Widespread adoption of cryptocurrencies and the increasing economic importance of digital assets increases the need to understand their respective tax implications. In Switzerland taxation of cryptocurrencies is usually based on existing tax laws. The Federal Tax Administration (FTA) has detailed its practice in a recently updated working paper.

This series of blogs will focus on explaining the income and wealth tax implications for owning and trading digital assets, the tax consequences for VAT, stamp duties and withholding tax, as well as taxation at issuer level.

The FTA recently published an updated working paper addressing the tax treatment of diverse cryptocurrency activities. In this blog, we focus on income and wealth taxes at the level of the beneficial owner.

Token Classification and Taxation

The tokens issued can take different forms. Depending on its design, a token can be classified as a payment, utility, or asset token. The FTA relies on FINMA's classification, in accordance with its guidance published on 16 February 2018. The FTA primarily distinguishes between the tax treatment of payment tokens held by investors, asset tokens issued by way of an Initial Coin Offering / Initial Token Offering (“ICO / ITO”) and the issuance of utility tokens.

Payment Tokens

Payment tokens are digital assets used for payment purposes. The issuer has no obligation to the investor to make any payment or provide a service. Bitcoin is a well-known example of a payment token.

Ownership

From a Swiss tax perspective, payment tokens are treated like foreign currencies: they qualify as movable capital assets and are subject to wealth tax at the cantonal level. The FTA publishes a list with the tax values of the most common cryptocurrencies, which is decisive for the assessment of wealth tax.

Mining

Provided that the general criteria of self-employment (i.e. use of work and capital in a freely chosen organisation, at one's own risk, continuously, systematically and with the intention of making a profit) are met, the compensation for mining in the form of payment tokens is considered income from self-employment and thus taxable income. The expenses related to mining are tax deductible, and any losses can be offset against other taxable income.

Staking

Staking is the process of locking tokens on a Proof of Stake blockchain for a certain period to validate new tokens. The tokens are typically collected in staking pools and the entire staking pool acts as a validator. During the lock-up period the owners of the tokens will not have access to their tokens. In return for providing their tokens they receive compensation from the staking pool. These premiums are subject to income tax.

Airdrop

In an “airdrop” the owners of a cryptocurrency receive additional units of this cryptocurrency free of charge and without any action on their part. At the time of allocation the airdrops are subject to income tax.

In both staking and airdrops, costs that are directly related to income generation and asset management are tax deductible. Any transaction costs are, however, not tax deductible.

Asset Tokens

Asset tokens are usually newly issued tokens in an ICO / ITO. Companies can use an ICO / ITO to raise capital. The investment tokens embody the investor's monetary rights vis-à-vis the issuer or counterparty. Taxation for the investor depends on the token's classification. Investment tokens are divided into three subcategories:

Debt Tokens

These tokens oblige the issuer to repay the investment and make an interest payment. From a tax point of view they qualify as bonds and are therefore considered movable capital assets. Interest in periodic form or in the form of one-off compensation is subject to income tax at the time of realisation.

Asset Tokens on a contractual basis

These tokens do not oblige the issuer to repay the investment. The investor receives a proportionate share of a certain size from the issuer (EBIT, royalty income or turnover) or a cash payment, measured by a certain ratio to the profit and/or liquidation outturn. Payments qualify as income from movable capital assets and are subject to income tax. Any losses are non-tax-deductible capital losses as there is no contractual repayment obligation on the part of the issuer in the event of liquidation.

Asset Tokens with participation rights

These tokens correspond to participation rights and are equivalent to shares or participation certificates. The pro rata entitlement to profit is confirmed in the articles of association. Dividends qualify as income from movable capital assets and are subject to income tax.

Any subcategories of Asset Tokens qualify as movable capital assets and are therefore subject to wealth tax at market value at the end of the tax period.

Utility Tokens

Utility tokens provide access to a digital application or service using blockchain infrastructure. The legal relationship between the issuer and the investor is contractual and does not provide any right to repayment of the investment. The investor merely acquires the right to use a digital service developed and provided by the issuer. Utility tokens are usually tradable and have a market value. They are therefore subject to wealth tax at market value. As there are no payments from the issuer to the investor there are no income tax consequences.

Token Trading

Buying and selling all types of tokens (payment, asset, and utility tokens) is equivalent to a transaction with conventional securities for tax purposes and would mainly be considered as private asset management activity. Any capital gains in private assets are tax-free, while capital losses are not tax deductible.

Depending on the type, scope and financing of the transactions, the trading activity may no longer be considered as private asset management but would qualify as self-employment activity for tax purposes. In that case the capital gains from the sale of tokens are considered commercial and subject to income tax. Any losses are tax deductible if they have been accounted for accordingly.

Conclusion

The classification of tokens, distinguishing between payment, utility, and asset tokens, plays an important role in determining their tax treatment. Cryptocurrencies and investment possibilities related to them are evolving at a rapid pace. Each case is very individual. A detailed case-by-case analysis and tax analysis are recommended for investors in cryptocurrencies before investing in order to avoid tax surprises.

Stay tuned as we explain tax consequences for VAT, stamp duties and withholding tax, as well as taxation at issuer level, in our following blogs.

Your Deloitte Corporate and Financial Services tax team will be happy to support you with the relevant actions. We are at your disposal for any questions you may have. Please reach out to your trusted FSI Tax team member, who will be happy to help.

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