Taxation of cryptocurrencies
If the cryptocurrency hype has also left its mark on you and you have invested in Bitcoin and Co., sooner or later you will inevitably have to ask yourself how to declare the digital currencies in your tax return. In this article, we explain how cryptocurrency is treated under tax law and what you as a crypto owner or trader have to consider when declaring it.
Is cryptocurrency an exchange product for tax purposes?
Short answer: No. Although cryptocurrency trading has a very speculative character, it is not treated by the Swiss tax authorities like a stock exchange product (e.g. share or derivative). Since cryptocurrency also serves as a medium of exchange, it is classified as a means of payment, just like conventional cash (so-called fiat money) or precious metals.
In terms of VAT, cryptocurrency is also no different from conventional currency. Thus, no VAT is due on the purchase or sale of cryptocurrency. This also applies when the digital money is used to purchase products or services: there is no additional VAT due to the use of cryptocurrency as a means of payment.
« So, the bottom line is that you pay tax on the assets you own in cryptocurrency together with your total assets.»
Cryptocurrency is an asset
From the perspective of Swiss tax law, cryptocurrency is attributed to the owner’s or taxpayer’s assets. A tax rate is determined from the total assets, with which the assets are then taxed.
It is generally permitted that smaller amounts of cryptocurrency that are actually used for payments may be disregarded in the tax return. This is an analogous regulation to cash as an asset, which does not have to be included in the tax return up to an amount that is customary for a household.
So if you hold cryptocurrency not only as an investment object, but also use it for payments, you are allowed to keep it partly out of your tax return. However, cryptocurrency amounts that exceed the limit of small amounts customary in households must be declared as assets.
So, the bottom line is that you pay tax on the assets you own in cryptocurrency together with your total assets.
Mining and trading cryptocurrency
If you achieve capital gains by trading cryptocurrency (e.g. through price increases), these are – analogous to trading with foreign currency – tax-free. Similarly, losses are not tax deductible.
If you mine cryptocurrency yourself or participate in a mining project in which you receive a fee for the provision of computing power, this is added to your taxable income and is therefore subject to income tax.
Gray area: Staking
If you provide coins to the crypto blockchain (staking) and receive a fee for this (staking reward), the legal situation is not yet entirely clear. So far, the cantons have not been able to agree on how staking should be treated under tax law.
There are two outstanding issues that still need to be clarified:
- Is staking a private activity or already a commercial activity?
- How should staking rewards be taxed?
The current trend is for staking rewards to be viewed like interest on credit balances. This means that they are then added to income. However, the cantonal tax authorities have not yet agreed on how they will deal with staking in the future.
How to declare cryptocurrency in the tax form?
From the above sections, the following relationships arise for the completion of the tax return:
- Cryptocurrency assets are to be reported as an asset in the list of securities and credit balances under the heading “other assets”
- Remuneration from mining activities must be reported as wages or as fringe benefits for income tax purposes.
- Enclosing a statement from Wallet of the account balance at the end of the tax year is helpful
How is the cryptocurrency rate quoted?
Cryptocurrency is treated like foreign currency in the tax return. This means that the exchange rates have to be converted into CHF. The Swiss Federal Tax Administration has published a list of exchange rates for the most common currencies. As of 31.12.2020, the following exchange rates are published:
- ADA Cardano 0.159035
- BCH Bitcoin Cash 303.263463
- BSV Bitcoin SV 144.264080
- BTC Bitcoin 25476.030647
- DASH Dash 77.672159
- EOS EOS 2.288707
- ETC Ethereum Classic 4.99883
- ETH Ethereum 650.931897
- IOT IOTA 0.255994
- LINK Chainlink 9.935530
- LTC Litecoin 110.448758
- NEO NEO 12.600750
- QTUM QTUM 1.962915
- TRX TRON Coin 0.023613
- USDT Tether 0.884341
- XEM NEM 0.175551
- XLM Stellar Lumens 0.113993
- XMR Monero 138.366848
- XRP Ripple 0.190534
- XTZ Tezos 1.777169
The prices are based on the annual average values for the specific cryptocurrency as traded on major crypto trading platforms such as Kraken and BitStamp. In order to make the high price fluctuations less significant in the calculation of the annual average value, the highest and lowest price values are not taken into account.
If the cryptocurrency you have in your possession is not listed, the tax authorities will usually use either the purchase price of the corresponding currency or the year-end rate as a basis. In this regard, each canton has its own regulations.
Private vs. commercial trading of cryptocurrency
Profits generated from cryptocurrency trading are only tax-free if this took place within the scope of private asset management. If your activities in trading cryptocurrency go beyond those of private asset management, you may be deemed to be engaged in commercial activities.
The tax authority considers the individual case and the overall circumstances in each case. Based on the findings, a decision is then made as to whether the investor’s activity is private or commercial. The latter is also a self-employed activity.
By definition, a self-employed person is an entrepreneur who carries out an economic activity on his or her own account and at his or her own risk, using labor and capital, according to plan and visibly to the outside world.
In contrast, private activity as an investor or asset manager is distinguished by the fact that it does not constitute gainful employment – not even in the case of very large assets.
Often, the tax authority only assumes that the activity as a crypto investor is businesslike if it is carried out professionally (e.g. if own servers are used for mining, trading with high transaction volumes takes place, or the market situation is monitored and favorable times are adjusted with the help of algorithms).
Do contents of “smart contracts” also have to be declared?
If you enter into a contract on a blockchain with smart contract functionality, the contents of that contract may also be considered part of your assets in some circumstances. Some examples of how this might look:
- If you receive rights to dividends on equity investments or digital shares in investment funds, these are subject to capital gains tax and withholding tax, and must be listed separately in the tax return
- Credit balances, loans, interest and claim rights must be reported in the list of securities or debts on your tax return
- If you acquire a physical asset with the token (e.g. precious metals, jewelry, diamonds, or real estate), these must also be declared, and depending on the nature of the matter, further taxes must be taken into account (e.g. value added tax or real estate tax)
The points listed above represent only a small selection of conceivable scenarios and are not a complete list. As there are also still some uncertainties from a legal point of view with regard to cryptocurrency, we recommend that you contact your cantonal tax authority or a tax expert in case of doubt.
Do you have further questions about taxation in Switzerland? Contact us for a non-binding quote. We will contact you promptly and discuss your individual situation.