Article Israel: Supreme Court Holds Fluctuating Market Value of Virtual Assets Does Not Justify Reexamining Scope of Seizure of Assets Held to Ensure Tax Collection

On July 29, 2021, Israel’s Supreme Court rejected a request by two applicants, whose assets had been seized as guarantee for payment of tax, to appeal a decision by the Tel Aviv-Yafo District Court regarding the seizure of their virtual assets. The district court had previously rejected their application to reduce the scope of the digital currencies seized following an increase in their value. (Civ.A request 4193/21 Shmueli v. Assessor – National Assessment Unit, State of Israel: the Judicial Authority (in Hebrew).

An appeal over a judgment of a district court in first instance and a judgment of a district court on appeal are not granted as a matter of right but require approval by the president of the Supreme Court, by another justice designated by the president, or by the Supreme Court in a judgment. Permission “will be granted if the court is convinced that if the appeal against the decision is heard as part of the appeal against the judgment and not immediately, it will have a real effect on the rights of the parties or the party may suffer real damage, or an unnecessary or erroneous proceeding may be conducted.” (Courts Law (Consolidated Version) 5744-1984, § 41).

Facts of the Case

As part of an investigation conducted by the Israel Police, a number of assets held by the first applicant were seized, including cash and funds in his bank account, as well as digital wallets containing 288.53 Bitcoin (BTC) and 211,800 Ripple (XRP) digital currencies. The applicant was subsequently indicted in the Tel Aviv-Yafo District Court for violating the Income Tax Ordinance [New Version], 5721-1961 and the Prohibition on Money Laundering Law, 5760-2000.

In addition to the criminal proceeding, both applicants were subject to a tax assessment, and their assets were confiscated in accordance with section 194 of the Income Tax Ordinance to ensure payment of the assessed tax. About two years later, the applicants petitioned the district court to remove the extra seizures imposed in the civil proceedings while providing a guarantee of Bitcoin at the value of the claimed tax assessment.

Verdict

Rejecting the application, Justice Ofer Grosskopf held that the increase in the value of Bitcoin did not constitute a change of circumstances that would justify a reexamination of the scope of assets held by the state:

This is because in speculative assets such as Bitcoin, which are routinely subject to particularly high volatility that may move in both directions, changes in value resulting from this volatility cannot be considered as a “change of circumstances” that justifies a change in the original decision (as opposed to an increase in the value of a foreclosed asset resulting from a permanent change in its value, such as an increase in the value of seized real estate following a change in its designation). If you say otherwise, then an asymmetrical situation will be created, in which whenever the value of the seized property increases, release of part of the foreclosure will be required, without ensuring the possibility … to increase the seizure in the event of a subsequent decrease in the value of the foreclosed property. As a result, if the value of the property rises first and falls thereafter, the state may find itself with a seizure whose value is less than the initial amount foreclosed to secure the liability. (Civ.A request 4193/21 para. 11.)

According to GrossKopf, the assessor acted fairly towards the applicants, by allowing them to decide that, if they

wish to continue betting on an increase in the value of Bitcoin, they can leave it in the hands of the state, and in the event that at the time of their realization, the value of the seizures exceeds the amount of the debt to the assessor, the balance will be transferred to them; if they are interested in (partially) realizing the profit generated for them from the investment in Bitcoin at this stage, they can instruct the tax assessor to convert that part required to cover the secured debt into Israeli currency, and the remaining Bitcoin balance will be returned to them, and they will use it as they wish. Yes, the way is open to them to petition for the conversion of Bitcoin with an appropriate guarantee. … All these possibilities are open to them. What they cannot do is force the tax assessor to take a position in betting on the future value of the Bitcoin coin. (Para. 13.)

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Israel: Supreme Court Holds Fluctuating Market Value of Virtual Assets Does Not Justify Reexamining Scope of Seizure of Assets Held to Ensure Tax Collection. 2022. Web Page. https://www.loc.gov/item/global-legal-monitor/2022-08-23/israel-supreme-court-holds-fluctuating-market-value-of-virtual-assets-does-not-justify-reexamining-scope-of-seizure-of-assets-held-to-ensure-tax-collection/.

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(2022) Israel: Supreme Court Holds Fluctuating Market Value of Virtual Assets Does Not Justify Reexamining Scope of Seizure of Assets Held to Ensure Tax Collection. [Web Page] Retrieved from the Library of Congress, https://www.loc.gov/item/global-legal-monitor/2022-08-23/israel-supreme-court-holds-fluctuating-market-value-of-virtual-assets-does-not-justify-reexamining-scope-of-seizure-of-assets-held-to-ensure-tax-collection/.

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Israel: Supreme Court Holds Fluctuating Market Value of Virtual Assets Does Not Justify Reexamining Scope of Seizure of Assets Held to Ensure Tax Collection. 2022. Web Page. Retrieved from the Library of Congress, <www.loc.gov/item/global-legal-monitor/2022-08-23/israel-supreme-court-holds-fluctuating-market-value-of-virtual-assets-does-not-justify-reexamining-scope-of-seizure-of-assets-held-to-ensure-tax-collection/>.