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Many immigrants in the US face a problem of transferring large amounts of money to and from their home country, usually including currency exchange. As a fact of life, transferring via a financial institution like a bank costs money in the form of fees on exchanging the currency, differences between the "buy", "sell" and "official" exchange rates, and the transfer itself.

In the search for the cheapest legal way to transfer money, some ideas include the exchange of funds between two individuals who need the transfer on opposite directions.

For example, person A needs to transfer $100,000 from the US to his checking account in a bank in Israel, to be converted to the local currency (say, ILS 350,000). At the same time, person B needs to transfer a similar amount from his checking account in Israel to the US, to be converted from ILS to USD.

Is there any legal issue (in the USA or Israel) with making both transfers domestically? I.e., Person A transfers $100,000 to person B in the US and person B transfers ILS 350,000 to person A in Israel?

If this is a legal move, is there any reporting that needs to be done to the authorities?

If this is only legal in smaller amounts, then what is the limit?

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    Isn't this basically how Wise (formerly TransferWise) works?
    – user253751
    Jan 2, 2023 at 19:07

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Is there any legal issue (in the USA or Israel) with making both transfers domestically? I.e., Person A transfers $100,000 to person B in the US and person B transfers ILS 350,000 to person A in Israel?

There may be some concerns.

For starters, it resembles the "Hawala" system of transferring money (used primarily in the Middle-Eastern and Asian countries, mostly Islamic cultures). That system is explicitly outlawed in the US, and is considered to mostly be used for money laundering.

Next you have income and gift taxes implications. You'll need to document the transfers and establish the whole chain in clear evidence. There's no gift tax in Israel, but there is in the US, so the person transferring money in the US would want to have a really good paper trail to avoid being on the hook for the >35% gift tax.

Both in the US and in Israel the recipients would also want to have a solid paper trail to avoid the claims by the tax authorities that this is unreported income.

In the US, recipients of $100K or more from foreign sources have to report it on the form 3520 to the IRS. US tax residents also have reporting requirements for foreign accounts, so if there's a foreign account with $100K sitting on it for the US beneficiary - FBAR (FinCEN form 114) and the IRS Form 8938 reporting requirements may kick in.

The penalties for non-reporting are draconian (in thousands of dollars, tens of thousands if intentional), even if no tax is due.

I would suggest sticking to the regular financial instruments like traceable electronic bank transfers or checks. There's more than enough financial companies that provide this in an accessible and inexpensive manner. It isn't excessively expensive compared to the headache of dealing with the audits and investigations if you end up on the law enforcement radar.

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