Israelis Unable to Pay Tax on Crypto-Trading Profits as Banks Freeze Up

Israeli tax authorities are missing out on potentially millions of dollars worth of tax income from cryptocurrency investors as local banks will not accept deposits from crypto earnings.

Israel's daily newspaper website Haaretz reported on Tuesday that the country's crypto investors were unable to deposit the returns on their bitcoin and other investments into bank accounts due to money laundering and terrorist financing concerns.

While bitcoin trading is subject to a 25% capital gains tax for individuals and a 47% rate for corporates, banks fear accepting deposits from crypto-trading activities due to concerns that they might be accused of abetting in criminal activity should the dealings of individual crypto traders be discovered illegitimate.

Supreme Court Intervention Fails

On February 25, 2018 the Supreme Court issued a temporary injunction prohibiting a bank from blocking activities in an account held by a company engaging in bitcoin trade. 

The bank countered, however, alleging that such activities might expose it to unlawful acts that "might harm its reputation and public trust in the bank".

The issue has yet to be resolved and remains under review by the Supreme Court.

Deposits Still Refused

Haaretz quoted the example of Ron Gross, who has reported all the bitcoin investments he's made since 2011 to the Israel Tax Authority, but his bank - Hapoalim - refused to let him deposit his profits in his account. 

This meant his profits were stuck in his Swiss bank where he deposits the dollars he converts from bitcoin and have no way of reaching Israel.

Without shekels to pay his bill the Tax Authority put a lien on his Hapoalim account and his home. He told Haaretz:

The Tax Authority is aware of the problem, but say the ball isn't in its court. I've tried working with almost all the banks, but the minute they hear the word 'bitcoin' they freeze up.

The Problem Deepens

Indeed, reports Haaretz, the Tax Authority estimates it is missing some 300 million shekels ($86 million) in unpaid tax on crypto earnings.

This is a classic example of a government shooting itself in the foot, as it was the Tax Authority, together with the Bank of Israel and market and financial crime regulators that issued a statement in February 2014 warning against dealing with cryptocurrencies.

The statement argued cryptoassets are not legal tender and there is "no requirement to accept them as payment", and specifically warned financial institutions that such activity came with a "high risk coefficient in terms of money laundering and terror financing".