Bitcoin Investors Trapped Between Their Bankers and Israel’s Tax Authority

Banks refuse to accept deposits of cryptocurrency profits out of fear they may be being used illicitly — and that makes it hard to pay taxes

A bitcoin store in Tel Aviv.
Gil Cohen Magen

Ron Gross has profited handsomely from the Bitcoin investments he’s made since 2011 and over the years he dutifully reported his incomer to the Israel Tax Authority. That is until the end of 2017 when his bank, Hapoalim, began refusing to let him deposit his Bitcoin profits in his account.

Gross didn’t accept that passively. He met with bank officers and showed them 70 pages of deposit records of Bitcoin earnings – all to no avail. Hapoalim’s refusal meant that his profits were stuck in the Swiss bank where he deposits the dollars he converts from Bitcoin and have no way of reaching Israel.

Gross’ problems didn’t end there. Without shekels to pay his tax bill, the tax authority put a lien not only on his Hapoalim account, but on his home and even his motor scooters. The lien on his bank account has since been removed.

“The tax authority is aware of the problem, but they say the ball isn’t in their court,” said Gross. “I’ve tried working with almost all the banks, but the minute they hear the word ‘Bitcoin’ they freeze up.”

>> Read more: Bitcoin is a fraud, and let’s hope and pray it stays that way | Opinion 

Gross isn’t the only one in a trap. The tax authority is aware of some 300 million shekels ($86 million) in unpaid tax due on the earnings from Bitcoin and other digital currencies; the figure is probably much higher.

The tax authority does not consider Bitcoin and other digital currencies to be currencies but rather subjects profits from trading them to a 25% capital gains tax for individuals and a 47% corporate tax rate for corporations. The unpaid back taxes represent a double loss for the government, which is not only losing tax revenues but also information about cryptocurrency activity that would give it better insight into potential money laundering and black market activity.

It’s also ironic because the banks’ hesitation to deal with cryptocurrency stems from concerns that they may find themselves accused of abetting illegal activity. They base their position on an opinion published jointly by Israeli financial regulators five years ago that warned the public and the banks about the heightened risk of cryptocurrencies as tools for money laundering and even terror financing.

Last year, the Israel Money Laundering and Terror Financing Prohibition Authority cited cryptocurrencies as well as cash transactions, real estate and Gemachim (Jewish free loan societies that are widely used by Haredim) as the main areas involving money laundering. Last week, it issued another warning concerning electronic wallets.

Roy Arav, another Bitcoin investor, ran into the same problem trying to pay his taxes and took his bank, Israel Discount Bank, to court. In his case, his Bitcoin profits were being put into a trustee account at Discount operated by the cryptocurrency trader Bit2C.

But Discount refused to let Arav move the money from the trustee account to his own personal account. Under the bank’s policy, activity in client accounts originating in distributed virtual currencies are not permitted due to anti-money laundering and terrorist financing risks to which the bank may be exposed.

Arav couldn’t pay his taxes either. The tax authority, he said, understood the problem and let him delay paying until the lawsuit he filed could be ruled on. But in the meantime he would have to pay interest on the back taxes. “I paid the money from money that was supposed to go to buying a house,” he said.

Arav’s suit prompted the attorney general to issue a statement saying regulators and banks had formed a committee to establish a common position on the issue of cryptocurrencies and bank deposits.

As a result, the suit itself has been postponed awaiting the committee’s recommendations.

Meanwhile, there are ways of getting around the problem, although they are far from ideal. One way is to buy shekels in the gray markets for paying taxes; another is to move money through the investment houses, but they collect high fees for the service.

The Bank of Israel has so far not chosen to intervene, although it did present its opinion in a suit brought by Bits of Gold, Israel’s biggest cryptocurrency trading platform with some 50,000 clients.

The company stated in its court filing that it had opened an account with Bank Leumi when it began operations in 2014. A year later, however, the bank asked it to close the account and later restricted its activities. Bits of Gold filed a suit that end up reaching the Supreme Court. Two months ago, the court ordered Leumi to maintain the accounts, but the decision pertains only to this particular case, and does not constitute a precedent. It didn’t even require Leumi to maintain other Bitcoin-related accounts.

During the proceedings, the Bank of Israel’s banks supervisor said that while cryptocurrencies represented a high risk for abuse it was up to the banks to take precautions and not resort to extreme solutions like closing accounts. That is, unless the account holder refused to cooperate in providing relevant information.

The Tel Aviv District Court echoed that position in a ruling on a suit brought by IsraMiners, a Bitcoin mining firm. In this case, it was Union Bank of Israel that refused to accept deposits on Bitcoin earnings.

Judge Limor Bibi said the bank could only close an account if the holder failed to provide information sought by the bank or if the bank had reasonable concerns the account was being used for money laundering or terror financing. Bibi said the bank had reason to be suspicious about the deposits but lacked justification for closing the account.

Gidi Bar Zakay, a former ITA deputy cirector and now CEO of Biitax, a cryptocurrency tax filing firm, said the banks needed to learn more about Bitcoin and the blockchain technology behind it. Once they did, they could understand that the risks aren’t there.

“Blockchain is like a bank account that cannot be forged,” he said. “When someone comes up with a story, you can see if they are telling the truth or not. You can’t cheat the blockchain.”