Dozens of Israelis who own digital currencies, particularly Bitcoin, recently received notification from the Israel Tax Authority, headed by Eran Yaacov, requiring them to fully disclose their assets and be taxed accordingly.
"Globes" has learned that tax assessors across the country have begun putting pressure on the digital currency market and are inspecting this sector for tax collection. Among other things, digital wallet holders have been sent letters requesting they report all assets and income, although many have no other assets aside from their digital wallets. Inquiries have also been submitted to cryptocurrency exchanges in Israel and around the world, to obtain information about Israelis trading in these currencies.
At the same time, the Tax Authority, having applied EU Common Reporting Standards (CRS) regulations for the automatic exchange of financial account information, receives data about the Europe-based funds and accounts held by Israelis. Additional information comes through the FATCA agreement, which conveys US Internal Revenue Service (IRS) data to Israel.
The Tax Authority's position, published in 2018, states that investors in digital currencies are subject to a 25% capital gains tax, as long as their activity does not turn into a commercial enterprise. In the event that the activity does become a business, proprietors will be charged a two-stage corporate tax, or a marginal tax according to the individual tax brackets.
Now, due to the revival in digital currency, especially the leap in Bitcoin, along with an intense need to fill state coffers, the Tax Authority is looking at this market with renewed interest.
According to CoinMarketCap, the digital currency market, with a total value of about $640 billion, currently turns over an estimated $181 billion a day through thousands of trading exchanges worldwide. The leading currency, since 2009, is Bitcoin, which earlier this week traded at an average price of $22,900 (after having dropped 3%).
Trading is conducted through thousands of crypto exchanges around the world. Some foreign exchanges, and Israeli ones as well, recently received a visit or a phone call from the Tax Authority, and subsequently have begun passing on information to it.
Several of the regional tax assessment offices have launched a new initiative, sending letters like those sent by the IRS to crypto players. The letters, written in the style of, "We have information about your activities that does not match your tax return," inform recipients that their activities are known, that the assessors are receiving information from the trading sites, and that the recipients had better report their income before the Tax Authority gets to them. Most players "get the message" and run to their representatives - lawyers and accountants - to look into how they should report.
According to Adv. Leor Nouman, chairman of the tax practice group at the law firm S. Horowitz & Co., "The Tax Authority renewed its interest in this area recently as a result of two factors: lack of money and a desire to fill the public coffers, where this resource could help. The second main consideration is that Bitcoin has rallied. The Tax Authority's working assumption is that, as Bitcoin has hit $20,000, quite a few traders must have cashed out, and the Authority assumes it can lay its hands on quite a bit of money."
Nouman says that, given this situation, several of his clients recently received inquiries from the Tax Authority. "Recently, the Tax Authority approached customers who are significant Bitcoin players. One of them has no income tax file at all while the other one does. The Tax Authority asked them general questions about declaring their assets, though it's clear they're targeting the Bitcoin because it’s their main asset.
"These questions are initial 'fishing' - 'Just tell us what you have' - general knowledge-gathering. But clearly, it's because of these currencies, as these are people who haven't traveled abroad much, or purchased lots of luxury goods, so there's no other reason to suspect them."
"A clear trend of increasing enforcement"
Adv. Ron Tsarfaty is the CFO and Compliance Officer at Bit2C, a trading platform that enables the buying and selling of cryptocurrencies against the shekel, managing digital currencies and realizing transactions. The tax sector is perking up, he observes. "There is a clear trend of increased enforcement by the Tax Authority towards cryptocurrency users who haven’t yet reported or have reported but said they’ve had no activity. Especially in light of the significant rise in the price of Bitcoin and many other currencies and the Authority's motivation to collect taxes due to the deepening economic deficit. The Tax Authority doesn’t just sit around. It’s researching the field of cryptocurrencies in depth and is taking active measures."
According to Tsarfaty, cryptocurrency holders who don’t report may run into problems when it comes to paying taxes. "The real problem is banks that block funds originating from cryptocurrency sales, so taxes can’t really be paid at the end of the day. It’s urgent that the government ministries and the Knesset regulate the issue, by finalizing the procedure for enacting an anti-money laundering order for financial entities, and regulating the sector by means of the Bank of Israel and other regulators."
Tsarfaty continues, "Recently, various digital wallet management entities have been contacted by law enforcement, the Tax Authority and other authorities - investigative and police - with demands for information and clarification. Taxpayers and individuals who haven’t yet reported, as well as their representatives, say they’ve received aggressive requests for explanations. The direction is clear: Bitcoin is raging right now, there’s a possibility of collecting on it, and the Tax Authority recognizes this. Other currencies are also going up, people are doing lots of currency conversions, and not everyone understands that this is taxable income from the Tax Authority’s standpoint."
"Across-the-board audits coming soon"
Gidi Bar-Zakay is the founder of Bittax, a platform for cryptocurrency taxation calculation, and the former Deputy Director of the Israel Tax Authority, in charge of, among other things, professional affairs. "The writing was on the wall," Bar-Zakay says. "The tax authorities work at a different pace and in recent years have gathered a lot of information, including taxpayer reports. The situation today is that, at tax authorities the world over, there are tax returns are just sitting there with partial information and the authorities are learning quickly how to locate what's missing."
"In our work with tax authorities in Europe and America, we’ve observed their procedures: tax return audits, cross-referencing data with other data received from trading exchanges, and enforcement actions, such as the letters sent recently by the IRS to U.S. taxpayers about differences uncovered when cross-referencing the reported figures with those received from the trading exchanges. In light of the dramatic rise in the price of Bitcoin and the measures taking place at tax authorities around the world, it’s no surprise that we’re also seeing action being taken by the Tax Authority in Israel to expand tax collection."
Bar- Zakay adds that "The Tax Authority understands that a deeper examination of reports that have already been submitted to them, along with cross-referencing, can bring the state treasury significant, readily available, and fast revenue. I anticipate that we’ll see across-the-board auditing and enforcement very soon."
Bar- Zakay further adds that, "Information received by the authorities from the trading exchanges is usually just the beginning, because we’re talking about the address of a Bitcoin wallet that’s made deposits or withdrawals. With the right technology, using an address, it’s possible to trace the entire wallet, and even reach wallets and platforms that haven’t been properly reported. This leads to a significant increase in tax collection from those who have already filed returns, as well as those who haven’t.
"In Israel, the professional echelons call it, 'money on the floor' that just needs collecting. Most recently, we saw it in real estate transactions, where the tax authority collected computer data and took action on taxpayers. Now it's Bitcoin’s turn."
Roy Katsiri contributed to this article.
Published by Globes, Israel business news - en.globes.co.il - on December 23, 2020
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