Challenges of Dealing With Cryptocurrencies in Israel

While Israel prides itself on a thriving high-tech industry and is home to many blockchain-related startups that export their goods and services, doing business locally with cryptocurrencies is an exercise in futility.

The difficulties began with a decision by the Israeli tax authorities in 2017 to define cryptocurrencies as "assets." That decision, which was designed to increase short-term tax revenue, has single-handedly killed any prospect of ever developing a viable cryptocurrency industry in the country.

Lior Yaffe is co-founder and director of Jelurida, and has 20+ years of experience in design, development and deployment of enterprise applications for large organizations. CoinDesk's Crypto State: Middle East virtual event is Aug. 11.

The “asset” definition – made all the more absurd by the widely used Hebrew term for cryptocurrency, “מטבע דיגיטלי,” meaning "currency" – also failed to provide any serious reporting guidelines. Businesses and private individuals dealing with crypto face an unpredictable tax exposure composed of a toxic mix of a capital gains tax (25%), income tax (up to 50%), value added tax (17%), corporate tax (23%), high revenue tax (3% on top) and who knows what else depending on the whims of the tax collectors.

According to the tax authorities, trading crypto to crypto using a bot on a decentralized exchange is considered a barter deal, like exchanging milk for eggs between farmers, and is taxed the same way. This implies some draconian reporting rules (that of course nobody ever follows) and an unknown tax exposure for years to come. Good luck trying to report cryptocurrency exchange transactions to your local tax office using forms designed in the 1980s. You did not report? You might be exposed to unspecified criminal charges.

Then there are the anti-money-laundering (AML) regulations that cast a wide net around anything related to crypto with very little risk management. Software companies and drug cartels alike are suspect until proven innocent. A dysfunctional government keeps hundreds of fintech companies in limbo for years by not approving their AML procedures.

Further muddying the waters, the Israeli banking sector monopoly strictly refuses to deal with cryptocurrencies or accept fiat funds from crypto exchanges. Some even refuse to accept salaries paid by foreign blockchain companies to their Israeli contractors. It seems like bankers, perhaps viewing crypto as a competition, enjoy making the lives of anyone dealing with crypto miserable.

Read more: What the Holy Land Reveals About Bitcoin

Considering our tax burdens, we might expect something from the state. But law enforcement entities provide very little security and support for cryptocurrency holders or the poor fellows who got scammed or suffered a ransom attack, or both. While Israel does have agencies dedicated to cybercrime, these agents are more concerned with fighting terrorism and seem to be ineffective with helping small businesses and individuals. Typically, if you're hacked, you will be directed to the local police station to file a complaint and never hear back.

In a country like Israel where democracy and civil rights are constantly under pressure, you would expect the media to understand the potential and power of blockchain technology and decentralization. Alas, most media mentions focus on cryptocurrency prices, scams and scandals, which this industry (unfortunately) provides on a daily basis.

Consider operating a blockchain or crypto business in Israel? Take my friendly advice and head somewhere else.