Israel’s Big Crypto Winners Have a Hard Time Cashing Out
The country’s banking laws and tax regime impose red tape, hindering crypto-to-shekel conversion
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Cryptocurrency can be converted to cash using several methods, the most popular of which is exchanges like Coinbase. Other options are peer-to-peer marketplaces and bitcoin prepaid cards.
The largest exchange is based in the U.S., but it is currently inaccessible to Israelis.
For those who do manage to convert their digital currency, depositing the money into a bank account in Israel poses another obstacle. That’s because of provisions contained in Israel’s Prohibition on Money Laundering Law, which requires Israeli banks to automatically report suspicious deposits and all deposits exceeding NIS 50,000 (around $14,700) to the Israeli Ministry of Justice. In these cases, account holders are required to turn in documents that verify the legitimacy of the deposit’s origin.
However, the anonymized nature of the cryptocurrency industry means Israeli banks refuse to accept such deposits, fearing they are illegally gained.
"The anonymous character of virtual coins means they can be used, and are indeed already used, for money laundering, criminal financing and similar activities," said Nadine Baudot-Trajtenberg, deputy governor of Israel's central bank, in a parliamentary committee meeting a few weeks ago.
"Beyond the risks posed for the customer, the action poses risks for the banks," Ms. Baudot-Trajtenberg said. "If the banks are suspected of money laundering, they could face repercussions from the authorities not only in Israel but also globally, and be at risk of severe sanctions." Therefore, she added, each bank must define whether it’s a service the bank is willing to provide, and if so, how it would manage the associated risks.
Lawyers Doron Levy and Racheli Guz-Lavi, of the tax department of Israel-based law firm AMP & Co., represent several investors that hold significant amounts of cryptocurrency and are interested in capitalizing on at least part of that potential.
The challenges facing players in this industry are twofold, they said in an interview with Calcalist Wednesday. The first obstacle is the difficulties they face with financial institutes, which act as a bottleneck when it comes to linking digital coins to fiat currency. The second is the matter of taxation, since no comprehensive guidelines have been formulated in Israel yet for how to tax crypto-derived income.
Even those cashing out sums that are low enough not to raise a red flag at the bank can run into legal trouble. Converting cryptocurrency to fiat money constitutes a taxable event, just like securities transactions are taxable. However, in Israel, taxes can only be paid through a locally-held account, and only in shekels. Thus, even investors who find an offshore bank willing to deposit crypto-based proceeds cannot, in effect, legally pay a tax in Israel.
Proceedings from selling bitcoin are subject to mandatory disclosure and taxation, according to income tax law, a spokesperson for Israel Tax Authority told Calcalist. He added that taxpayers facing difficulties should turn to a tax assessor for assistance.