Israel’s $800M Crypto Tax Gap: Auditor Calls for Targeted Tax on Digital Assets

Crypto Tax Underreporting: A Major Concern

According to a report from Israel’s financial news outlet Globes, the Tax Authority’s limited efforts to collect taxes on crypto assets resulted in substantial underreporting. Between 2018 and 2022, the Tax Authority received reports for only about 500 cryptocurrency transactions each year. This is remarkably low given that Israel’s crypto wallet owners are estimated to number between 200,000 and 1.7 million. Englman’s findings estimate that only 0.25% of crypto transactions were reported for tax purposes, underscoring a systemic issue of non-compliance and lax oversight in this rapidly growing sector.

https://twitter.com/_cryptoera_/status/1854138609827283287

Key Findings:

• Missed Revenue: Israel could have generated 3 billion New Israeli Shekels ($800 million) in taxes from crypto transactions over the past few years.

• Low Reporting: Only 500 crypto transactions are reported annually, despite hundreds of thousands of wallets.

• Tax Compliance Gap: The 0.25% reporting rate reflects a significant gap in tax compliance.

Limited Guidance and Outdated Policies

The Comptroller’s report criticized the Tax Authority for providing minimal guidance on crypto taxation, with only three documents released since 2018. These documents have not been updated to reflect the rapidly evolving digital asset landscape, leaving many crypto holders uncertain about their tax obligations. The outdated guidance has likely contributed to the low compliance rate, as investors may lack clarity on how to report their cryptocurrency gains.

Israel classifies cryptocurrency as an asset, meaning that gains from crypto sales are subject to capital gains tax. However, without clear, regularly updated guidelines, this policy has been challenging to enforce effectively. Englman’s report emphasizes that targeted, up-to-date regulations are essential for aligning crypto tax policy with the digital finance ecosystem.

Stronger Measures Against Crypto Terrorism Funding

While Israel’s tax collection on crypto has been lacking, the government has been more active in tracking and seizing crypto assets linked to terrorist organizations. The National Bureau for Counter Terror Financing (NBCTF) has intercepted several crypto accounts associated with Hamas and other organizations suspected of using digital assets for illicit funding. In 2023, Israeli authorities seized millions of dollars’ worth of cryptocurrency tied to groups like Hamas and Hezbollah, underscoring the government’s commitment to countering crypto-based terrorism financing.

https://twitter.com/CryptoniteUae/status/1854121283744838115

Despite these enforcement efforts, Englman’s report stresses the need for the Tax Authority to expand its focus beyond criminal uses of crypto. Effective taxation and better policy guidance would not only increase revenue but also bring more transparency and legitimacy to Israel’s growing crypto market.

Summary Points:

• $800M Tax Shortfall: Israel’s missed revenue highlights a need for focused crypto tax collection.

• Outdated Policies: Minimal guidance on crypto taxes has contributed to low compliance.

• Anti-Terror Measures: Israel has made strides in blocking crypto funds linked to terrorism.

In light of these findings, Israel may need to rethink its approach to crypto taxation to address both revenue needs and financial transparency.