Israeli Bitcoin investors are finding themselves unable to pay taxes on their profits due to banks denying them the ability to deposit the associated funds.

This inability to tap into funds derived from cryptocurrency investing is causing the investors to run afoul of the Israel Tax Authority, even though they want to pay their fair share of taxes owed.

Between a rock and a hard place

The banks are concerned that any profits derived from investing in Bitcoin could be associated with money laundering or the financing of terrorists.

As such, they are completely restricting the ability of Israeli investors to pay any taxes owed unless they can tap into a revenue stream other than their cryptocurrency investments.

Israel taxes cryptocurrencies based upon the profits realized from trading them with a 25% capital gains tax for individuals and a 47% tax rate for corporations.

One such victim of this malfeasance by Israeli banks is Ron Gross, who has been investing in Bitcoin since 2011.

Gross had been making deposits into his local bank, Hapoalim, from his investment profits and fully declaring his income to the Israeli Tax Authority, but all this changed in 2017 when his bank refused to accept any more deposits.

Gross tried to reason with bank officials, to no avail, even though he showed them 70 pages worth of deposits he had made over the years from his Bitcoin investments.

Gross was forced to keep subsequent profits in a Swiss bank account but without the ability to transfer those profits to Israel, Gross found himself the target of the tax authorities, who put liens on his home, bank account, and even his scooters.

“The tax authority is aware of the problem, but they say the ball isn’t in their court,” Gross explained.

“I’ve tried working with almost all the banks, but the minute they hear the word ‘Bitcoin’ they freeze up.”

Another victim of a bank’s zero-tolerance stance towards Bitcoin is Roy Arav.

Arav had his BTC profits put into a trustee account belonging to Bit2C, a local cryptocurrency exchange, at Israel Discount Bank.

The bank then refused to allow Arav to transfer the funds from the trustee account to his own personal account.

He was told that it was bank policy that activity in client accounts originating in cryptocurrencies are not allowed out of concern for potential exposure to terrorist financing and money laundering risks.

Just like Gross, Arav found himself unable to pay his taxes and, as a result, has since filed a lawsuit against Israel Discount Bank.

The Israel Tax Authority has held off demanding payment until the lawsuit is ruled on, although he still has to pay interest on the back taxes.

A major issue

The Israel Tax Authority (ITA) say they know of US$86 million (300 million shekels) is owed to the government over unpaid taxes on crypto investment profits, although the actual number could be higher.

The inability to access profits from crypto investing is putting the squeeze on Israeli investors, but there may be some hope on the horizon.

Due in large part to Arav’s lawsuit, the Israeli attorney general recently announced that a committee of banks and regulators had been created to “establish a common position on the issue of cryptocurrencies and bank deposits.”

Gidi Bar-Zakay, a former ITA deputy director and current CEO of the crypto tax filing firm Bittax, says banks need to become more knowledgeable about Bitcoin and its underlying blockchain technology.

He stresses that once banks actually understand cryptocurrency and blockchain they would realize that the money laundering and terrorist financing risks they worry about could be disproved.

“Blockchain is like a bank account that cannot be forged. When someone comes up with a story, you can see if they are telling the truth or not. You can’t cheat the blockchain,” he said.