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Switzerland's tax handling of cryptocurrency

9 February 2022
- Di
Vari monitor di dispositivi mobili con immagini di criptovalute
Tempo di lettura: 6 minuti

TAX HANDLING CRYPTOCURRENCY - Switzerland has a distinct advantage in establishing and expanding FinTech business models, such as DLT-based services. Switzerland has evolved into an innovation hub for developing technology-based financial solutions as a well-established, leading financial center with an investor-friendly tax and legal environment. This is also due to the Swiss government's and legislators' quick actions to enhance the legal and regulatory climate.

The path of cryptocurrency tax treatment

Several regulatory provisions have been in place since 2017 to allow FinTech business models to be created in a technology-neutral environment, with measures appropriate with their size and dangers, while always keeping public interests in mind. FinTech enterprises have limited prospect of long-term success if clients and the functioning of financial markets are not protected.

This is also valid for taxes. Unlike several of our neighboring nations, such as France, Swiss tax legislation does not provide any special provisions for cryptocurrency at the time of writing. As a result, the taxation of these digital assets will be based on existing legislation and tax authority practice based on the similarity of tax consequences of other assets.

This essay will summarize the critical elements of cryptocurrency taxation in Switzerland. It's important to remember that Cantonal Tax offices may also have slightly different practices and that every tax case is unique.

Tax handling of cryptocurrency: Taxation strategies

The Federal Department of Finance (FDF) has been revising Swiss tax legislation in light of rapid advancements in blockchain technology and the new problems brought by cryptocurrencies. It released a report (in French) in June 2020 that outlined the potential need for tax law reforms to deal with developments in distributed ledger technology.

The FDF looked into whether changes to income tax, wealth tax, VAT, withholding tax, and stamp duty was necessary. However, the investigation judged that the existing Swiss regulations were adequate. On the one hand, the current legal framework supported by authorities in practice can account for the vast majority of situations encountered. On the other hand, the existing quo ensures that Switzerland remains a desirable location for cryptocurrency innovation and investment.

Similar activities have taken place on a global scale. For example, in October 2020, the OECD published a paper on virtual currency taxation that provided a country-by-country summary of tax treatment. However, this document merely addressed generic, non-binding factors that public policymakers should consider when considering cryptocurrency taxation.

While there are no intentions to change Swiss tax law, a proactive strategy is nevertheless required. Potential future tax concerns for individuals and professionals may only be predicted by closely watching technological advancements.

So let's deep into taxation.

What exactly is a cryptocurrency?

Cryptocurrencies are decentralized, peer-to-peer computer networks that generate encrypted and virtual money. Blockchain is the most well-known network of this type, validated by "miners." Users who make IT resources available to ensure transaction security are miners. They are in charge of the blockchain system and ensure that the transaction user genuinely owns the cryptocurrency. This operation referred to as "mine," is carried out using sophisticated mathematical equations and is remunerated by the system's creation of cryptocurrency.

There are various sorts of cryptocurrencies

To figure out how a cryptocurrency is taxed, we must first determine how it is classified in Switzerland. Based on FINMA (the Swiss Financial Market Supervisory Authority) guidelines, the Swiss Federal Tax Administration (FTA) has identified three types of cryptocurrency:

• Native tokens: These can be used to make electronic payments and do not provide the issuer any rights. These are "pure" cryptocurrencies like Bitcoin or Ether, and they are the subject of this article.

• Asset-backed tokens: these tokens are issued as part of an issuer's initial coin offering (ICO/ITO) and include issuer rights. They can be debt obligations that require the issuer to pay the holder interest and even give the holder voting rights under company law.

• Utility tokens: these tokens are also issued in conjunction with a funding round. Unlike asset-backed tokens, they do not give the bearer any ownership or payment rights. They give you the only right to use an electronic service that runs on a blockchain platform.

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Native tokens have their own set of tax regulations.

Cryptocurrency holdings and certain capital gains must be declared on your tax return in Switzerland. You must consider the declared value and the cryptocurrency's origin to ensure that they are accurately declared. Whether they came from the taxpayer's personal or company fortune, they will be taxed differently.

Tax handling of cryptocurrency: Income Tax

The first thing to remember is that capital gains from a private wealth asset are tax-free. This regulation also applies to bitcoin capital gains. As a result, realized gains deriving from the sale of cryptocurrency are not taxed. Any losses incurred as a result of the sale of cryptocurrency assets, on the other hand, are not tax-deductible.

However, there are several circumstances in which cryptocurrency is not considered part of a person's private wealth. When cryptocurrency is earned through self-employment, it is considered business wealth. When virtual money is employed in ordinary trading, this is the case. How can you tell if your cryptocurrency is part of the regular trading market? There are several criteria, the most important of which are:

• Use of leverage,

• After fewer than six months, the cryptocurrency is sold.

• In any calendar year, a total volume of transactions that exceeds five times your total assets at the start of the tax period

• The requirement to raise funds through cryptocurrency transactions to compensate for lost revenue.

However, we should stress that only a thorough examination of your circumstances will indicate whether or not your activity qualifies as that of a professional trader.

Every Canton has the authority to decide whether or not a person's cryptocurrency transactions are considered self-employed. Furthermore, each Canton has a different tax treatment. Given the authorities' discretion, it is recommended that you seek legal guidance from an expert if you want to conduct any significant transactions.

Taxation and AHV

This is a crucial issue because it might significantly influence your assets. Taxation and AHV (old age and survivors' insurance) are the main drawbacks of the company wealth classification. All gains are taxable if the bitcoin transactions are considered business-related. Unlike profits derived from private wealth, these gains can no longer be deemed exempt. Furthermore, because bitcoin is virtual security, any securities (physical or virtual) activity deemed business-related is likely to include cryptocurrency activity by definition and vice versa. AHV contributions, on the other hand, can be deducted from realized cryptocurrency gains because they are computed based on actual income flowing from business wealth. There will be an increase in business costs as a result of this. And what about the bright side? Those who own cryptocurrencies as part of their business assets can deduct any realized losses and any value decreases!

The main question for blockchain miners is whether mining is done as a self-employed activity. If this is the case, the cryptocurrency received is taxable as self-employment income. Because they are considered company assets, any capital gains derived from their disposal will be taxed.

It's worth noting that mining categorization is a point of contention in Switzerland. The Cantons of Bern and Zurich, for example, have decided that a miner's work is always regarded as self-employed. In contrast, the Cantons of Zug and Lucerne assess the nature of such activity on a case-by-case basis before making their decision.

In the case of self-employment or cryptocurrency trading, taxable income is comprised of cryptocurrency obtained through mining on the one hand, and realized capital gains arising from the business wealth on the other, i.e., realized gains from the sale or purchase of cryptocurrency after short-selling it.

Tax handling of cryptocurrency: Wealth tax

Cryptocurrencies are considered things that can be valued and traded under Swiss tax law. As a result, they are assets subject to wealth tax. The tax rates differ from one Canton to the next.

Each year on December 31, the Swiss Federal Tax Administration determines the taxation value of the most widely used cryptocurrencies. Bitcoin, Bitcoin Cash, Ether, Litecoin, and Ripple are among them. When declaring virtual assets, taxpayers must relate to this taxation value. If the FTA has not assigned a value to a cryptocurrency, the asset holder must report the value as of December 31 using the platform's value. The taxpayer must declare the purchase price if the platform does not allow the user to determine the value of the virtual currency.

Business wealth is valued for tax purposes in the same way as private wealth is valued, i.e., according to the taxation value of the currency on December 31 of that year.

Asset-backed tokens have their own set of tax laws.

The civil law relationship between the investor and the issuer determines the tax status of asset-backed tokens.

If the holder earns interest on their investment, they must pay tax on it in the same manner that a taxpayer who receives interest on other investments does. In a similar vein, the issuer's payment of benefits to token holders computed based on a portion of profits is deemed taxable income from wealth.

The same regulations apply to capital gains tax deriving from asset-backed token transactions for native tokens.

The rules for wealth tax are the same as they are for native tokens.

Utility tokens have their own set of tax laws.

The civil law relationship between the investor and the issuer impacts the tax treatment of utility tokens.

If these tokens grant access to a service, there is no taxable income, and no payment is made to the token holder.

Utility tokens follow the same regulations as native tokens regarding capital gains and wealth taxes.

Correctly declaring  your assets in Switzerland and the use of a Voluntary Disclosure

What are the benefits of adequately declaring cryptocurrency? Because any taxpayer who fails to report their assets risks receiving an additional tax assessment as well as being prosecuted for tax evasion. The latter procedure could result in a punishment ranging from a third to three times the tax owing.

It's important to note that this option is only available once, and it doesn't imply you'll be able to avoid paying taxes or interest for late payments. However, once in a lifetime you declare your undeclared cryptocurrency wealth and income (and other if any) through a voluntary disclosure, you can escape the fine. The tax authorities must have no prior knowledge of tax evasion to be qualified for this procedure. The taxpayer must completely cooperate with the authorities in determining the amount of tax owing and paying it back.

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