[...] citizens who travel abroad frequently without having the requisite funds on paper, or those who own over three apartments have been sent warning letters.
To be fair that's purchasing habits that raise red flags with financial authorities in other countries as well, regardless of whether crypto is involved or not.
The question is how is the status of cryptocurrency in Israel, legal or illegal? Isn't that illegal? Then why should pay tax?
Crypto is legal in Israel [1]. Also attempting to tax illegal contraband is not unheard of [2]. I mean, heck, Al Capone's main criminal charge was tax evasion [3] and his sources of income were rather questionable.
[1]
https://en.wikipedia.org/wiki/Legality_of_bitcoin_by_country_or_territory[2]
https://en.wikipedia.org/wiki/Crack_tax[3]
https://en.wikipedia.org/wiki/Al_Capone