In the world of digital currencies (crypto) they discovered last week the destructive effects of leverage: once liquidity stops, leveraged investments, such as those based on loans, are very vulnerable. Meanwhile the crypto market continues to decline, and as of Sunday at noon the Bitcoin exchange rate stood at $ 17.5 thousand, and the leading currency completed a fall of about 30% in seven days. It is difficult to overstate the damage done to the market – alongside huge entities that have collapsed, there are countless projects (the equivalent of the digital currency sector for companies) that are uncertain about the future, and investor confidence in the market has been undermined.
● Currency crash, layoffs and investor flight: The tough week of Bitcoin
● hopeless optimism: Analysts have missed the current crisis
The rapid collapse has led to another problematic situation: investors who owe huge sums to the tax authority, but on the other hand see how their investment is sharply cut and even accumulates losses. In practice, in the real world, they are approaching a situation where millionaires are momentarily approaching bankruptcy, when they will have to bring in more money from home, just to pay the high tax liability. How did this happen, and what are the next dangers in the crypto world?
Crypto taxation and the reason for the problematic situation
The tax authority considers all crypto assets to be capital investment assets, including NFT (Non-Fungible Token, which is not a currency but an irreplaceable token that allows authentication and proof of ownership, for example for digital works). As such, they are liable to capital gains tax, that is, tax at a rate of 25% of profit. When is the tax liability created? As a rule, liability for capital gains tax is created at the time of realization of the property, ie at the time of its sale. The tax authority has ruled that the conversion of a cryptocurrency into one another is also considered a sale. That is, an investor who bought Bitcoin, and converted it into Luna, Celsius, NFT or any other cryptocurrency that was the flagship and rose rapidly, made for the tax authority a sale of Bitcoin, and a purchase of the same other cryptocurrency. The Authority takes the difference between the exchange rate on the day of sale and the exchange rate at which the currency was originally purchased, and taxes the gap between them by 25%.
Starting in 2020 and throughout 2021, the crypto market has experienced high increases and recorded trading volumes that broke records. During this period there were also many realizations: by investors who changed investment tastes, due to the transition from Bitcoin and Materium to other popular currencies like Solana, Luna, Cardano, Dodgecoin, and more, and also due to NFT acquisitions. These are significant gains, especially from veteran investors who have exercised a position. For example, just three months ago, the head of the Tax Authority said that she had collected a tax of NIS 300 million from one crypto investor. In the industry there are also many stories of 17-year-old boys coming with their parents to the tax authorities after accumulating high profits in NFT of computer games, and parents fear getting involved with the tax authorities. However, there is no organized way to pay tax on crypto, especially when it comes to tax on investing in crypto outside of Israel. Tax is collected only from an Israeli bank account, and Israeli banks are in no hurry to introduce money originating from crypto investments into the Israeli financial system. It so happened that many people invested in crypto, and were unable to bring the profits into Israel in order to pay the tax from them legally.
This is where the story begins to get complicated, the investors in crypto are roughly divided into two: the professional and the simple. Professional investors know that they have a liability to the tax authority, they take the money they need to pay to the authority, and put it in a stable currency in order to maintain its value (stable currencies are those whose exchange rate is linked to some fiat currency – dollar, euro, etc.). The simple investors, in most cases, continue to invest the money further, rather than “putting aside” the tax authority’s share.
“They will have to bring millions of shekels from home”
The market has said in recent days that after the last week many investors, especially those in leveraged positions, see their investment value decline rapidly and sometimes even forcibly liquidated and at a big loss if they leveraged, now worth less than their tax liability for years’ profits. 2020 and 2021. That is, in order to pay off the debt, they will have to bring extra money from home. It is important to note in this context that if investors now realize the investments at a loss, this loss can be offset for tax purposes only against future profits, i.e. those that will accrue in the coming years, and can not be offset against past profits. That is, even realizing a loss now will not reduce the tax burden on past gains. So basically on 2021 profits one has to pay tax even if there are losses in 2022.
“Some customers will have to bring millions of shekels from home, some customers will go bankrupt because of this, the rapid contraction of the market has created a problem,” said a veteran activist in the crypto market. It should be noted that some of the older investors are enjoying tax protection due to the losses accrued in the years 2018-2019, with the big hit being those who joined the digital currency market during the corona period and beyond.
Severely vulnerable to market mistrust
Seemingly, the situation of professional investors is better: they have put the money in a stable currency that preserves its value, and they have a source for paying the tax they owe on past realizations, even now when the value of their investments is declining. But in a market where even stable currency bodies have already collapsed, professional investors are also exposed. The main scenario currently feared on the market is that of the collapse of the stable currency giant Theter, the issuer of the popular dollar-denominated stable currency USDT. This is against the background of a reality in which the difficulties in one body catch up with another body that is facing investment and trade ties, and thus the lack of trust in the market is growing.
The lack of trust creates two more noticeable effects in the field: First, it prevents tax planning. The most popular tax planning in the crypto market is selling at a loss in order to win a tax shield. Thus, when a currency that an investor wants to hold in the long run drops sharply, it is sold, a loss is recognized, and money is bought again. But now that volatility is high, and the various stock markets are stopping pulls, investors are afraid to change position even for a short time. Another effect has to do with the fact that entities stop pulling, and even a large stock exchange like Binance has stopped pulling for hours. This arouses suspicion and causes investors who believe in the market to hesitate before putting more money into it, which could possibly have supported the gains.
The crypto market estimates: the correlation with stocks will be broken
Against the background of the recent sharp falls in the digital currency market, it is said that the market is undergoing a rapid process of disintegration of leverage, and many forced liquidations of positions. “The biggest problem right now in the market is the lack of trust,” noted Tomer Ravid, founder and CEO of BloxTax. In this respect, what is happening now in the crypto market is reminiscent of the 2008 crisis, a liquidity crisis very quickly reveals problems, and creates a crisis of confidence. “
Yuval Roash, CEO of the Bits of Gold Crypto Exchange, said that “What’s happening now is not the fault of Celsius (the crypto bank that stopped the withdrawals last week, AA), nor is it the fault of the collapse of Terra Luna (a popular stable of currency blocks that collapsed last month, AA). Every four years or so we see cycles of bitcoin and cryptocurrencies, there is a rise, an explosion and a drop in price. Every time there is the culprit on duty, but also in the ascent there are a lot of events that happen, break-ins, entrepreneurs disappearing with the money, when bitcoin goes up, it is easier to ignore it, and when there are declines, the events get higher weight. We are now in a process of declines, but the market is more mature, so are customers, regulation is intervening, and we will see it stabilize. Today there are also a lot of institutional investors who have entered the market, they invest in crypto as they are used to investing in the capital market, according to the same rules, and it strengthens the correlation between markets, but the correlation is not fixed, and when the market stabilizes, I think “.
Advocate and CPA Ron Tzarfati, VP of Finance and Regulation of the Israeli crypto exchange Bit2C, says that “although it is not pleasant to experience a loss of value of investments, it also has advantages in pushing negative factors out of the market and maturation of players and investors learning how to manage Risks and investments. It should be remembered that technological progress in the field has not stopped. “He said,” The current crisis only reinforces the great importance of effective and coordinated regulation. “Regulators must recover as soon as possible and effectively and correctly monitor the crypto market by licensing, enforcing it and educating the public.”