In 2005, the Tax Authority first introduced a voluntary disclosure procedure. This procedure allows taxpayers who have not reported their income to regularize their reporting and tax obligations and, in return, to receive criminal immunity. Between 2011 and 2019, the Tax Authority published three additional temporary orders for voluntary disclosure, but it is noticeable that the conditions for voluntary disclosure have progressively hardened from one procedure to the next.
For example, while the initial procedures aimed to “catch in the tax net” taxpayers who had not reported their income over the years through a relatively simple and expedited process to regularize their tax liabilities for the ten years preceding the tax year, the later procedures marked a “step up” by the Tax Authority.
Although criminal immunity is granted for every voluntary disclosure procedure, it is noticeable in the latter procedures that the Tax Authority is not satisfied with merely capturing the taxpayer and bringing them into the tax net. It also examines aspects of money laundering, especially following Amendment No. 14 to the Prohibition of Money Laundering Law, which determined that tax evasion offenses would constitute predicate offenses for the purposes of said law.
In practice, this is reflected in the Tax Authority requesting documentation for the source of funds. In cases where it is not convinced that the source of the funds is “kosher and legal,” taxation (in addition to the tax on current income during the ten years) is applied at a rate of 10%/15% and in exceptional cases, even 50% on the principal amount of the funds.
Recently, it has come to our attention that the Tax Authority has been working on a voluntary disclosure procedure for crypto and plans to publish it soon.
In 2024, the value of Bitcoin has risen and is expected to rise significantly, among other things due to the reduction in the rate of new Bitcoin entering the market (a professional term called “halving event”), as well as the approval of Bitcoin ETFs by the SEC, which may lead to realizations by investors.
Recently, a temporary order for the acceptance of tax payments for profits from the realization of distributed means was issued, aimed at easing the burden on crypto investors in paying taxes due to the difficulties banks have in accepting these funds, suggesting that the Tax Authority is preparing the ground for the soon-to-be-published crypto voluntary disclosure procedure.
Several interesting points to consider regarding the voluntary disclosure procedure, especially in the context of cryptocurrencies, have been highlighted:
- Tightening of the Procedure Over Time: Based on the history of voluntary disclosures, it is expected that the crypto voluntary disclosure procedure will be more stringent than in the past. The scrutiny over the source of funds and the tax rates applied in cases where the tax officer is not satisfied are likely to be higher.
- Voluntary Disclosure Before Initiated Contact by the Tax Authority: Typically, the Tax Authority operates on a “carrot and stick” basis. Previous voluntary disclosure procedures provided a window of opportunity to regularize unreported incomes before the Tax Authority began enforcement actions. For example, the 2014 voluntary disclosure procedure was introduced about a year and a half before the Tax Authority announced it had received information on countless Israelis holding bank accounts in Switzerland, which made the path to criminal proceedings very short for those who had not reported.
- Voluntary Disclosure Without an Official Procedure: In practice, it is currently possible to regularize profits and unreported incomes, including those from the crypto sector, without an official voluntary disclosure procedure. This can be done through tax assessment discussions with the Tax Authority and signing a tax agreement at the end of the process.
Reporting profits from crypto can raise professional doubts (e.g., whether it’s business or capital income, VAT liability, etc.) and technical challenges (collecting information from the blockchain, tracking transactions, etc.), thus it’s advisable to seek assistance from experts in the crypto field.
The firm, including lawyers and accountants specializing in crypto, is ready to assist with all matters related to reporting to the Tax Authority. It’s important to note that this does not constitute investment advice and does not replace comprehensive professional advice in the fields of taxation and investments.
