For new and old investors in the blockchain worlds, cryptocurrency tax codes remain a gray and undefined area. In fact, it seems that the reporting rules remain vague and dynamic and can even change at any day.
In practice, many cryptocurrency investors wonder if they are supposed to report their crypto transactions (the short answer: yes), and how? If you own Bitcoin, Ethereum, or another virtual currency, it is important to know the current tax rates and how to properly file a tax payment for cryptocurrency.
In 2024 we anticipate a significant change in terms of tax payment on crypto profits that will allow payment from banks and trading platforms abroad.
What are cryptocurrencies?
Digital currencies are intended to be a worldwide payment system. Unlike traditional currencies, such as shekels, dollars and pounds, cryptocurrencies are created by digital means and are only held on computers.
The purpose of digital currencies, and Bitcoin in particular, is to prevent the concentration of control by a central entity, such as a bank. Thus, no single entity controls the digital currencies and cannot manipulate their value or, alternatively, destabilize the entire network. The digital currencies are exchanged electronically by users using encrypted wallet addresses.
Cryptocurrency taxation
Similar to the USA and most Western countries, cryptocurrency is not yet among the fiat currencies we know (shekels, dollars, euros, etc.) and they do not have such status from a legal point of view. In this context, it should be noted that so far no legislation or rulings with wide-ranging validity in the field of cryptocurrencies have been published and anchored in law.
However, the Tax Authority was ahead of the other entities in the country and already in 2018 published a flier, in which it considers cryptocurrencies as equivalent to assets (similar to shares). Because of this, according to them, given the realization of the currency, the tax provisions applicable to property, including capital gains tax, will apply.
Alternatively, if it is determined that currency trading is done as part of a business and a trade, then this is where progressive tax comes in and the taxation will be done according to the variable tax rates set forth in the Tax Ordinance. At this stage, we recommend consulting with a crypto lawyer to understand the size of the taxation you face and how it can be paid.
Loss report
If an orderly tax payment process towards the Tax Authorities is carried out, given losses, it is possible to cut them back, similar to what is done in the capital market. There may be a significant advantage in cases where fraud or theft of a digital currency is carried out, and experienced lawyers may help you offset taxes regarding these currencies as well.
What is the Voluntary Disclosure Procedure?
A voluntary disclosure procedure is carried out before the Tax Authority in order to regulate the taxpayer’s reports and his tax liability in cases where the taxpayer is required to report about his income or assets that must be reported to the Tax Authority, and he has not yet done so.
As part of this procedure, the taxpayer applies to the Tax Authority on his own initiative and details all the income as a result of business profits or, alternatively, as a result of investments and other capital gains. If a report is given, it is possible to settle the tax liability for the income that has not yet been reported.
The essence of the Voluntary Disclosure Procedure
It is likely that many of you know that tax evasion is a criminal offense and can be subject to administrative sanctions that include significant fines, and there are also cases where for crimes in the tax field, which include tax evasion, as mentioned, the taxpayer can be sent to prison. The essence of the voluntary disclosure procedure is to prevent these scenarios.
During this procedure, the taxpayer must disclose all of his income, which he did not report, and, in addition, submit a full report on all of the reportable assets in his possession.
Thus, in practice, the taxpayer settles his obligations to the Tax Authority through a voluntary disclosure procedure and will not be subject to the administrative and criminal sanctions that burden him as long as he did not do so.
Voluntary Disclosure Procedure with Cryptocurrencies
To know how to make a voluntary disclosure with cryptocurrencies correctly, we recommend paying attention to this paragraph.
If you only hold cryptocurrencies, according to the current provisions of the law, you are not obliged to report to the Tax Authority. This is as long as the amount of assets held by you during the tax year did not exceed an amount of ILS 1,872,000.
However, we would like to emphasize that there is a significant number of operations that require reporting. Thus, given the sale of the cryptocurrencies, their exchange, conversion and even transfer as a gift – you have to report to the Tax Authority, regardless of the sale price and the total profit generated at the time of the sale. This is similar to security sales in the capital market.
Therefore, given that you have performed one of the actions described above (for example, a sale of cryptocurrencies) and have not submitted an immediate report to the Tax Authority, it is of utmost importance to start a voluntary disclosure procedure.
Providing proof of all transactions during voluntarily disclosure of cryptocurrencies
First, in order to make a voluntary disclosure of cryptocurrencies correctly, the income source and the amount must be presented to the Tax Authority. Therefore, you must collect the information you have and present the transactions – this can be done by providing proof of the existence of the currency in the digital wallet, its sale and the profit generated as a result.
If you have difficulty finding evidence of the transactions, we recommend using the help of a lawyer (if you have not done so in earlier stages). The lawyers will often help you find blockchain investigators who know how to find these types of transactions.
Conducting a voluntary disclosure procedure
In the past, taxpayers could apply for an anonymous voluntary disclosure procedure. As part of this, they paid their full tax liability and received immunity from criminal proceedings. Today it is no longer possible to apply for this procedure; however, it is possible to apply for a voluntary disclosure procedure at the civil level in a regular or a short procedure.
For the most part, and without committing to it, when applying for a voluntary disclosure procedure and paying the tax – the Tax Authority does not apply criminal charges. This is especially when it comes to digital currencies, and its taxation matter is vague and difficult.
Nevertheless, if it has not been clear until now, we strongly recommend using the help of a lawyer who will make sure that you manage the procedure properly and in a way that will create the maximum benefit for you, with minimal loss (which may be zero).
Summary
The world of taxation is a complex one, and it becomes even more so when we deal with the world of cryptocurrencies.
Therefore, if you have not paid the required taxes on capital gains as defined by the Tax Authority, we recommend contacting the crypto lawyer Daniel Yanovsky who is knowledgeable in the field of taxation and the voluntary disclosure procedure – he will advise you according to the specific situation you are in and will even help to carry out the procedure in the most correct and appropriate manner.
