Introduction to Virtual Currency Tax Implications
The term “virtual currency” can be deceptive. Despite the fact that it contains the word “currency,” it is not a recognized currency under the Israeli tax regulations. For example, whereas transferring one kind of traditional currency for another (e.g., shekels for dollars) does not result in a taxable event under the Income Tax Ordinance, exchanging virtual currencies such as Bitcoin for Ethereum is subject to tax.
Virtual Currency Taxation and Voluntary Disclosure
The Israel Tax Authority does not consider virtual money to be a “currency” or “foreign currency” because it is not recognized as legal tender, according to Tax Circular 5/2018, which tackles the tax consequences of activities employing decentralized payment mechanisms. As a result, the Tax Authority classified virtual Currencies as an “asset” under Section 88 of the Income Tax Ordinance. This approach was supported by the court decision in Noam Koppel v. P.S. Rehovot (Civil Appeal 11503-15-16).
The Circular clarifies the tax issues and the methods for classifying transactions as investment or business income. Virtual currency trading income, such as Bitcoin, Ethereum, Litecoin, Dogecoin, Shiba, Solana, and others, must be reported to the Tax Authority. Virtual currency investments are subject to a 25% capital gains tax, while revenue from business activity is taxed at marginal tax rates.
In cases that a report has been submitted to Israel Tax Authority according to which the activity is an investment activity subject to capital gains tax, while the Tax Authority reclassifies it is a business income, the meaning will usually be the paying tax differential between capital gains and marginal tax rates. In case of non-reporting the income, the exposure expands, and beyond the financial exposure, criminal exposure is added. The Tax Authority clarified that it has already begun to expand the criminal investigation against Israelis who hold and trade in virtual currencies and do not report it to the Tax Authority.
Procedures for Voluntary Disclosure in 2023
The formal voluntary disclosure mechanism expired in 2019, but a new system is anticipated to be put in place shortly. Taxpayers can still voluntarily declare concealed income and potentially get criminal immunity in the meantime. This entails filing an application with the Tax Authority, which may include income both locally and internationally.
As of 2023, one can still make voluntary disclosures by contacting the Tax Authority directly through a tax representative or by submitting tax reports. Expert advice can assist in reducing criminal liabilities resulting from failure to report income from virtual currency transactions.
Our firm has an extensive experience in all aspects of the voluntary disclosure process from early decision-making through strategic tax planning, negotiations and final settlement with the Tax Authority. Please contact our office if you have any questions about this issue.
