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18 December 2017

Taxation of cryptocurrencies

Currently, the cryptocurrency Bitcoin ("BTC") is for the first time passing the threshold of USD 20,000 per BTC and setting a new record. The phenomenal rise in price of the BTC recently, but also the increased use of cryptocurrencies in daily life (e.g. purchasing BTC at Swiss Railway Company ticket vending machines or the paying for the services of the company register of the canton of Zug with BTC) has led to more and more people wanting to join the party. Accordingly the tax treatment of cryptocurrencies has greatly gained in importance.

In the meantime, various Swiss fiscal administrations are being swamped with questions regarding the tax treatment of cryptocurrencies and the fiscal administrations of the cantons of Lucerne and Zug have decided to set out their current practice in leaflets ("LU Leaflet" and "ZG Leaflet", both in German). Other cantons are expected to follow.

Cryptocurrencies must be declared as taxable assets
Based on their distinguishability and on their segrability, cryptocurrencies such as Bitcoins may generally be treated, like cash, as movable assessable assets (see No. 2 of the ZG Leaflet). They are subject to wealth tax and must be listed in the "Schedule of Securities and Assets" in the Swiss tax return. Regarding the valuation of a BTC portfolio, the average year-end rate for BTC as determined for a few years now by the Swiss Federal Tax Administration ("SFTA") should be used. If the SFTA has not published a rate for the relevant cryptocurrency and it is impossible to determine, e.g. due to a lack of trade of the relevant cryptocurrency, the value declared should be the purchase price of said cryptocurrency (cf. second paragraph LU Leaflet and No. 3 ZG Leaflet).

Commercial trade of cryptocurrencies
Capital gains from movable private assets are in principal tax exempt in Switzerland. At the same time, exchange losses are not tax deductible. If, however, a person commercially trades in cryptocurrencies (e.g. because it is a professional security trader), any gains are taxable as self-employed income and in such case, losses are tax deductible. The demarcation criteria are based analogously on circular No. 36 of the SFTA on commercial securities trading (cf. third paragraph LU Leaflet and No. 5 ZG Leaflet).
If an employee or a self-employed receives cryptocurrencies as a salary payment or as a compensation for services, these earnings are subject to income tax (cf. No. 4 ZG Leaflet); moreover, if self-employed persons are paid for their services in cryptocurrencies, this must be allocated to the business assets and in such cases, profits from price rises in cryptocurrencies, if realized, will not be qualified as tax exempt but rather as income from self-employment.

Mining-Profits are subject to income tax
Mining of a cryptocurrency, in simple terms, means offering computer processing power for the operation of e.g. Bitcoin and being paid, in this case, with Bitcoins. Both the LU Leaflet and the ZG Leaflet state that mining-profits are generally subject to income tax (cf. third paragraph LU Leaflet and No. 4 ZG Leaflet).

Cryptocurrencies are not all alike nor are they like other digital assets
While the above guidelines generally cover the tax law issues  the currently most well-known cryptocurrencies like BTC, Ethereum, Ripple, Litecoin or Dash (cf. No. 1 ZG Leaflet), the question remains how to treat other digital assets (e.g. tokens with specific features) in terms of taxes. As such, each digital asset will have to be assessed individually according to its relevant features (cf. first paragraph LU Leaflet and No. 7 ZG Leaflet).

Due to the dynamics of the developing technologies in the field of cryptocurrencies and digital assets, the legislators and the regulatory bodies need to stay up to speed permanently in order to ensure the law covers the newly appearing phenomena. In this context, the Swiss Financial Market Supervisory Authority FINMA has recently published guidance 04/2017 where it raised its concerns with respect to the notable increase in Initial Coin Offerings (ICOs) conducted in Switzerland and the regulatory risks involved. The tax administrations will also have to deal increasingly with the topic of cryptocurrencies in the years to come and with experience, more and more precise principles will crystalize regarding the treatment of the cryptocurrencies and digital assets which will prevail on the market.

For further questions, please contact our Banking and Finance or Tax Team.

Authors: Jana Essebier, Christoph Niederer

Category: Tax


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