Have you purchased crypto? That way you won't get into trouble with the tax authorities Everything you need to know

Cryptocurrencies have made an impressive leap in recent years, both in terms of trading volumes and in certain periods – also in the increase in value. Bitcoin recently reached a value of about $73,000, the highest since these currencies burst into our lives in 2009 – and the hand is still tilted.

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If at the beginning it seemed that the Israelis were suspicious of cryptocurrencies, it seems that most of the suspicions have already been removed – and these currencies are attracting investors from all walks of life, businesses and investors as well as private individuals, including quite a few young people or minors for whom this is their first investment. They open a "digital wallet", learn the various currencies and how they operate, purchase and hold, trade them and make purchases and sales – with the hope of generating profits.

However, many investors involved in cryptocurrency trading are unaware of their obligations to report and pay tax on their income from this activity, and avoid doing so. This behavior turns many Israelis into tax delinquents – without their knowledge. So what is important for everyone involved in the crypto worlds to know?

1. The cryptocurrencies can be accumulated in anonymous digital wallets. The usual division is into a "hot wallet", which is connected to the Internet and allows its use to carry out transactions using the coins, and a "cold wallet", which is usually not connected to the Internet and is mainly used for the "maintenance" of the coins – but not for trading in them.
2. Anonymity is a central feature of cryptocurrency activity . Crypto transactions are recorded as transfers between one digital wallet and another while the personal identity of the person holding the digital wallet remains unknown, including to the various state agencies, including the tax authorities.
3. The owner of the wallet can indeed use the cryptocurrencies without revealing his name, and without showing that the activity carried out in the wallet was reported and the tax paid for it, but if he does so – he may be perceived as having committed an offense according to the Anti-Money Laundering Law, the Income Tax Ordinance, etc.

   Therefore, as much as possible, it is very important to keep documentation showing that the coins were purchased with "white" money , from reliable sources, that every action performed on them was reported to the authorities , and that their ownership appears in the annual report and capital statements, as well as the tax paid for them. The dealings with the crypto-currencies must be organized and documented, reported in the annual report and capital statements, with the understanding that at the end of the day, the existence of the wallet may well end up being examined by the tax authority and law enforcement authorities, who will be required to prove legal, transparent and correct conduct.

4. Unlike "classic" currencies, such as the shekel, the euro or the dollar, a cryptographic currency is defined by the tax authority as an "asset" for all intents and purposes , and the tax authorities see these currencies in a similar way to shares or other securities . Therefore, any transaction or operation carried out in cryptocurrency, such as conversion in another currency, purchase, sale, realization – requires reporting to the tax authority and payment of tax for the profit generated at the time of sale (the difference between the purchase price and the sale price). Did you not report and pay the tax on time? You have committed a criminal offense, and in terms of the law – you are a "tax delinquent".
5. Buyers of cryptocurrency who hold the coins for a long period of time and do not trade them frequently (a similar move, for example, to a person who buys an apartment for investment and only holds it) – will probably be required to report and pay a tax at a rate of 25% as a capital gain when selling the coins they own – whether in exchange to a "hard" currency, or in exchange for another cryptocurrency.

   As long as the buyers do not realize the coins and only hold them – no tax event occurs . On the other hand, Israelis who purchase currencies and trade them frequently (buy, sell, convert, exchange currency for currency, leverage, carry out frequent transactions of buying, selling and exercising) – will be considered by the tax authorities to be engaged in cryptocurrencies, and therefore – income from activities in crypto will be are subject to marginal tax like any other business (while granting the right to deduct expenses in the production of income), as well as to VAT (as a "financial institution") and social security fees.

   Therefore, one must carefully consider whether the same merchant wants to reach the status of "business", since the tax rates that will apply are quite different. Therefore, anyone who wishes to engage in cryptocurrency should consider doing so through a limited liability company, in which the tax rate is reduced. This requires opening an income tax and VAT file in favor of legal and transparent conduct and/or considering a change of authorized corporations.

6. It should be taken into account that the authorities are working to encourage Israelis to report and pay the tax on their income from trading in crypto, and recently it was even announced that the Tax Authority intends to renew the "voluntary disclosure" procedure and target mainly the holders of cryptocurrency in recognition of the inherent difficulty of the Tax Authority in locating the taxpayers who hold the wallets digital (due to the anonymity aspect), and giving taxpayers the opportunity to "extricate" themselves from the tax delinquent status they have fallen into against their will.

   Have you accumulated cryptocurrency in the digital wallet and made transactions without reporting and without paying tax? This is the time to initiate a visit to the tax authority on your own initiative and "confess" about the digital wallet through a "voluntary disclosure" procedure. To this end, it is recommended to use professionals who will assist you in building a suitable strategy for the situation you have found yourself in and will accompany you in dealing with the authorities. Bottom line, this is the only way you can remove the title of "tax delinquent", legally enjoy the profits you have accumulated through dealing with cryptocurrencies and go back to "sleeping peacefully".

7. Have you sold crypto and want to deposit the money in the bank? You will find that it is really not as simple as you thought. The banks in Israel function as the "gatekeepers" of the law enforcement authorities, and they are expected to create difficulties for anyone who wishes to deposit funds originating from crypto-currencies due to fear of violating the rules of money laundering. In the past, banks almost overwhelmingly refused to accept funds originating from the sale of crypto, which led the Bank of Israel in 2022 to call on the banks to make things easier for the public and examine each case individually. In reality, many banks in Israel still make it difficult to receive funds originating from virtual currencies (buying and selling).

The authors are tax experts from the Doron, Tykotsky, Kantor, Gutman, Amit Gross & Co. law firm