New FATF pronouncement shakes up the cryptocurrency market
By LEON HARRIS A coin representing the bitcoin cryptocurrency is seen on computer circuit boards in this illustrative picture(photo credit: REUTERS)
The international Financial Action Task Force (FATF) issued an important pronouncement on June 21 regarding virtual assets, such as bitcoins and other cryptocurrencies.It describes how countries and obliged entities must comply with the relevant FATF recommendations to prevent the misuse of virtual assets for money-laundering and terrorist-financing and the funding of “proliferation” (interpretive note to recommendation 15 on new technologies).US Treasury Secretary and outgoing FATF president Steven Mnuchin said the new guidelines “will make sure that virtual asset service providers do not operate in the dark shadows,” and will enable the emerging financial technology sector “to stay one step ahead of rogue regimes and sympathizers of illicit causes searching for avenues to raise and transfer funds without detection.” Whom did he have in mind?Other finance ministers and central bank governors at the G20 meeting in Fukuoka, Japan, in June welcomed and expressed their support for the FATF’s actions on the regulation and oversight of virtual assets and virtual-asset service providersIn October, the FATF updated its standards to clarify their application to virtual assets and virtual-asset service providers by amending recommendation 15.The UN Security Council welcomed these efforts by the FATF in its Resolution 2462 of March 28, 2019.The latest action by the FATF builds on those developments.The new recommendations:According to the FATF, countries must now assess and mitigate their risks associated with virtual asset activities and service providers, license or register service providers, and subject them to supervision or monitoring by competent national authorities.AdvertisementCountries must implement sanctions and other enforcement measures if service providers fail to comply with their AML/CFT (Anti-Money Laundering/Counter Finance of Terror) obligations regarding virtual assets as recommended by the FATF.These include customer due diligence, record-keeping, suspicious transaction-reporting, and screening all transactions, just like other entities subject to AML/CFT regulations.Coordination will be needed between relevant authorities to ensure the compatibility of AML/CFT requirements with data protection and privacy rules and similar provisions.Comment:All this underscores the importance of international cooperation. There is a suspicion that cryptocurrencies facilitate tax evasion and the concealment of income. Presumably, tax evasion will be harder to hide now.And in Israel?Until recently, there was a theory that an exemption for individuals from foreign exchange gains applies equally to gains from cryptocurrencies.If you buy a security on the New York Stock Exchange and sell it at the same dollar price, there is no Israeli tax to pay even if you get back more shekels.So if you invest NIS 1,000 in a cryptocurrency and later get back NIS 1,200, is the NIS 200 gain taxable?The position of the Israeli Tax Authority (ITA) is that all gains in shekels from transactions done in cryptocurrencies are taxable like barter transactions, i.e., as if you were paid in gold or diamonds.No part is exempt simply because a cryptocurrency is not a real currency. You may disagree, but the courts have upheld this.And if you continue to disagree and adopt a contrary position, you must report this to the ITA. This may of course trigger a tax audit.Israeli financial institutions already apply strict checks on currency transfers to and from Israel.The FATF says this should be extended to bitcoins and other virtual currencies.This stalls payments and transactions, because the financial institutions tend to check things fully, not on a sample basis or the most important aspects.And not far away?On a separate note, the Palestinian Authority is known to be interested in encouraging the use of cryptocurrencies rather than shekels. Will the latest FATF international guidance make it easier to uncover crypto-transactions that might otherwise have stayed below the radar?As always, consult experienced tax advisers in each country at an early stage in specific cases. The writer is a certified public accountant and tax specialist at Harris Horoviz Consulting & Tax Ltd. leon@h2cat.com.
