Hundreds of thousands of Israelis trade in digital currencies, but only a small fraction report their activity to the Israel Tax Authority. Here is what you need to know before filing your annual tax return
The digital currency market continues to grow. Bitcoin has crossed the USD 100,000 threshold, Ethereum continues to attract investors, and millions of people around the world, including in Israel, buy, sell, and convert digital currencies daily.
But one figure from the State Comptroller’s report of November 2024 should make you pause: between 200,000 and 1.67 million Israelis hold a digital wallet, yet on average only about 500 filed a tax return for crypto activity in each of the years 2018-2022.
This gap has not gone unnoticed by the Israel Tax Authority. In recent years, enforcement in this area has increased, from the seizure of digital wallets, through attachment orders, and up to the filing of criminal indictments. It is important to emphasize: the reporting obligation to the Israel Tax Authority is entirely separate from the question of profit. In other words, reporting is required even if no profit was generated from the activity, and even if the scope of activity is low. If you are active in the crypto market and have not yet regularized your reporting, this article is for you.
Crypto Is an “Asset” – and That Changes Everything for Tax Purposes
The starting point for understanding crypto taxation in Israel is simple: the Israel Tax Authority determined back in 2018 that a digital currency is classified as an “asset” for income tax purposes. Not as currency, and not as foreign currency.
The practical meaning: every action you take with crypto - selling, converting, and even using it to pay for a product or service - constitutes a tax event
How Much Tax Is Paid on Crypto?
Type of Activity | Classification | Tax Rate |
Infrequent buying and selling | Capital gain | 25% |
Active and frequent trading | Business income | Up to 50% |
Mining / staking | Business income | Up to 50% |
Conversion of one digital currency into another | Tax event – capital gain | 25% |
It is important to emphasize: the line between an “investor” and a “business” is not clear-cut. The Israel Tax Authority examines a range of criteria: the frequency of transactions, the amounts involved, the level of expertise, and the holding period. Based on our professional experience, incorrect classification of the activity is one of the most common mistakes we see among clients – and one of the costliest.
What Must Be Reported in the Annual Return, and What People Forget
One of the most surprising things crypto investors discover is just how broad the reporting obligation is in practice. According to the Israel Tax Authority’s position, the following tax events must be reported:
- Sale of crypto for fiat money – dollars, shekels, euros
- Conversion of one digital currency into another – even if you did not receive cash
- Payment in crypto for a product or service – any barter transaction
- Receipt of crypto as compensation – including trading, mining, or staking
- Sale of a non-fungible token (NFT) – under the principles of capital gains tax
The critical point that many people miss: even if you did not “cash out” into money, for example if you converted Bitcoin into Ethereum, this is a tax event that requires reporting and payment.
No less important: losses must also be reported. Failure to report losses each year means you will not be able to use them as a tax shield in future years. In addition, someone who filed returns in previous years and had no crypto activity in a certain year may be required to state this explicitly, to maintain reporting continuity and avoid suspicion of withholding information.
How Do You Report Crypto to the Israel Tax Authority?
Reporting crypto gains is done using Form 1399 (“Notice of Sale of an Asset”), which is attached to the annual tax return (Form 1301).
This is where the real challenge begins: the form was originally designed for reporting a single transaction. But in the crypto market, an average wallet may show anywhere from several hundred to several thousand transactions a year. The Israel Tax Authority has permitted consolidated monthly reporting, but even that requires accurate and organized documentation.
What you need to prepare before filing the return:
- A complete transaction history from all exchanges and wallets
- The purchase cost of each coin or token, in ₪, based on the exchange rate at the time of the transaction
- The sale consideration, in ₪, based on the exchange rate at the time of the transaction
- Execution dates for each transaction
- A working paper explaining the calculation method selected
What happens when there is no documentation? The collapse of an exchange, loss of access to a wallet, and transactions conducted outside an exchange can all create “gaps” in the documentation. In such cases, dedicated software tools available in the market can help with partial reconstruction, but not always complete reconstruction. It is recommended not to leave this until the last minute.
What Happens If You Did Not Report? Sanctions Many People Are Not Aware Of
It is important to know: even if you were not aware of the reporting obligation, the Israel Tax Authority does not waive compliance with the law. Enforcement activity in the crypto field is increasing every year, and anyone who has not regularized their reporting may face administrative and even criminal sanctions. The possible sanctions include:
- Administrative fines for failure to file returns
- Interest and linkage on the tax debt from the date it was created
- Late-payment penalties
- Attachment of assets, including digital wallets
- Criminal exposure, up to the filing of an indictment
What is important to know: the Israel Tax Authority is currently working to build a database of digital wallets and is working on automatic international information exchange under the Organisation for Economic Co-operation and Development (OECD)’s Crypto-Asset Reporting Framework (CARF). This means that information regarding Israelis’ activity on foreign exchanges is expected to reach the Israel Tax Authority in the coming years, even if you do not report it voluntarily.
Based on our experience, those who take the initiative to regularize their reporting before the Israel Tax Authority reaches them achieve far better terms than those who are caught after the fact.
Were You Unable to Pay Through the Bank? There Is a Special Procedure for That
One of the known barriers in the crypto field is the difficulty of depositing funds originating from digital currencies into a bank in Israel. To address this issue, on 31.12.2023 the Israel Tax Authority published a “Temporary Order Procedure for Receiving Tax Funds Due to Gains from the Realization of a Decentralized Means of Payment” – a procedure for paying tax directly into the Israel Tax Authority’s account at the Bank of Israel.
Who can submit an application under the procedure:
- Individuals only, not companies
- Anyone who has accumulated a gain from the realization of digital currencies
- Anyone who has received a refusal from a commercial bank in Israel
What must be attached to the application (Form 909):
- A working paper with a calculation of the taxable income and the amount of tax
- Confirmations regarding the source of the funds used to purchase the currencies
- A working paper showing the path of the currency movements throughout the holding period
- Confirmation of refusal from the commercial bank
- Confirmation of account management from the entity transferring the tax funds
It is important to know: the procedure is complex, involves a significant bureaucratic burden, and requires careful preparation of documents. It is highly recommended to obtain professional advice before submitting the application.
Filing Alone or with a Representative? What Is the Real Difference?
The annual tax return can be filed independently, with the assistance of dedicated calculation software, or with the help of a certified public accountant specializing in crypto.
Independent Filing – What Is the Risk?
The online reporting system may look simple, but crypto involves conversions, fees, changing exchange rates, and activity across different wallets. Investors who filed independently later discovered demands for corrections and the denial of loss offsets, which can lead to unnecessary tax payments of thousands of ₪.
What Does a Professional Representative Add?
A representative who specializes in crypto examines whether losses from previous years can be offset, identifies lawful tax-saving opportunities, and represents you before the Israel Tax Authority if necessary. The professional fee constitutes a deductible expense for tax purposes. Dedicated software for calculating capital gains is an important tool, but it does not replace personal advice and cannot conduct a dialogue with the tax assessor.
Nimrod Yaron & Co. specializes in Israeli and international taxation. Our team is made up of professionals with years of experience at the Israel Tax Authority, alongside experience at leading accounting firms and law firms, and brings together legal and economic insight. We advise private and public companies, Israeli and foreign, global venture capital funds, as well as clients seeking focused advice in clear, accessible language. We also work with a professional network of accounting firms and law firms around the world in order to provide comprehensive support in cross-border matters.
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FAQ
Do I have to report even if I did not sell crypto for money?
Yes. According to the Israel Tax Authority’s position, even converting one digital currency into another constitutes a tax event that must be reported. Any change in the economic rights in the currency, including exchanging Bitcoin for Ethereum, is considered a sale for tax purposes.
What is the tax rate on a gain from Bitcoin?
For most private investors, the rate is 25% capital gains tax. If the activity is active, frequent, and amounts to a “business” under the tests established in case law, the tax can reach up to 50%. The classification depends on the individual circumstances and requires professional review.
What happens if I did not report crypto in previous years?
Exposure to fines, interest and linkage, and in serious cases, criminal proceedings. It is possible to consider applying to regularize the reporting retroactively. It is recommended to consult with a tax expert before any approach to the Israel Tax Authority, as the way the regularization process is handled has a material impact on the outcome.
Can a company pay crypto tax through the Bank of Israel?
No. The special procedure for paying tax through the Bank of Israel applies to individuals only, and only in cases where the commercial bank refused to accept the funds. Companies cannot use this procedure and are required to find alternative solutions.
