A few weeks ago, an Israeli crypto trader had a lien put on his home and vehicles, and had his bank account frozen for failing to pay taxes on his crypto gains.
The interesting part is, he wasn’t trying to avoid paying his taxes. He actually tried to pay them, but couldn’t.
Why? Because of a crazy Catch 22 that has come out of governments’ excessive tax collection efforts of the last few years and their contradictory stances on crypto.
Read on in today’s article to find out what’s happening…
Breaking News: The Government Wants Your Tax Dollars
No doubt, you’ve heard the news that the IRS sent out letters to more than 10,000 cryptocurrency holders to “remind” them of their obligation to pay taxes.
With the US government $22.5 trillion in debt, it should come as no surprise that the IRS is eager to claim “its” tax money. And they’re not the only ones…
I’ve written before about the extreme lengths that governments around the world have gone to collect taxes from their citizens.
Last year, on a train from Italy to Switzerland, I was stopped by the border police who interrogated me and searched all of my belongings to see if I was trying to smuggle any cash or gold out of the country.
I not only got a full-body pat-down, but they emptied all of my pockets, opened all of my bags, removed the interior lining of my carry-on, and inspected every single item in my wallet.
I had heard about how Italy’s politicians were fearful of capital flight given the country’s debt crisis, but here I got to see it first hand.
Around the same time, neighboring Spain imposed regulations to require its citizens to report all of their crypto holdings domestically and abroad. They were laying the foundation for crypto taxes that they didn’t even have at the time.
So we know that governments want your tax money. That’s not much of a surprise. But what makes things interesting right now is that in their hunt for tax money, they’re actually sabotaging their ability to collect it. Here’s why…
What Do You Do When Banks Won’t Take Your Money?
In their efforts to root out tax evasion, naturally, the government turned to where the money is — the banking system. Through a series of stringent regulations, they threaten and intimidate the world’s financial institutions into collaborating with them.
Of course, all of this is done under the rhetoric of fighting crime. Governments argue that they can’t fight terrorists, drug dealers and money launderers without access to your bank account information.
The net result is that all banks globally must carefully vet all their customers’ activities and report any ‘suspicious’ activity they see.
If a bank so much as misses a questionable transaction or fails to properly do their KYC AML due diligence they could be hit with severe, multi-million dollar penalties.
As a result, banks across the world are terrified of working with customers who can’t provide documentation on the source and purpose of every single transaction. Given the lack of tools to track crypto transactions, this is nearly impossible to do for crypto traders, so banks started shutting down or rejecting accounts for anyone or any business even remotely connected to crypto even if they had documentation.
That’s what happened to this Israeli crypto trader.
He had the money to pay his taxes, but when he tried to deposit it in his bank account, the bank wouldn’t take his money.
He even went in and showed them 70 pages of documentation on his Bitcoin earnings, but the bank still refused to accept the funds.
Having missed the payment deadline, the Israeli Tax Authorities put a lien on all of the man’s possessions and told him it was his responsibility to figure it out.
What does this mean for Crypto Law Insiders?
If you have crypto gains you likely owe taxes. But because you trade in crypto, you likely can’t pass most banks’ KYC AML requirements to be able to deposit your fiat tax payment.
From a distance, the situation seems funny, but the reality is quite sad.
Insiders need a plan. Before you start trading, figure out how you’re going to repatriate your funds to pay your taxes.
My advice is to actively seek a bank that is okay with you trading crypto. There aren’t many banks that have welcoming crypto policies, but there are some. Open an account and test it out.
Don’t stick with your current bank because you’ve been an account holder for 20 years and never had a problem. The minute they find out you trade crypto, your accounts could be frozen.
And always have a backup plan. If possible try to keep enough cash in your local bank account that can cover taxes owed from your crypto gains. But if that’s not possible, at least have enough non-crypto liquid assets you could sell in a pinch.
When I was a child, my mom always told me “failing to plan is planning to fail.” When dealing with government tax agencies that can enforce their rules at gunpoint, it pays to have a plan.