit, keep the loss, and carry it forward to future years to offset against taxable profit.
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D. Employee Options (Section 102)
The circular confirms that a capital loss can be offset against the Capital Gain portion of income from employee options under the 102 track (taxed at 25%), but not against the fruit/ordinary portion classified as employment income.
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Practical Implications for Representatives and Taxpayers

• Year-End Tax Planning: Towards the end of the 2025 tax year, it is recommended to examine clients' investment portfolios. Realizing losing securities ("cleaning the stables") can create a tax shield against capital gains or land appreciation created this year. Ensure the sale is executed by Dec 31.
• Optimization of Offset Order: Since there are no regulations determining a rigid order, it is recommended to offset the loss first against profits taxable at the highest tax rate (e.g., land appreciation tax, real capital gain at marginal tax rate, or capital gain at 25%/28% rate), and only afterwards against profits at lower tax rates.
• Caution in Calculating Forex Losses: When calculating losses from foreign securities, do not settle for the nominal calculation (cost vs. consideration in Shekels). It is mandatory to perform the split calculation according to the Moses precedent and neutralize the forex component to avoid assessments and fines.
• Documentation for Returning Residents: Separate records must be kept between losses created during the exemption period (which cannot be offset) and losses created subsequently.
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In conclusion: Circular 10/2025 is a vital working tool. It provides legal certainty but requires attention to small details and complex calculations, especially in portfolios including international activity and securities.

Link to the full document: Circular 10/2025

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