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By Matthew Kalman
There is no agreement between Bits of Gold, Israel’s largest cryptocurrency exchange, to pass information on its largest clients to the country’s tax authority.
“There is no arrangement or agreement or anything with the tax authority,” said Youval Rouach, CEO of Bits of Gold, which was established in Tel Aviv in 2013. “We gave exactly and not more than what we need to give by law,” he said.
The Israel Tax Authority also denied that there is a special agreement. The tax authority has previously “asked for the information in accordance with its legal powers to carry out audits of businesses,” a spokeswoman said July 8.
The blanket denial from both the tax authority and cryptocurrency exchange comes amid speculation in domestic news outlets in recent days that the exchange and the tax authority reached an agreement to share additional information on large clients.
Still, a recent audit of Bits of Gold has practitioners wondering about the limits of the tax authority’s power to extract information not directly related to the audit of the company’s income. Legislation regarding the tax treatment of cryptocurrency is pending, but in the meantime the tax authority is following the lead of the anti-money laundering authority in seeking information from the exchanges, treating them as regular businesses rather than banks.
The information the exchange has shared with the tax authority is the same information it has been giving to Israel’s Anti-Money Laundering Authority, and is information to which the tax authority already had access, Rouach said July 9. Bits of Gold says it has more than 50,000 clients.
“All the information that the tax authority had from us they already had for five years. We didn’t give anything new to the tax authority or anything more than what we needed exactly,” he said. “We have been working really hard to keep our clients’ privacy.”
Israel is expected to adopt a new financial services act in October which for the first time will recognize cryptocurrency exchanges. The Bank of Israel has demurred from regulating the industry and many banks refuse operate accounts for cryptocurrency traders due to concerns about money laundering.
The tax authority recognizes cryptocurrencies like bitcoin and Ethereum as assets rather than currencies, subjecting profits from exchange rate fluctuations to capital gains tax. Anyone engaging in cryptocurrency mining is subject to value-added tax.
By law, all Israeli companies, including Bits of Gold are “required to give the tax authority information about all their customers,” said Meni Rosenfeld, chairman of the Israel Bitcoin Association, an industry group. “It’s not like the tax authority needs to strike a deal with Bits of Gold in order to receive this information.”
“Any company has to issue invoices with the name of the customers and the amount so it’s not really conceivable to hide information about customers from the tax authority. The assumption for everyone should be that if they are working with any kind of an organized regulated service, they are not keeping their anonymity from the authorities,” Rosenfeld said July 9.
Under current law, the tax authority has the power to ask for all records and documents relating to a company, its suppliers and clients. “It’s basically not limited,” said Vered Meller, a tax partner at Shibolet and Co. law firm in Tel Aviv.
“The assessing officer has the authority to demand information and documents about a person’s business relations with his suppliers, customers or other persons with whom he has business relations, even though that information and those documents are not required to ascertain his income,” Meller said in a July 9 email.
But she questioned whether the tax authority is empowered to seek information unconnected to the auditing of the company’s own books.
“If the audit is just to reach potential clients or significant clients and from there to track down anyone who’s not reporting transactions, then it’s an issue,” she said. “The audit is supposed to audit your books and is not part of an ongoing investigation. It’s not an investigation by the tax authority. It’s not done by an investigating authority.”
The extent of the tax authority’s powers was the subject of a Tel Aviv District Court decision in 2002. In that case, the judge ruled that Section 135 of the tax code didn’t allow access to the records of a bank in a manner that would negate the bank’s higher duty of privacy to its account holders.
If the tax authority’s demand for information went beyond what would normally be supplied during an audit, that could harm the privacy of Bits of Gold’s clients, said Boaz Feinberg, a partner at Zysman, Aharoni, Gayer and Co. law firm in Tel Aviv.
“Clients assume when they give information that it will be held in confidence even though there is no secrecy law in Israel, only a privacy law,” Feinberg said July 8. Bits of Gold “holds information which the client assumes will never go to the tax authorities without consent or without a criminal investigation, or a specific audit conducted against that client.”
It seems the tax authority is making an attempt to “overrule a district court decision that prevented them from receiving any information relating to general clients of the bank. It is harmful to the privacy of the clients if the request for information is not related to a specific ongoing investigation or an audit,” he said.
Protecting privacy should trump Section 135, he said.
“It is also concerning that the tax authority seems to be using existing tools that may not be constitutional, and on the same time making an attempt to pass laws that will enable it to receive general information about a financial entity’s costumers,” he said. “So far all attempts to pass such laws have failed, and now it seems the tax authority is trying to overcome these failures by overruling and perhaps disregarding the district court’s decision.”
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