Terms like “blockchain”, “bitcoin” and “currency mining” seem to be cropping up more and more often. But what do they refer to? What tax liabilities arise from holding and selling cryptocurrencies in Switzerland?
What is a cryptocurrency?
Cryptocurrencies have seen exponential growth since the early 2000s. Although bitcoin is probably the best known, there are currently almost 1,500 cryptocurrencies available.
They are virtual currencies that use cryptography for security, and they are generated using blockchain technology, which involves a decentralised, peer-to-peer IT network controlled by “miners”
How does the system work, and is it secure?
User orders are executed by “miners”, which encrypt transactions in a way that prevents forgery and thus help ensure that the system is secure, in return for remuneration.
All transfers taking place between holders since the cryptocurrency was created are recorded in a ledger.
Holding cryptocurrencies must also be secure, particularly against hackers. Similarly, cryptocurrency that is lost after being downloaded to a USB stick or hard drive is lost forever.
Can cryptocurrencies be used in ordinary transactions?
They can potentially be used to pay for certain items or to make other payments. For example, the Swiss city of Zug has allowed residents to pay certain bills and taxes in Bitcoin since 2017. However, cryptocurrencies are not widely used at the moment, and they must generally be converted into currencies like the euro or dollar before they can be spent.
The chairman of Swiss stock-exchange operator SIX recently encouraged the Swiss National Bank (SNB) to launch its own cryptocurrency, following the example set by Sweden’s central bank, which is looking at issuing an “e-krona” in a few years’ time.
What are the tax issues that should be taken into account when selling cryptocurrencies?
In Switzerland, gains realised when selling private assets, such as cryptocurrencies, are in principle exempt from income tax. Exceptionally, however, the tax authorities may regard the seller as a “professional securities trader” and tax any income arising from a sale or deduct any losses from taxable income.
Guidelines for establishing whether a gain is exempt or taxable have been established through practice and the case law; for example, if a person carries out transactions frequently and holds assets for only a short time (i.e. less than six months in practice), the gain will be taxable.
Although these rules are clear for “traditional” securities such as shares or options, there is a question mark about whether they are appropriate for cryptocurrencies. The criteria do not appear to be suited to a market as volatile as the cryptocurrency market. In our view, the taxpayer’s intention is what should determine the tax treatment.
Is the taxpayer’s intention simply to manage private assets, or is the taxpayer applying a strategy to generate income?
What value should be ascribed to cryptocurrencies when declaring them for income tax?
Cryptocurrencies are taxable like any other asset. The Swiss Federal Tax Administration publishes an official bitcoin exchange rate as of 31 December every year and is likely to do the same for other cryptocurrencies in future, in order to make it easier for all taxpayers to calculate their taxes.
How can Bonhôte Services SA help you in this area?
If investors are interested in cryptocurrencies, they should also consider their specific activities and their possible tax consequences. Similarly, although the value of bitcoin for income tax purposes is clear, other cryptocurrencies do not yet have official valuations.
As a result, some thought is required about how to value those other cryptocurrencies before filling in your tax return!