New hope for Israeli cryptocurrency users


Cryptographic currencies (also known as digital currencies) have played a major part in the world economy for many years. People perform transactions of all sizes with them, and use them to purchase products, assets, rights, and investments in search of profit.

At the same time, however, there are many worries for digital currency users. For example, banks in general, and Israeli banks in particular, rarely permit their clients to deposit or to transfer funds originating from digital currencies into their bank accounts.

The banks’ main fear is that this is “black” money not reported to the tax authorities, on which taxes have not been paid, and in more severe cases there is suspicion that the funds arose from criminal or terrorist activity.

As a result, funds arising from the use of digital currencies remain in the hands of the public, in an improper, even illegal, manner, due to the lack of reporting and tax payment in Israel, or due to the difficulty of depositing them in an Israeli bank, even if there is a desire to report to tax authorities. Law-abiding people thus risk finding themselves prosecuted as tax offenders, including in criminal proceedings, with all that that entails.

The Israeli law enforcement authorities, including the Tax Authority, the Money Laundering Prevention Authority, and the police Lahav 433 fraud unit, strive to uncover holders of digital currencies, even if their holdings arise from business activity or from capital gains. All too often, citizens find themselves arrested and interrogated on suspicion of severe tax offenses, money laundering, etc., and risk being indicted and even imprisoned.

We have therefore established a dedicated in-house unit for digital currencies. The team includes a former Israel Tax Authority official and a former deputy director of the “Diamond Unit”. It has gained extensive experience in leading economic investigations in cooperation with the Israel Police, VAT and customs authorities, the Israeli Securities Authority, and the Israeli Money Laundering and Terror Financing Prohibition Authority.

It seems however that hope is not lost for users of digital currencies, and there is light at the end of the tunnel. The Israel Tax Authority has announced that it will issue a new voluntary disclosure procedure, specifically for digital currencies.

Tax Authority director Shay Aharonovich, recently claimed that he expected a gain of NIS 2-3 billion to state revenues from a voluntary disclosure procedure that includes crypto profits. The Tax Authority says that this procedure will be both retroactive and forward-looking, meaning that it will be possible to disclose unreported income and profits in digital currencies (including from “cold” wallets).

On the one hand, the funds created by using digital currencies will receive an official stamp of approval, which could reduce the difficulties in working with banks using these currencies. On the other hand, the fear of criminal prosecution will also be removed from users of these currencies, which constitutes a major change.

A procedure was recently issued permitting players in the crypto market to pay tax directly to the Tax Authority, even for funds that the banking system has refused to accept. Under the new voluntary disclosure procedure, it is possible that even unreported profits will be exposed to the Tax Authority and taxed.

In voluntary disclosure procedures in recent years, the government collected over NIS 3.5 billion, and it is expected that the forthcoming procedure will earn the government NIS 2-3 billion if it includes voluntary disclosure for crypto profits.

Will crypto profits help the government compensate people harmed by the war?

The Tax Authority director recently commented on the fear of the government running out of compensation funds in the Swords of Iron war, saying, “We started the war with NIS 18 billion in the compensation fund, and we estimate that direct and indirect damage, in the north and in the south, will reach NIS 20-22 billion. If, God forbid, we end up with a total war in the north, including rocket fire on larger areas, the number may be completely different. Thus arises the question: if we are attacked by Hezbollah rockets, will the government be able to pay for indirect damage?”.

For people unfamiliar with the term “voluntary disclosure”, we should note that this is a Tax Authority procedure permitting citizens – following negotiations between the Tax Authority and a lawyer representing the taxpayer that result in an agreement – to report income and profits which were not reported beforehand. Negotiations permit the taxpayer to enjoy immunity from criminal prosecution, subject to the exceptions and limitations in the voluntary disclosure procedure.

It is recommended to examine the chances of using the voluntary disclosure procedure and then engage in it in practice, supported by a law firm and/or a CPA specializing in this field, as unprofessional examination of this matter may put the taxpayer at risk of criminal prosecution, financial losses, reduced chances of the voluntary disclosure application being accepted, and other hazards.

Adv. Sharon Nahari, is the chairman of the Committee on International Crime and Extraditions in the Israeli Bar Association, and specializes in white collar crime, taxation, and general criminal law.

Published by Globes, Israel business news – en.globes.co.il – on May 9, 2024.

© Copyright of Globes Publisher Itonut (1983) Ltd., 2024.




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