About 16 years ago, we became aware of the world's first digital currency, Bitcoin. Since then, terms like 'crypto' and 'digital currency' have become highly relevant, appearing in every newspaper or financial website, and updates in the field make headlines in news bulletins. The widespread interest in the crypto space has led many Israelis to invest in digital currencies like Bitcoin, Ethereum, and others
While cryptocurrencies are recognized in many countries, including their impact on banking, Israel lacks clear legislation on the matter. As a result, legal issues arise occasionally. If you're investing in digital currencies, it's wise to grasp some basics of cryptocurrency taxation. We'll cover this topic briefly in the following paragraphs
Crypto is an asset, not a currency
Currently, this is the stance of the tax authority, backed by a district court ruling, establishing a 25% tax liability (unless the purchase was made before 2012, in which case taxation might differ).
The classification of digital currency is crucial for understanding cryptocurrency taxation in Israel. In 2018, a circular was issued by the tax authority clarifying that digital currencies are assets, not currency. This means that investing in digital currency is treated similarly to stocks or real estate. Therefore, any increase in the asset's value is subject to tax upon realization.
If cryptocurrencies were classified as currency for tax purposes, changes in their value would be considered exchange rate differences. In this case, private individuals would not be required to pay taxes or report them
When is there a tax liability for crypto?
Your investment in crypto raises questions about when exactly you're liable for taxes. What counts as a 'tax event' in crypto? Many clients mistakenly believe that tax is only triggered upon cashing out the digital currency, but they're mistaken. According to the tax authorities, taxes are due even when converting between digital currencies.
When reporting to the tax authorities in your annual report, you need to declare profits made from digital currencies. When there are numerous conversions without an actual sale ('fiat money'), reporting becomes crucial, as it could mean the difference between owing zero taxes or hundreds of thousands of shekels. This can be achieved through a simple reporting method, outlining the order of sales—whether it's the first cryptocurrency bought that's sold first (FIFO method) or the last one bought that's sold first (LIFO method).
The Importance of Ongoing Documentation in the Digital Wallet
Following the previous sentence, for easy and convenient reporting to the tax authorities about your activities in the crypto field, there's a real need to document every transaction you've made, whether you've sold or bought, what the transaction price was, and more. Another recommendation is to consult tax experts, especially when dealing with substantial amounts, as this area is still relatively new and not entirely regulated in Israel. For example, for those conducting numerous transactions on a large scale and with expertise in the subject, there may be a claim by the tax authority that it constitutes business income, resulting in taxation of up to 50%.
This documentation will also help you, to some extent, to gain recognition when you wish to cash out the money you've accumulated. For instance, in Israel, there was a ruling last year against one of the banks that refused to accept funds from the sale of virtual currencies, fearing they were laundered money or funding terrorism. The court ruled that the bank must accept the funds, which is somewhat encouraging news for crypto investors. Of course, continuous documentation of transactions throughout the year will help establish recognition that the money was acquired legitimately.
Want to cash out your crypto to your bank account? Here's the professional solution that works
A significant issue that arises from cashing out profits originating from digital assets, including cryptocurrencies, is that each profit realization essentially triggers a tax event, resulting in tax liabilities. However, it's not possible to pay these tax liabilities because Israeli banks are not willing to accept funds derived from digital assets. Is it possible to cash out digital assets in large amounts and how? What are the advantages and disadvantages? Additional useful information is provided here
Cashing out a digital asset essentially involves selling that asset in exchange for fiat currency (Fiat), defined by a country, such as the dollar, euro, shekel, and so on, as well as converting one digital asset into another, such as converting Bitcoin (BTC) into Ethereum (Eth).
The tax event resulting from the cash-out must be reported to the tax authority within 30 days, and the resulting tax payment must also be transferred. In most cases, the profit is stored on the blockchain network, which currently does not allow payments in fiat currency or payments to institutions and others. Thus, for those applications, there is a tax liability without the possibility to pay, leading to sanctions, penalties, attachments, fines, and in extreme cases, even criminal proceedings
Why don't banks in Israel accept money originating from cryptocurrency?
Banks in Israel, in accordance with banking supervision directives and anti-money laundering laws, are restricted in accepting funds because there is a comprehensive instruction that stipulates funds can only be accepted when the source of the funds is known and that source does not violate the conditions set forth by law. Therefore, when a bank wishes to accept funds, it must prove that the money does not originate from prohibited sources. Consequently, the bank is required to trace the path of the money from its inception to its current state, i.e., from the day it was deposited in fiat currency through all its transitions in digital assets until it returns to fiat. Due to the anonymity of this world, it is extremely difficult to trace this path, creating complexity and inherent risk when accepting such funds, causing banks and financial institutions to be reluctant to accept them.
Some info about digital wallets
A digital wallet is essentially an address composed of a sequence of random numbers and letters on the blockchain network whose holder's details are unknown. This address enables the holder to conduct electronic commerce transactions.
So what is the solution that really works?
The main solution that works today is to obtain an opinion from a specialized expert who understands the laws and the world of digital assets, about the source and path of funds, and essentially to prove to banks or other financial institutions that the money is "clean" and does not violate anti-money laundering laws.
The solution for implementing digital currencies with Shtainmetz Aminoach and Co.
he topic of virtual currencies is one of the areas of expertise of the CPA firm Shtainmetz Aminoach and Co., and we are knowledgeable about the legal regulations in Israel regarding the legality of activities involving virtual currencies and the restrictions applicable to such activities.
For the purpose of writing financial opinions, we utilize technology that can trace the money trail from its inception, through all the transactions, and across various wallets. This enables us to identify and present the full source and path of the money and ensure that no prohibited activity has been conducted.
As a certified public accounting firm, we prepare and certify professional opinions required for income tax authorities, non-banking financial institutions, and even banks, confirming that the source has been verified and no irregularities have been found.
Following the numerous opinions provided by our firm, our clients have successfully received the funds, paid taxes, and even made additional uses of those funds within a regulated banking system.
The solution you receive at Shtainmetz Aminoach and Co. is professional and leading in the field
If you wish to convert digital assets to fiat currency, you have a solution at our firm.
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