Virtual-currency Investors Face Deadline to Report Profits to Tax Authority

While the exact extent of virtual currency investment in Israel is unknown, following Bitcoin’s rise from a valuation of a few dollars apiece to more than $20,000 in December, it is likely rather popular in Israel

A man speaks on the phone inside a Bitcoin shop in Tel Aviv, Israel, January 2018
\ Gil Cohen-Magen

Investors in bitcoin and other virtual currencies have another three months to report their profits to the Tax Authority before they face potential investigation, under the authority’s program enabling anonymous reporting.

While the exact extent of virtual currency investment in Israel is unknown, following Bitcoin’s rise from a valuation of a few dollars apiece to more than $20,000 in December, it is likely rather popular in Israel. Your average trend lover, or gambler, likely has a few thousand shekels or more invested in bitcoin. And then there are the other, less well known virtual currencies such as Etherium.

Attorney Liat Gerber, a partner in the taxation department of the law firm Goldfarb Zeligman, anticipates that the Tax Authority will start taking aggressive action against virtual currency investors as of the start of 2019. Gerber left the Tax Authority last year after more than a decade in senior positions there.

>> Netanyahu looks into exempting investments on the stock exchange from tax

“The authority has been gathering data for the past year. In some cases investors were sent letters demanding they report, in other cases investigations were launched into heavy investors,” she said. In the meanwhile, the taxman is building a database to use to contact investors, she said.

Over the past year, the Tax Authority struck an agreement with Bits of Gold, a company that enables customers to buy and sell digital currencies. Bits of Gold will be sending the Tax Authority details of customers who carried out transactions worth more than $50,000 a year. Estimates are that there are thousands of customers who meet these terms.

The end of this year marks the end of the Tax Authority’s clemency program, which enables investors to report hitherto unreported gains anonymously via a third party and work out a compromise with the authority before revealing their identities, as well as be exempt from criminal charges. They can also choose to anonymously reject the compromise offer, in which case they would remain open to potential investigations. The program is not specifically directed at virtual currency investors.

>> Israel to tax bitcoin as an asset, not a currency

Gerber says that investors who have been in the field for a long time, and have potentially lost documentation of their purchases and sales, have nothing to lose by going the anonymous route. The fines will be smaller, and they can always choose to reject the offer, she says.

Gerber believes that Israel’s digital currency market could be worth billions of shekels.

“Israel is a center of crypto currency action, both by investors and by entrepreneurs and startup founders,” she said. The global crypto currency market is valued at some $200 billion, and Israel is considered a centra hub, she said.

In terms of the tax bill, the Tax Authority determined that digital currencies are considered an asset and not a currency, and thus is subject to 25% capital gains tax or a 47% marginal tax rate – depending whether the investor is an individual or a business. Digital investors are obliged to come to the authority’s offices and report transactions within 30 days, and pay an advance on any taxes owed, and submit an annual tax filing. It’s not a simple matter, given that the tax regulations weren’t written specifically for the digital currency field.

>> Bitcoin firms barred from Tel Aviv Stock Exchange indices

It’s not clear how much Israelis owe the tax authority for their digital currency gains. Gerber says it could even be hundreds of thousands of shekels.

Meni Rosenfeld, chairman of the Israeli Bitcoin Association, says that the tax regulations don’t fit the nature of digital currencies, and that the reporting costs and efforts are often disproportionate to the actual gains.

For instance, many investors entered the field before 2011, the year the Tax Authority first started making its stances clear. They may lack documentation, including their expenses and fees, for the years before 2011.

Gerber acknowledges the issues. For instance, if an investor converts one virtual currency into another, he or she is liable to pay taxes, even if no actual money has been made, she notes. And what if they convert virtual currencies straight into plane tickets? The Tax Authority considers this, too a taxable event, despite the problems with this approach, she says.

Ultimately, investors won’t have a choice. People who want to take their virtual gains home and use them will encounter the Israeli banking system, which is strict about depositing money from virtual sources, she said. “Ultimately they’ll need to pay taxes, and better it comes from them and not from the authority,” she said.