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The taxation of cryptocurrencies

The ryptocurrencies reach a high level of recognition in recent years for their innovation, their function and the potential gains they offer. The success of cryptocurrencies and in particular the Bitcoin, has generated questions from individuals and from the states concerning the computation of their value and their tax treatment. Several states, including Switzerland, have recently begun to recognize the tax value of cryptocurrencies. Therefore, theree are able to tax their value and hence avoid a loss of tax income.

Cryptocurrencies are cryptographic and virtual currencies that can be generated by a decentralized computer network, peer-to-peer, in particular by the blockchain, controlled by miners. Miners are the users who make available computer resources for securing transactions. They manage the blockchain system and check that the user who wishes to operate a transaction, owns cryptocurrencies through complex mathematical equations. The activity of the miner, called "mining", is rewarded by the creation of bitcoins issued by the system.

In Switzerland, the owning of cryptocurrencies as well as the realisation of some kind of capital gains of cryptocurrencies must be announced in the tax return. In order to declare them correctly, the value and to the source must be announced. Indeed, their tax treatment will be different if they come from the private or the commercial wealth of the taxpayer.

The Federal Tax Administration (FTA), defines each year the tax value of the most common crypto-currencies as of  December 31. Taxpayers are required to refer to this tax value in order to declare their virtual assets. If the FTA does not provide a value for a cryptocurrency, the holder is required to report the value as of December 31, which is defined by the platform on which the assets are held. If the platform does not determine the value of the virtual currency, the taxpayer is required to report the purchase value.

The diagram below summarizes how to declare cryptocurrencies held in private wealth:

 

 

 

 

 

 

 

The FTA has defined the tax value of the currency as of 31.12

 

 

 

Value defined by the FTA on 31.12

 

Cryptocurrency held in the private wealth

 

 

 

 Tax value

 

The value as of 31.12 has not been determined by the FTA but is determinable by the holder

 

 

Determinable value as of 31.12

 

 

 

 

The value is not determinable

As of 31.12

Purchase value of the currency

 

 

 

 

 

 

 

 

 

 

 

In Switzerland, the capital gain from private wealth is exempt from income tax. This characteristic is also applicable to the capital gain realized on the cryptocurrency. Therefore, the capital gain realized as a result of the alienation of the cryptocurrency is not taxable.

Nevertheless, there are situations in which cryptocurrency is not considered as part of private wealth because it is attributed to the taxpayer's commercial fortune. The cryptocurrency which derives from an independent activity, notably the virtual currency produced by the miner as well as that resulting from his regular trade is considered to belong to the commercial wealth. There are several criteria to qualify the regular cryptocurrency trade into a commercial activity. The most determining criteria is the alienation of cryptocurrency after less than 6 months, a trading volume of transactions per year more than five times the number of the assets owned at the beginning of the tax period and the need to realize capital gains from cryptocurrency trades to replace missing income.

Moreover, there are distinctions for each Canton. Indeed, the Cantons freely appreciate whether the cryptocurrency operations of an individual are assimilable to an independent lucrative activity. For example, the Canton of Berne has determined that the activity of a miner is still considered an independent gainful activity, while the Cantons of Zug and Lucerne are more strictly proceeding to assessments on a case-by-case basis.

The benefits of owning cryptocurrencies in the commercial concern the possibility to deduct realized losses. On the other hand, the disadvantage of having cryptocurrencies in the commercial wealth is that each gain is considered and taxed as benefit. This is not the case for the cryptocurrency held in private wealth, considering the capital gain is exempt from tax in Switzerland. Moreover, considering the contributions to the AVS are computed on the basis of the income earned during the year in the commercial wealth, these will also be computed on the gains made in cryptocurrencies, which implies an increase of the commercial burden.

The determining value for the tax on the commercial wealth is determined in the same way than the private wealth, which means according to the tax value of the currency on December 31st of the year.

In the context of a independent activity or of the cryptocurrency business, the taxable income is composed by the cryptocurrency provided from the mining and the capital gain realized in the commercial wealth. The capital gain represents the benefits realized on the sale or purchase as a result of a short sale of the cryptocurrency.

For any questions on the subject, please do not hesitate to contact Mr. Daniel Spitz, certified tax expert, at 021 311 00 21 or to the following e-mail address: daniel.spitz@rsmch.ch.

Authors

Daniel Spitz
Partner Tax

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