On January 17, 2018, the Israeli Tax Authority published Circular No. 5/2018 regarding the taxation of activities in Decentralized payment method (hereinafter: ‘the Circular’). According to the Circular, the Tax Authority’s position is that cryptocurrency should be considered an asset for tax purposes and not as a currency. This implies that when realizing cryptocurrency, the conversion of one cryptocurrency to another or to any other asset is a taxable event requiring reporting and, if necessary, tax payment in Israel.
In many cases, even after the taxpayer reported income derived from cryptocurrency, and in more specific cases, even after signing a tax assessment agreement with the Israeli Tax Authority, the taxpayer found themselves helpless and without options when facing Israeli banks that refused to accept funds originating from cryptocurrency activities, even when presenting the tax assessment agreement with the Tax Authority. This was due to the banks’ concerns about money laundering.
Recently, the Tax Authority has acknowledged the challenges in this area and, in response, issued a new guideline on December 31, 2023. Named ‘Temporary Order for Tax Payment Arising from Digital Currency’ (hereafter referred to as ‘the Procedure’), it specifically addresses these issues.
In 2024, the cryptocurrency sector anticipates several key changes, including the introduction of a voluntary disclosure procedure. To facilitate this and other updates, the Tax Authority is preparing to implement a new Procedure for receiving tax payments. This step is crucial to effectively enable the cryptocurrency voluntary disclosure process.
It is important to note that the Procedure is designed to allow tax payment only for cryptocurrency activities. It is not intended to enable tax payment on all sources of the taxpayer’s income using the realization of virtual currencies.
What does the procedure determine?
The procedure establishes two conditions that must be met in order to start implementing it:
- The procedure applies only to tax payments on activity in virtual currencies.
- The taxpayer has proven to the Tax Authority that at least one bank has refused to accept funds originating from cryptocurrency activity.
After meeting both of these cumulative conditions and for the purpose of paying tax on behalf of the taxpayer, the representative of the taxpayer must approach the tax assessment officer responsible for their tax file. They should provide details of their activity in virtual currencies, their taxable income from it, and the tax arising from this activity, and attempt to reach a tax settlement with the Income Tax Authority.
The Income Tax Department of the Tax Authority will have several options
- To determine a tax assessment agreement with the taxpayer.
- To partially determine the taxpayer’s assessment, which will only apply to profits derived from cryptocurrency.
- To leave the taxpayer’s self-assessment as reported by the taxpayer (this does not prevent the tax assessor from determining an assessment for the taxpayer later on).”
It should be noted that this regulation does not affect any criminal proceedings that may be brought against the taxpayer for cryptocurrency-related activities. In addition, the tax authority is currently working on a disclosure regulation for unreported cryptocurrency income, which is expected to provide criminal immunity. For more information on cryptocurrency disclosure regulations, click here.
Upon approval by a tax official, the funds will be transferred exclusively in Israeli Shekels to the account of the Israeli Tax Authority. Any conversion fees or additional charges incurred during this process will be the responsibility of the taxpayer. These funds will originate from the taxpayer’s foreign account, investment, or cryptocurrency holdings, provided the taxpayer has demonstrated a clear association with these assets.
The taxpayer will provide an attachment to their request that allows the tax authority to verify their details and waive confidentiality under section 231 of the Income Tax Ordinance, as well as a declaration stating that any excess amount paid, whether due to calculation errors or loss deductions, will not be refunded to them. The purpose of this declaration is to prevent the possibility of money laundering through the tax authority’s mechanism.
For the purpose of this regulation and for cryptocurrency disclosure in general, which is expected to be released soon, it is recommended to keep all relevant documentation related to cryptocurrency activities and to prove the money trail.
Voluntary disclosure in the field of cryptocurrency will involve complex actions, including:
- Conducting a comprehensive review of the sources of funds to provide an opinion and justify the matter to banks and tax authorities.
- Performing calculations for various alternatives to calculate the tax arising from cryptocurrency activities.
- In certain cases, drafting a legal opinion for the classification of funds originating from cryptocurrency.
- Dealing with the conversion of funds from USD to ILS and transferring them to the tax authority.
- In some cases, integrating the issue with corporate structure and tax planning to facilitate future fund inflows to Israel.
The regulation will come into effect after the relevant authorities within the tax authority, particularly the investigation departments, have verified that there are no ongoing investigations, no information regarding tax evasion, and no pending criminal proceedings, whether open or concealed against the taxpayer requesting to apply the procedure.
The effective date of this regulation is January 1, 2024, and it will initially apply for a period of only 6 months. It’s important to note that even though there is currently no regulation for the disclosure of virtual currencies, our office is still engaging in discussions and reaching agreements with the tax authority in specific cases.
Our office includes former senior tax authority officials, lawyers, CPAs, tax consultants, and economists with extensive experience in the field of cryptocurrency, voluntary disclosures, and arranging tax debts for unreported income. Please feel free to contact us, and we will be happy to assist you.
